U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the
Fiscal Year Ended December 29, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] FOR THE
TRANSITION PERIOD FROM _______________ TO ____________
Commission File Number 0-24768
INTERNATIONAL NURSING SERVICES, INC.
(Name of small business issuer in its charter)
Colorado 84-1123311
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
Suite 400, 360 South Garfield Street
Denver, Colorado 80209
(Address of Principal Executive Offices)
Issuer's Telephone Number: (303) 393-1515
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock. $.001 Par Value;
12% Cumulative Convertible Preferred Stock;
1994 Warrants to purchase Common Stock;
Units, each consisting of two shares of
12% Cumulative Convertible Preferred Stock,
one share of Common Stock
and three 1994 Warrants
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[ ]
State registrant's revenues for its most recent fiscal year:
$14,259,000
The aggregate market value of the registrant's Common Stock held
by non-affiliates of the registrant as of March 18, 1997 was
approximately $7,252,548 (for purposes of the foregoing
calculation only, each of the registrant's officers and directors
is deemed to be an affiliate).
There were 7,382,548 shares of registrant's Common Stock
outstanding as of March 18, 1997.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (Check
one): Yes [ ] No [X]
This document contains pages
The Exhibit Index is located at page .
TABLE OF CONTENTS
PART I 3
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2 DESCRIPTION OF PROPERTY 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II 15
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION 15
ITEM 7. FINANCIAL STATEMENTS 27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 27
PART III 28
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT 28
ITEM 10.EXECUTIVE COMPENSATION 29
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND AGREEMENT 35
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 35
ITEM 13.EXHBITS AND REPORTS ON FORM 8-K 36
PART I
ITEM 1. DESCRIPTION OF BUSINESS
International Nursing Services, Inc. and its subsidiaries
(collectively, the "Company") , doing business as Nurse Source,
National Care Resources, STAT Health Care Services, Ellis Health
Services, TherAmerica, Inc. and Paxxon Services, provides skilled
nursing, therapists, rehabilitation and other medical personnel for
supplemental staffing in home care and in a broad spectrum of health
care and educational facilities. The Company's supplemental staffing
services are provided through a pool of approximately 2,200
caregivers including licensed and registered nurses, rehabilitation,
physical, respiratory, occupational and speech therapists, medical
social workers, home care aides and other unlicensed personnel. The
Company's supplemental and home care staff currently serves over 900
hospitals, clinics, nursing homes, physician groups, assisted living
facilities, health maintenance organizations and other health care
institutions, a variety of educational facilities and individual home
care clients. The Company operates through offices located in
Yonkers and the Bronx, New York, Houston and San Antonio, Texas,
Emoryville and Ontario, California, and Denver, Colorado. The
Company currently provides supplemental staffing services and
therapists in New York, Texas, Colorado and California. Travel
nurses and therapists are provided in 13 other states. The Company
intends to expand through a combination of providing home care
services at existing supplemental staffing facilities, implementing a
strategic marketing program directed to local and national health
care providers and acquisitions of additional home care, supplemental
staffing, and related businesses.
History of the Company
The Company was incorporated in the State of Colorado under the
name NUR-Staff West, Inc. on April 22, 1988. On May 24, 1988, the
Company's name was changed to Med-Temps, Incorporated and on February
16, 1990, the Company adopted the name under which it currently
conducts business. On August 12, 1988, the Company completed a self-
underwritten public offering pursuant to which an aggregate of
150,100 units, each unit consisting of one share of common stock and
one redeemable warrant, were offered and sold. The Company received
gross proceeds of $150,100 from its initial public offering of such
units. On September 19, 1994, the Company completed a public
offering of 225,000 Units, each Unit consisting of two shares of
preferred stock, one share of common stock and three 1994 Warrants.
A portion of the proceeds of this public offering was used to finance
the Company's acquisitions in September, 1994 of Paxxon Services,
Inc. ("Paxxon Services") and Mint Energy Corporation, doing business
as Nurse Connection ("Nurse Connection").
In April 1996, the Company acquired certain assets of Ellis
Health Services, Inc. ("Ellis"). The purchase price for the Ellis
assets was $1,025,000. The purchase price was paid by issuing
256,250 shares of the Company's common stock and guaranteeing that
the former owner of Ellis would receive at least $1,025,000 in
proceeds from the sale of the shares. Ellis is an affiliated company
of Paxxon Services, Inc., which the Company acquired in September,
1994. Ellis had revenues of approximately $1,800,000, gross profit
of approximately $560,000 (31% gross profit margin), and net income
before tax of $56,000 for the year ended December 31, 1995.
In August 1996, the Company acquired certain assets of STAT
Health Care Services, Inc. ("STAT") for a purchase price of
approximately $2,145,000. STAT is a home care company which provides
home health aides to its customers and operates in New York, New
York. STAT had gross revenues of approximately $5,625,000 for the
fiscal year ended December 31, 1995. The purchase price was paid
$1,550,000 in cash, approximately $468,500 worth of common stock of
the Company and warrants to purchase 125,000 shares of common stock
at $1.88 per share.
In January 1997, the Company acquired certain assets of Colorado
Therapists On Call, Inc. ("CTOC") and Professional Healthcare
Providers, Inc. ("PHP"), together doing business under the name
TherAmerica ("TherAmerica). TherAmerica had gross revenues of
approximately $8,378,000 and a net loss of $63,000 for the year ended
December 29, 1996. The acquisition was effective January 1, 1997 and
the Company paid $2,000,000 cash and assumed approximately $175,000
in liabilities for the TherAmerica assets which will be treated as a
purchase for accounting purposes.
In addition to the Ellis, STAT and TherAmerica acquisitions, the
Company intends to pursue other possible acquisitions, however, the
Company has no other agreements, understandings or commitments
regarding any other acquisitions. All of the acquisitions currently
being considered by the Company will be subject to entering into
definitive documentation which will contain certain closing
conditions, including the Company obtaining necessary financing.
There can be no assurance that the necessary financing will be
obtained or that all other conditions to closing will be satisfied.
Consequently, there can be no assurance that the Company will
consummate any or all of the contemplated acquisitions. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
Overview."
Pending Disposition
In January 1997, the Company entered into a letter-of-intent to
dispose of its Medicare/Medicaid home care and staffing business in
Denver, Colorado for a sale price of $300,000. The sale is
contingent on the completion of the due diligence process by the
buyer and other closing conditions. Revenues from the
Medicare/Medicaid home care and staffing business in Denver were
approximately $1,598,000 in 1996. There can be no assurance given
that the necessary closing conditions will be satisfied and the sale
consummated.
Industry Overview
The Company believes the size of the supplemental staffing industry
to be $45 billion and this segment of the market is growing at a 15%
per year rate. Medical supplemental staffing is provided to health
care institutions in the form of either staffing done on a daily
basis or through travel nurse assignments that are generally thirteen
weeks or longer in length.
Health care institutions use supplemental staffing for the
following reasons:
Local and regional health care worker shortages;
Episodic needs for specialty health care during specific disease
epidemics;
Increased patient acuity mix within the hospital markets;
Increases in labor intensive medical care technology;
The aging of the population; and
Hospital trends to contain costs by cutting back staff positions to
a minimal level and supplementing increased occupancy rates with
agency staff.
Hospital occupancy has shifted towards more outpatient/hospital
early discharge/home health care programs. Numerous health care
organizations have developed special or innovative arrangements for
early discharges, including both pre- and post-admission services.
The home health care market represents a $34 billion industry
growing at 10% per annum. Health aides, nurses and therapists are
provided to health care agencies on a per visit or daily basis. The
home health care industry is expected to reach the $50 billion mark
by the end of the decade. Independent projections indicate that 1995
revenue for home health care was approximately $28 billion with a
compounded annual growth rate between 1995 - 1999 of 15%.
The rapid growth of home health care in the United States is due
to:
The general aging of the United States population;
The realization of cost savings through treatment at home as an
alternative to hospitalization;
The fixed amount of Medicare reimbursement to hospitals based upon
a patient's diagnosis, regardless of the cost of service or length of
stay. Hospitals are incented to minimize the length of a patient's
stay;
Advances in medical technology which have enabled a growing number
of treatments to be provided in the home rather than requiring
hospitalization; and
Patient preference to be cared for in the home rather than the
hospital when the alternative is medically possible.
Several programs have been proposed to reform the United States
health care system. Some of these programs contain proposals to
increase government involvement in health care, lower reimbursement
rates and otherwise change the operating environment for the
Company's customers. Health care facilities may react to these
proposals and the uncertainty surrounding such proposals by
curtailing the use of flexible staff. The Company cannot predict
with any certainty what impact, if any, proposals for health care
reforms might have on the Company's business. As part of health care
reform, recent federal and certain state legislative proposals have
included provisions extending health insurance benefits to temporary
employees. Due to the wide variety of national and state proposals
relating to health care presently under consideration, the impact of
such proposals cannot be predicted. The health care industry is
subject to changing political, economic and regulatory influences
that may affect the procurement practices and operations of hospitals
and other health care facilities. During the past several years, the
health care industry has been subject to an increase in government
regulation of, among other things, reimbursement rates and certain
capital expenditures. In addition, major third party payers of
hospital services (insurance companies, Medicare and Medicaid) have
significantly revised payment procedures in an effort to contain
health care costs. Recently, Congress has proposed modifications to
the budgets for Medicare and Medicaid. These proposed budget
modifications were vetoed by President Clinton. However, the Company
believes that if similar budget modifications were enacted in the
future, the budgets for Medicare and Medicaid would likely experience
a decrease in the rate of growth in the amount of budgeted funds
available for use under such programs. The recent proposals did not
contemplate a decrease in the amount of budgeted funds available for
use under such programs which would have had a significant negative
impact on the Company's revenues derived from the home care services.
The Company expects that future legislative proposals affecting
Medicare and Medicaid may be introduced by Congress from time to
time. The Company cannot predict in any meaningful way what such
proposals might entail or what effect any such proposals may have on
the Company's business. However, if any such proposals resulted in a
reduction in the reimbursement rate available under Medicare and
Medicaid programs, the Company's revenue derived from home care
services could be adversely affected. These and other factors
affecting the health care industry may have a significant impact on
the Company's operating results.
Business Strategy
The Company's strategy is to provide comprehensive services to
clients located in hospitals, health care organizations, and homes.
Staffing is provided in homes, school settings, hospitals, clinics
and physician offices utilizing a supplemental diversified mix of
traditional nursing and other allied health care professionals such
as physical, occupational and respiratory therapists, home health
aides, and other nursing professionals.
The services provided by the Company bridge the gap between
hospital and home. Often times the same professionals caring for
patients in the hospital setting are involved in the care at home.
Clients request that the Company provide the same trained
professional for both home and hospital health care. This request
has driven the Company to provide supplemental staffing, travel nurse
and home health care in each of the geographical markets that the
Company operates.
Other key elements of the Company's strategy include:
Broaden customer relationships through enhanced contracting,
marketing and obtaining certain key accreditations such as the Joint
Commission Accreditation for Health Care Organizations (JCAHO);
Expand services utilized by clients;
Growth through acquisition; and
Development of an integration philosophy and plan that defines the
achievement of certain operating efficiencies.
The foregoing business strategies include forward-looking
statements, the realization of which may be impacted by certain
important factors discussed elsewhere herein. See "MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Overview".
Customers
The Company's customers include, but are not limited to, patients,
hospitals, physicians, discharge planners, social workers, third
party payers including Medicare and Medicaid, educational facilities
and other types of health care organizations. Approximately 6% of
the Company's revenues in 1996 were derived from third party payers,
including Medicare and Medicaid programs. These programs require
that the Company meet and maintain standards of eligibility for
participation and reimbursement. A certain portion of the Company's
future operating results are dependent on it's ability to keep
current on changes and modifications within the programs and to
incorporate these changes into its operations to continue to meet
eligibility standards.
Billing, payment arrangements and staffing agreements with the
Company's customers are stipulated by contracts with the customer.
The contracts are not exclusive and do not obligate the customer to
utilize a certain amount of service for any specific period of time.
Customers often use several supplemental staffing agencies to meet
their needs and the Company competes with these agencies on the basis
of pricing, availability of caregivers, and quality of service.
Services
The Company offers a broad range of professional and support
services to meet medical and personal needs in the home or in health
care or educational facilities. The following provides a brief
description of the services customarily provided by skilled nursing
personnel and other caregivers placed with customers.
Registered Nurses provide a broad range of nursing care services,
including skilled observation and assessment, instruction of patients
regarding medical and technical procedures, direct hands-on
treatment, and communication and coordination with the attending
physician or other service agencies.
Licensed Practical Nurses perform, under the supervision of a
registered nurse, technical nursing procedures, which include
injections, dressing changes, assistance with ambulation and catheter
care.
Physical and Rehabilitation Therapists provide services related to
the reduction of pain and improved rehabilitation of joints and
muscles, including strengthening and range-of-motion exercises, heat
lamp therapy and massage.
Occupational Therapists assist patients in restoring their ability
to perform routine activities of daily living by offering instruction
in self care, discussing techniques for coping with physical
disability and suggesting the use of assistant devices or home
adaption to make living at home easier.
Speech Therapists retrain patients who have swallowing difficulties
or speech, language or hearing problems to improve their physical
capabilities or communication abilities.
Social Workers help patients and their families deal with the
emotional, social, financial and personal problems that may occur as
a result of illness or disability including the identification and
coordination of services with other community resources.
Home Health and certified Nurse Aides, working under the
supervision of a registered nurse, provide health-related services
and personal care such as assistance with ambulation, limited range-
of-motion exercises and monitoring of vital signs.
Homemakers/Companions provide personal care and assistance with
daily living activities, including bathing, dressing, grooming, meal
preparation, light housekeeping and occasional shopping for essential
items.
Recruiting
The Company is active in recruiting skilled nursing personnel
and other caregivers in order to assure availability of personnel as
customer demand warrants. Location of assignment, compensation and
benefits are generally the principal factors considered by medical
personnel when determining whether to contract with a particular
flexible staffing business. To date, the Company's operations have
not been adversely affected by the shortage of nurses in certain
geographical regions or specialties.
The Company's ability to deliver quality nursing services is
dependent upon the Company's ability to recruit qualified skilled
nursing personnel. The Company's recruiting efforts include
advertising, attendance at national and regional conventions,
personal and professional referrals and participation by the
Company's officers in nursing and other trade associations. The
Company has recruited and continues to recruit medical personnel and
has entered into agreements with other staffing agencies whereby the
Company can use the other agency's personnel under contract. The
Company has compiled a listing of over 2,200 qualified nurses and
medical personnel who are classified by skills, experience and
availability for assignment. These nurses and other medical
personnel generally do not work exclusively for the Company. The
Company has in the past been generally successful in meeting its
staffing requirements from its existing pool of caregivers and, in
cases where a particular specialty or expertise was unavailable, the
Company has been successful in hiring personnel on a subcontract
basis from other flexible staffing companies.
Marketing and Sales
The Company has developed distinct marketing strategies for its
services. The Company's clientele currently consists of hospitals
and other health care and educational facilities located in New York,
Texas, California and Colorado and its travel nursing and therapist
clientele consists of hospitals and other health care facilities in
13 states. The Company has secured non-exclusive agreements to
supply supplemental staff to these health care facilities for a
period of between one and two years. The Company derives a
significant portion of its business through its marketing efforts and
expects to expand its marketing efforts to local and regional
hospital chains as the expected consolidation in the health care
industry is anticipated to result in an increasing number of regional
and national hospital chains.
The Company markets its supplemental staffing services
principally through direct contact with hospitals, direct mail,
attendance at national and regional conventions and seminars and
telephone solicitations. In order to increase its penetration in the
supplemental staffing market, the Company has also initiated a
program to include rehabilitation, physical and respiratory
therapists for placement in hospitals and other health care and
educational facilities. Management anticipates the Company will
continue to develop its marketing programs.
Management also believes that the Company's ability to expand
its business will depend in part on the implementation of an
acquisition strategy which has been initiated by the acquisitions of
Paxxon Services, Ellis, STAT, TherAmerica and Nurse Connection.
Management believes that the daily staffing business is particularly
suited to a "growth by acquisition" strategy because hospitals and
other health care and educational institutions customarily draw
supplemental staff from local providers. Acquiring ongoing
businesses in new locations gives the Company the advantage of
building on existing referral relationships and customers.
Accordingly, the Company expects to continue to seek out acquisitions
in the daily staffing market in order to increase its market
penetration.
The Company's marketing and sales strategy consists of working
to increase its shift count and improve its gross margins with
existing clients, bidding competitively on new contracts and
continuing to expand its opportunities to place its personnel at non-
traditional facilities. The Company has expanded its geographic
presence with the recent acquisitions of STAT and TherAmerica and
intends to aggressively market its skilled nursing, nurse aides, home
health aides and therapists to offices which currently don't staff
these services. In addition, the geographic expansion allows for
more skilled nursing and therapist travel placements. The Company
intends to utilize the existing infrastructure in each of its branch
offices to expand its service offerings in each branch office.
The Company's home care services are paid for by a variety of
sources. Payment for services generally comes from Medicare,
Medicaid, local government health care programs, commercial insurance
carriers and private individuals. In instances where patients have
more than one source of reimbursement, the portion the Company
charges that is not covered by a primary source may be covered by a
secondary source of reimbursement. The Company also obtains an
assignment of benefits from the patient that enables the Company to
file claims for its services with third-party payers. As a result,
such third-party payers pay the Company directly for the reimbursable
amount of its charges. The Company's experience has been that
certain policies offered by insurance carriers and governmental
agencies contain reimbursement limitations.
Medicare reimburses health care providers, on a cost-base
system, up to certain limits. To the extent Medicare limits exceed
the provider's direct cost for a particular service, the provider can
seek reimbursement for certain indirect costs, up to an aggregate
amount equal to the Medicare limits for that service. In order to
receive Medicare reimbursement, the Company must provide services in
states which have certification requirements and must be in
compliance with those requirements. The Company is currently
certified in the State of Colorado and licensed in the State of New
York as a home health care agency. In certain states which require a
certificate of need (a "CON"), the Company may be required to be
certified in order to provide home care services. Although
certification is a requirement to receive a CON, the Company is not
prohibited from subcontracting its personnel to CON providers.
Because CON's are limited in a number of states and may only be
obtained by acquiring a CON provider, the Company may continue to
subcontract to CON providers in those states. In those states where
CON's become available and Medicare and Medicaid are expected to
constitute a material portion of the Company's revenues, the Company
may seek to obtain certification. Each state may have its own
certification standards with which the Company will be required to
comply in order to receive a CON.
Competition
The Company's supplemental staffing businesses compete with
other medical recruitment and supplemental staffing organizations
which offer the same or similar services provided by the Company.
Many of these competitors have greater financial and other resources
than are available to the Company. Competition for hospital and
other health care clients is generally based on the ability to
provide qualified nurses and medical personnel on a timely basis in
a cost-competitive manner. The Company also experiences competition
in recruiting for professional nursing staff.
The Company believes the key competitive factors in its industry
include service, price and its ability to deliver staff to the
geographic area where needed. The range of specialized services
offered, together with the price charged for the services, are also
competitive factors in attracting clients. There is limited, if any,
competition in price with respect to Medicare and Medicaid patients
because the revenue for services to such patients is strictly
controlled and based on fixed rates and uniform cost reimbursement
principles.
Regulation
Several programs have been proposed to reform the United States
health care system. These programs include proposals to increase
governmental involvement in health care, lower reimbursement rates
and otherwise change the operating environment for the Company's
customers. The objective of these programs is to expand health care
coverage to every American while curtailing medical costs. There can
be no assurance the Company will be able to capitalize on the effect
of such legislation or that such legislation will not have a negative
impact on the Company's operations.
The federal government and the states in which the company
currently operates regulate various aspects of the Company's
supplemental staffing business. Home care agency certification by
the Health Care Financing Administration ("HCFA") is required to
enable the Company to receive reimbursement for nursing services and
supplies from Medicare. HCFA requires, as a condition to
participation as a home care agency in the Medicare program, the
satisfaction of certain standards with respect to personnel, services
and supervision, appropriation of annual budgets, cost reports and
capital expenditure' plans, and the establishment of a professional
advisory group. The Company's Denver office presently provides
services covered by Medicare. The Company has received,
accreditation from the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") to evidence the Company's
commitment to high service standards in its Bronx and Yonkers offices
and intends to seek such accreditation in its other offices to the
extent deemed beneficial. Management believes such certification
provides a marketing advantage to the Company's home care and
rehabilitation services, although there is no assurance such
certification will be received by all of its offices. In the future,
it is possible that home care providers may be required to obtain
JCAHO or other certifications, the receipt of which by the Company in
all of its offices is not assured.
In many of the states with regulations governing health care
providers, the Company need only be licensed by the state. In almost
half the states, home care providers must receive a CON from the
state. CON laws can limit or prohibit a company's ability to provide
certain services and to establish or expand its operations within a
state. CON laws and other regulations may limit to designated
geographic locations the services to be provided by the Company or
healthcare providers which utilize the Company's supplemental staff.
CON requirements and restrictions vary substantially from state to
state. The Company's inability to obtain or renew any license, CON
or certification could adversely affect the Company's operations. If
the Company is not able to obtain a CON in any particular
jurisdiction, the Company may still provide services which are
reimbursed by payers other than Medicare by subcontracting to a CON
provider.
Several states have enacted legislation requiring providers of
supplemental staffing services to publicly post their billing rates.
At least one state has adopted legislation that provides for
regulatory review of such billing rates. The adoption of similar
legislation by other states could have an adverse impact on the
supplemental staffing industry.
The Company is subject to various city, county and state
payroll, occupational and professional licensing laws that apply to
medical professionals. Many states have statutes requiring training,
monitoring and regulating of medical professionals.
Employees
Exclusive of medical personnel, the Company has 73 full-time and
4 part-time administrative employees.
The number of caregivers on assignment varies from day to day.
These medical personnel do not necessarily work full-time shifts and
may not work exclusively for the Company. The Company's employees
are not represented by a union and the Company considers its
relations with its employees to be good.
The Company currently has in place a screening process for all
prospective medical personnel. The Company has entered into
agreements with other staffing agencies whereby the Company may place
medical personnel currently under contract with other staffing
agents.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at Suite 400, 360
South Garfield Street, Denver, Colorado. A summary of the Company's
facilities is provided below:
<TABLE>
<CAPTION>
Square Expiration 1996
Footage Date Rent
<S> <C> <C> <C>
Houston, Texas 2,626 8/14/97 $ 22,000
San Antonio, Texas 1,270 4/30/98 13,000
Yonkers, New York 2,006 6/30/97 18,000
Denver, Colorado 6,613 9/30/00 91,000
Englewood, Colorado (1) 2,269 10/31/97 36,000
Phoenix, Arizona (1) 704 4/30/97 6,000
Ontario, California (1) 1,513 12/31/98 25,000
17,001 $211,000
</TABLE>
1) Includes TherAmerica
The Company believes these facilities, which are used for
administrative offices, will be suitable for the Company's needs for
the foreseeable future. The Company believes that all of its
properties are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
On July 26, 1996, Staff Builders, Inc. filed a civil action
against the Company in the US District Court for the Southern
District of New York demanding payment of an outstanding note
payable. The plaintiff alleged that the Company owed approximately
$145,000 in principal and $12,000 in accrued interest. The Company
entered into a settlement agreement in January 1997 whereby the
Company will pay $166,122 in installments between February 15, 1997
and July 15, 1997 in exchange for a release of all claims.
In January 1997, the Company was named as a party in a lawsuit
filed by a former patient in San Antonio, Texas. The complaint
alleges that a respiratory therapist employed by the Company was
negligent in his duties resulting in bodily injuries and mental
anguish suffered by the patient. In a separate but related matter,
the client/hospital at which the alleged incident occurred has paid
$100,000 to the plaintiff in exchange for being released as a party
to the lawsuit and has demanded that the Company indemnify the
hospital as the hospital alleges is stipulated in the contract
between the Company and the hospital. The Company believes that its
employee was not negligent in his duties and that the Company has no
liability in this matter. The Company intends to vigorously defend
itself in this matter. In addition, the Company does not believe it
has an obligation to indemnify its client hospital under its contract
as the Company was not a party to the settlement.
The Company's professional liability policy covers the defense
of the allegations of negligence, but does not cover settlements,
awards or damages. The Company has accrued $100,000 in 1996 as a
potential settlement and litigation expense.
The Company purchased Ellis Health Services, Inc. by issuing
256,250 shares of the Company's common stock and guaranteeing that
the former owner of Ellis would realize at least $4.25 per share upon
the sale of the first 12,000 shares each month and $4.00 per share
thereafter. The Company agreed to issue additional shares or stock
to make up any shortfall and the Chairman and CEO of the Company
pledged 100,000 of his personal shares as collateral. At December
29, 1996, the former owner of Ellis had a shortfall of approximately
$500,000 from the sales of stock to that date. In January 1997, the
former owner of Ellis exercised his right to take the security
pledged by the Chairman and CEO of the Company. The Board of
Directors approved the issuance to the Chairman and CEO 100,000
shares of common stock and options to purchase 250,000 shares of
common stock at $1.00 per share to compensate the Chairman and CEO
for the loss of his personal shares. The $1.00 per share represented
the fair market value of the shares at the date of the grant. In
March 1997, the former owner of Ellis has presented a demand letter
to the Company requesting immediate payment of the remaining amount
due of approximately $400,000 or if the Company is unable to pay, the
former owner of Ellis is threatening to sue the Company. The letter
also stated that if the Company is unable to pay such amount by April
7, 1997, legal action will be pursued with the former owner seeking
recovery of the shortfall, interest, attorney fees, and other related
expenses incurred. The Company has begun negotiations with the
former owner in an attempt to resolve this matter.
In February 1997, the Company received a subpoena in connection
with a grand jury investigation on organized crime influence of the
securities markets. The Company is in the process of fully complying
with the subpoena. The Company has been informed that it is not a
target of the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 4, 1996
in Denver, Colorado (adjourned as to certain matters until November
21, 1996) for the purpose of electing a board of directors, authorize
an increase in the authorized shares of the Corporation's common
stock from 15,000,000 to 25,000,000, ratify and approve the Company's
1996 Stock Incentive Plan (the "1996 Plan"), approve an increase in
shares reserved for issuance under the 1996 Plan from 500,000 to
2,000,000 and approving the appointment of independent auditors.
Proxies for the meeting were solicited pursuant to Section 14(a) of
the Securities Exchange Act of 1934 and there was no solicitation in
opposition to management's solicitations.
Voting results for the nomination of each director,
authorization of the increase in the authorized shares, ratification
and approval of the 1996 Plan and the increase in shares available
thereunder and approving the independent auditors were as follows:
<TABLE>
<CAPTION>
Shares Shares Shares Shares Shares
Voted Voted Voted Voted Not
For Against Withhold Abstain Voted
<S> <C> <C> <C> <C> <C>
Election of directors
John Yeros 3,569,625 - 64,860 - -
Colleen Dougherty-
Gray 3,572,499 - 61,626 - -
Tom Oberle 3,572,499 - 61,626 - -
Charlie Powell 3,572,499 - 61,626 - -
Approval of increase
in authorized
shares 3,383,285 196,753 - 54,087 -
Approval of 1996
Plan and amendment
to 1996 Plan 821,938 249,098 - 92,242 2,481,047
Approval of
independent
auditors 3,552,781 30,088 - 51,256 -
</TABLE>
Shareholders of record for purposes of this annual meeting were
determined as of September 18, 1996 and total shares able to be voted
were 4,631,567. Therefore, all proposals were approved by the
shareholders except approval of the 1996 plan and amendment to the
1996 plan.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ SmallCap
Market under the symbol "NURS." The following table shows high and
low bid price information as quoted by NASDAQ. Such quotations
reflect inter-dealer prices, without retail mark-ups, markdowns or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Bid Price
High Low
<S> <C> <C>
1995 Fiscal Year
First Quarter $ 3.75 $ 2.00
Second Quarter 2.88 1.06
Third Quarter 2.19 1.13
Fourth Quarter 5.97 .44
1996 Fiscal Year
First Quarter $7.94 $ 3.00
Second Quarter 3.69 1.88
Third Quarter 3.15 1.69
Fourth Quarter 2.63 1.00
</TABLE>
There were approximately 313 holders of record of the Company's
common stock as of March 3, 1997. This number includes shareholders
of record who may hold stock for the benefit of others.
The Company does not expect to pay any dividends on its common
stock in the foreseeable future. Management currently intends to
retain all available funds for the development of its business and
for use as working capital. The payment of dividends on the common
stock is subject to the Company's prior payment of all accrued and
unpaid dividends on any preferred stock outstanding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The Company's revenues are derived primarily from providing
supplemental staff for hospitals and other health care and
educational institutions and individual patients restricted to the
home. The Company believes the medical staffing market will continue
to grow. The Company believes it is positioned to expand in the
rapidly growing health care industry.
The Company's business strategy is to provide a range of
flexible staffing services to a diversified mix of health care
organizations in markets served by the Company. The Company expects
to implement this strategy through internal growth achieved through
strategic marketing programs and expansion of services offered at
existing locations, as well as acquisitions of businesses, which will
complement existing services.
Historically, the Company chose to segregate its revenues
between home care revenues and supplemental staffing revenues. The
distinction between the two being that home care revenues generally
related to revenues derived from patients cared for in the home for
which the Company was the primary caregiver and party responsible for
billing the third party payer. During 1996, with the acquisition of
STAT and the decision to sell the home care business in Denver,
Colorado, a larger percentage of the Company's home care revenues
relate to staffing of individuals in homes for other home care
agencies. In these instances, the caregiver is effectively
supplemental staff for the home care agency. The home care agency is
the primary caregiver and is responsible for billing the third party
payer. The Company bills the home care agency. The characteristics
of this type of home care are similar to the Company's supplemental
staffing business and therefore, revenues are not broken out between
home care and supplemental staffing in the current presentation.
1996 Private Placements
In July and September 1996, the Company completed a private
placement of 244 units, each unit consisting of a share of
convertible preferred stock, $10,000 par value ("1996 Preferred
Stock"), a warrant to purchase 8,000 shares of the Company's common
stock at $2.50 per share and a unit purchase option to purchase an
additional unit at $10,000 per unit. The convertible preferred stock
carries a 10% dividend and is convertible at the lesser of $1.25 or
75% of the average sales price for the five trading days prior to
conversion. The private placement raised gross proceeds to the
Company of approximately $2,440,000.
Approximately $1,550,000 of the proceeds raised was used to fund
the cash purchase portion of STAT. A shareholder who participated in
the placement of the private placement was paid a commission of
$117,000 in 1996 and issued a warrant to purchase 100,000 shares of
common stock at $2.00 per share. The warrant price was subsequently
reduced to $1.00 per share in January 1997.
During 1996, 88.5 units (with accrued dividends) were converted
to 923,111 shares of common stock. In addition, a Unit holder who
held 17 units was allowed to reduce their purchase price on their
warrants to $1.00 per share from $2.50 per share, resulting in gross
proceeds to the Company of $136,000 in November 1996. Subsequent to
year end, an additional 100 units have been converted through March
3, 1997 resulting in the issuance of an additional 1,388,723 shares
of common stock in 1997. Also in 1997, a Unit Holder who held 20
Units exercised their Unit purchase option resulting in gross
proceeds to the Company of $200,000. The Unit holder immediately
converted the preferred to common resulting in the issuance of
257,028 shares of common stock in January 1997.
1997 Private Placement
In January and February 1997, the Company completed a private
placement of 167.15 Units, each unit consisting of one share of
convertible preferred stock, $10,000 par value, "1997 Preferred
Stock", and a warrant to purchase 10,000 shares of common stock at
$1.00 per share. The convertible preferred stock carries no dividend
if the underlying common stock is included in an effective
registration statement within 90 days of the date of the agreement.
After 90 days, if the underlying shares are not included in an
effective registration statement, the dividend rate becomes 18%. In
addition, the preferred stock contains a redemption feature whereby
if the underlying common stock which the preferred shares are
convertible into is not effectively registered by the second
anniversary date of each respective unit placed, the holder at their
option may redeem the preferred shares for $10,000 each plus all
accrued unpaid dividends. The Company raised gross proceeds of
$1,671,500 from this private placement. Commissions of $99,540 were
paid to individuals who assisted in the private placement who are
also shareholders of the Company. Substantially all of the proceeds
were used to purchase TherAmerica (See Note 2 to the audited
financial statements).
Acquisitions
In September 1994, with a portion of the proceeds from the above-
described public offering, the Company acquired substantially all of
the assets, excepting accounts receivable, of two businesses which
provide supplemental staffing. Paxxon Services, located in Yonkers,
New York, provides daily staffing and rehabilitation services to the
acute and long-term pediatric and geriatric patient population in
health care and educational facilities in a five-county area
including a portion of New York City. Nurse Connection, located in
Houston, Texas, provides daily staffing services of licensed medical
personnel in Houston and San Antonio, Texas and travel nurses in
Texas and several other states.
In connection with its acquisition of the assets of Paxxon
Services, Inc. in 1994, the Company executed and delivered to the
seller a promissory note in the principal amount of $937,500 (the
"Paxxon Note"). The outstanding principal balance of the Paxxon
Note, net of certain credits was $434,202 as of March 1, 1996.
Accrued and unpaid interest on the Paxxon Note totaled $9,149 as of
March 1, 1996. The Paxxon Note was payable in quarterly installments
of $78,125 each with the last installment being due in 1998. In an
effort to improve the balance sheet and cash flow of the Company, the
Company paid $312,500 of the principal balance of the Paxxon Note and
issued to the holder of the Paxxon Note 28,203 shares of the
Company's Common Stock in full satisfaction of the remaining balance
of the Paxxon Note.
Additionally, the Company entered into an agreement in 1994 to
acquire substantially all of the assets of Ellis, which is located in
Yonkers, New York and had common ownership with Paxxon Services.
Ellis provides home care services in the same five county area as
Paxxon Services. Completion of the Ellis acquisition was subject to
regulatory requirements, including the Company obtaining a license
from, and the approval of, the Department of Health of the State of
New York. The Company received approval from the Department of
Health of the State of New York in January 1996 and received issuance
of the license. The Company and Ellis terminated the original
agreement and entered into a new agreement pursuant to which the
purchase price of the assets was paid through the issuance of 256,250
shares of the Company's Common Stock.
In connection with the purchase of Ellis Health Services and the
issuance of 28,203 shares of common stock to pay off the remaining
amount due under the Paxxon note payable, the Company guaranteed that
the former owner of Ellis would realize at least $4.25 per share upon
the sale of the first 12,000 shares each month and $4.00 per share
thereafter. The Company agreed to issue additional shares or stock
to make up any shortfall and the Chairman and CEO of the Company
pledged 100,000 of his personal shares as collateral. At December
29, 1996, the former owner of Ellis had a shortfall of approximately
$500,000 from the sales of stock to that date. In January 1997, the
former owner of Ellis exercised his right to take the security
pledged by the Chairman and CEO of the Company. The Board of
Directors of the Company issued the Chairman and CEO 100,000 shares
of common stock and options to purchase 250,000 shares of common
stock at $1.00 per share to compensate the Chairman and CEO for the
loss of his personal shares. The $1.00 per share represented the
fair market value of the shares at the date of the grant. In March
1997, the former owner of Ellis has presented a demand letter to the
Company requesting immediate payment of the remaining amount due of
approximately $400,000 or if the Company is unable to pay, the former
owner of Ellis is threatening to sue the Company.
In July, 1996, the Company and its wholly-owned subsidiary JJ
Care Resources, Inc. ("JJ Care") completed the acquisition of certain
assets of STAT Health Care Services, Inc. for a purchase price of
$2,145,000, payable with $1,550,000 in cash and approximately
$468,000 worth of common stock and warrants.
STAT provides nurse and home health care staffing services in
the metropolitan New York area. Based on audited financial
information, STAT had revenues of $5.7 million and pre-tax net income
of $514,000 for its fiscal year ending December 31, 1995.
In addition to the Ellis, STAT and TherAmerica acquisitions, the
Company also intends to pursue other possible acquisitions. All of
the acquisitions currently being considered by the Company, are
subject to entering into definitive agreements which will contain
certain conditions, which may include the Company obtaining necessary
financing. There can be no assurance that financing will be obtained
or that all other conditions will be satisfied. Consequently, there
can be no assurance the Company will consummate any or all of the
acquisitions it is pursuing. See "DESCRIPTION OF BUSINESS - Pending
Acquisitions."
Forward-Looking Statements and Associated Risks
Management believes that this filing contains certain forward-
looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 and the Company intends that such forward-looking statements
be subject to the safe harbors created thereby. These forward-
looking statements include the plans and objectives of the management
for future operations, including plans and objectives relating to
services offered by and future economic performance of the Company.
The forward-looking statements and associated risks set forth in this
filing relate to the Company's business strategies to increase
revenues from providing services to existing and future customers,
implementing a strategic marketing program directed to local and
national health care providers, the broadening of customer
relationships through enhanced contracting, expanding services
utilized by existing and future customers and clients; development of
an integrated philosophy and plan defining the achievement of greater
operating efficiencies, cutting operating costs, recruiting
additional health care professionals, obtaining improved accounts
receivable financing, funding current and future operations, the
ability to raise additional debt or equity capital, the ability of
the Company to avoid certain "extraordinary" or "non-recurring"
charges and the Company's expressed desire and plan to grow through
acquisitions.
The forward-looking statements included herein are based on
current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on
assumptions that the Company will continue to be able to provide on a
cost effective and competitive basis quality home health care and
supplemental staffing services, that the regulatory environment
governing the Company's industry will not change in ways that are
materially adverse to the Company and its operations, that the
Company will be able to continue to fund operations, that improved
receivables financing will be obtainable by the Company on terms
acceptable to the Company, that the Company will be able to raise
additional equity capital if required to fund operations and
acquisitions, that the Company will be able to achieve operating
efficiencies resulting in cost reductions, that a sufficient supply
of qualified health care personnel will be available to the Company
for deployment in the health care industry on a competitive and cost
effective basis and that there will be no material adverse change in
the demand for the Company's services or in the Company's operations
or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and
market conditions, and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes the
assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove inaccurate, and therefore, there
can be no assurance that the results contemplated in the forward-
looking statements will be realized. In addition, the business and
operations of the Company are subject to substantial risks which
increase the uncertainty inherent in such forward-looking statements.
Important factors to be considered in connection with forward-
looking statements include, without limitation, (a) the fact that the
Company reported net losses in fiscal 1995 and fiscal 1996 and had an
accumulated deficit and a working capital deficit in fiscal 1996; (b)
the Company's lack of working capital may require the Company to
raise additional equity or debt financing in order to fund operations
and the cash portion of purchase prices payable in connection with
acquisitions and the Company may be unable to raise such debt or
equity financing; (c) the Company may not be able to obtain an
improved credit facility for its current receivables financing
arrangement or may not be able to obtain such credit facility on
terms acceptable to the company; (d) the current uncertainty in the
health care industry and government health care reform proposals
considered from time to time may adversely affect the regulatory
environment in which the Company operates and specifically affect the
reimbursement rate payable under government programs such as Medicare
and Medicaid, potentially resulting in decreased revenues from home
care services; (e) the Company's dependence on customer relationships
makes the Company vulnerable to consolidation in the health care
industry, changes in customer personnel and other factors that may
impact customer relationships; (f) the Company's ability to obtain
needed licenses, permits and governmental approvals will directly
affect the Company's economic performance and operation; (g) the
Company's ability to compete in the highly competitive supplemental
staffing services market will directly impact the Company's
profitability and operations; the Company depends on key-management
personnel, especially John P. Yeros to manage and direct the business
and operations of the Company; (h) hospital budgetary cycles,
increased competition for qualified medical personnel, patient
admission fluctuations and seasonality will also impact the
profitability of the Company and cash flow may fluctuate due to the
adoption by hospitals and third party payers of new or revised
reimbursement policies; (j) the Company's operations would be
adversely affected by the expansion of more favorable credit terms in
order to keep existing customers; (k) Company's ability to manage
growth, particularly through acquisitions, will directly impact the
Company's profitability and operations; (l) uninsured risks
associated with providing home care and supplemental staffing
services will also impact the Company's profitability and operations;
and (m) various other factors may cause actual results to vary
materially from the results contemplated in any forward-looking
statements included in this filing. No assurances can be given that
the foregoing factors will not result in a material adverse effect on
the Company and its operations. Any of these important factors
discussed above or elsewhere in this filing could cause the Company's
revenues or net income, or growth in revenues or net income, to
differ materially from prior results. In addition, growth in
absolute amounts of selling, general and administrative expenses or
the occurrence of extraordinary events could cause actual results to
vary materially from the results contemplated by the forward-looking
statements. Budgeting and other management decisions are subjective
in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the
impact of which may cause the Company to alter its marketing, capital
expenditures or other budgets, which may, in turn, affect the
Company's results of operation.
In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company
or any other person that the objectives or plans of the Company will
be achieved.
Results of Operation
Comparison of Years Ended December 29, 1996 and December 31, 1995
Historically, the Company chose to segregate its revenues
between home care revenues and supplemental staffing revenues. The
distinction between the two being that home care revenues generally
related to revenues derived from patients cared for in the home for
which the Company was the primary caregiver and party responsible for
billing the third party payer. During 1996, with the acquisition of
STAT and the decision to sell the home care business in Denver,
Colorado, a larger percentage of the Company's home care revenues
relate to staffing of individuals in homes for other home care
agencies. In these instances, the caregiver is effectively
supplemental staff for the home care agency. The home care agency is
the primary caregiver and is responsible for billing the third party
payer. The Company bills the home care agency. The characteristics
of this type of home care are similar to the Company's supplemental
staffing business and therefore, revenues are not broken out between
home care and supplemental staffing in the current presentation.
Total net revenues increased approximately 10% from $12,978,000
for the year ended December 31, 1995 (the "1995 Fiscal Year") to
$14,259,000 for the year ended December 29, 1996 (the "1996 Fiscal
Year"). The increase was mainly attributable to the acquisitions of
STAT and Ellis. The STAT and Ellis acquisitions were accounted for
under the purchase method of accounting. Accordingly, revenues from
these acquisitions are included in the consolidated financial
statements of the Company from the date of the acquisitions, April
1996 for Ellis and July 1996 for STAT. Revenues from these two
entities included in the statement of operations for the 1996 fiscal
year were $2,395,000 for STAT and $1,185,000 for Ellis. These
increases were offset by revenue losses in Colorado and Texas.
The Company's total gross margin increased from 21% for the 1995
Fiscal Year to 24% for the 1996 Fiscal Year. The total gross margin
increase reflects the higher gross margins from its recently acquired
STAT and Ellis divisions.
See Footnote 2 of the consolidated financial statements for the
unaudited results of operations of the Company after giving effect to
the Ellis, STAT and TherAmerica acquisitions as if they had been
acquired as of January 1, 1995.
Selling, general, and administrative expenses decreased
approximately $1,213,000 or 23% from $5,296,000 in the 1995 Fiscal
Year to $4,083,000 in the 1996 Fiscal Year. The decrease in selling
general and administrative expenses relates to several factors:
The Company engaged certain financial consultants in 1995 to
provide financial consulting services for which the consultants were
issued 500,000 shares of common stock valued at $2.00 per share. The
$1,000,000 consulting expense was included in 1995 with no related
expense in 1996.
The Company reduced managerial and administrative staff at several
of its branches.
Legal and accounting costs were nearly $200,000 higher in fiscal
1995 versus fiscal 1996 due to two failed merger transactions in
1995.
These decreases were offset by additional selling, general and
administrative expenses incurred in connection with STAT ($495,000)
and Ellis ($145,000) and additional amortization expense related to
the STAT and Ellis acquisitions of $102,000.
Loss from operations decreased $3,241,000 from $3,896,000 in the
1995 Fiscal Year to a loss from operations of ($655,000) in the 1996
Fiscal Year. The decrease reflects increases in gross margins from
21% to 24% and items discussed in the preceding paragraphs.
Interest expense decreased 23% from $715,000 in the 1995 Fiscal
Year to $552,000 in the 1996 Fiscal Year. The decrease relates to a
renegotiated financing agreement with its lender which reduced the
Company's effective interest rate from over 30% to approximately 12%.
This decreased interest rate was partially offset by the increase in
funding costs on the additional accounts receivable due to the STAT
and Ellis acquisitions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -- Liquidity of Capital Resources" and Note 5 to
the Consolidated Financial Statements.
Net loss decreased from ($4,611,000) in the 1995 Fiscal Year to
($1,207,000) in the 1996 Fiscal Year.
Comparison of Years Ended December 31, 1995 and 1994
Total net revenues increased approximately 89% from $6,867,000
for the year ended December 31, 1994 (the "1994 Fiscal Year") to
$12,978,000 for the year ended December 31, 1995 (the "1995 Fiscal
Year"). The increase was mainly attributable to the acquisitions of
Paxxon Services and Nurse Connection. The Paxxon Services and Nurse
Connection acquisitions were accounted for under the purchase method
of accounting. Accordingly, revenues from these acquisitions are
included in the consolidated financial statements of the Company from
the date of the acquisitions, September 19, 1994. Revenues from
these two entities included in the statement of operations increased
from $2,614,000 in 1994 to $9,421,000 in 1995.
Supplemental staffing services increased from $4,787,000 to
$11,647,000 from the 1994 Fiscal Year to the 1995 Fiscal Year. This
increase is due largely to the inclusion of a full year of revenues
from the Paxxson Services and Nurse Connection acquisitions which are
both supplemental staffing services operations.
Home care services revenues decreased from $2,080,000 to
$1,331,000 from the 1994 Fiscal Year to the 1995 Fiscal Year. In
October 1994, the Company's Executive Vice President resigned. This
individual had built and managed a large Medicaid based pediatric
home care practice in rural Colorado. When this executive left the
Company, many of the nurses which worked in this program left with
the executive to work with a competitor. The Company was unable to
replace this business in 1995.
The Company's total gross margin decreased from 27% for the 1994
Fiscal Year to 21% for the 1995 Fiscal Year. The total gross margin
decrease reflects the lower proportion of home care services
performed by the Company in the 1995 Fiscal Year as compared to the
1994 Fiscal Year (home care services revenues were 10% of total net
revenues in 1995 versus 30% in 1994) which generated a higher gross
margin than supplemental staffing services. The Company's net
revenues and gross margin for fiscal year 1995 do not include any
amounts from Ellis, an entity that the Company is under contract to
purchase upon receipt of the license recently approved by the
Department of Health of the State of New York.
The Company's total gross margin from supplemental staffing
services decreased from 26% in 1994 Fiscal Year to 20% in 1995 Fiscal
Year. Direct cost of services are substantially all employee and
independent contractor related and consist of wages, payroll taxes,
transportation and housing costs and other personnel related costs.
The reduced margins in 1995 are largely the result of the Company's
decision to convert its independent contractors in Texas to employees
which resulted in the Company paying additional employer related
payroll taxes. This reduced margin is also attributable to a more
competitive environment in the Texas market which included
significant consolidation amongst potential clients, more aggressive
pricing from the Company's competitors and reduced staff
availability.
The Company's gross margin from home care services decreased
from 29% in 1994 Fiscal Year to 25% in 1995 Fiscal Year. Direct cost
of services in the home care area are similar to those listed above
for supplemental staffing. This reduction in margin is directly
attributable to a decrease in the pediatric home care business in
Colorado. This business allowed for hourly billing which in some
instances required 24 hour care and was not standard cost
reimbursement limitations which allowed for higher gross margins. As
this business was decreased in 1995 due to reasons discussed above,
the gross margin decreased accordingly.
Medicare and Medicaid reimburse the Company at a negotiated rate
which is expected to equate to the Company's cost of administering
the program. At the end of the year, the Company submits a cost
report to Medicare and Medicaid which is used to assess whether the
Company has been over or under reimbursed by Medicare and Medicaid.
During 1995 Fiscal Year and 1994 Fiscal Year, the Company has been
over-reimbursed due to the reimbursement rate as set by Medicare and
Medicaid exceeding actual costs. These over-payments have been
recorded as liabilities and reductions of revenue. This amounted to
$453,000 in 1995 and $150,000 in 1994. Of the $453,000 recorded in
1995, $98,000 related to revenues recorded in 1994. The Company has
prepared a preliminary cost report for the cost report period ended
December 31, 1995 indicating that the liability as recorded by the
Company is reasonable. This over-reimbursement was caused in part as
the Company suffered through cash flow problems, it was forced to
reduce the staff administering the Medicare and Medicaid programs.
This staff reduction and efficiencies of operation were not reviewed
in connection with their impact of reducing the reimbursement rate.
The Company has remedied this situation and is reviewing its
reimbursement are compared to its costs of administering the program
on a quarterly basis and making the appropriate adjustments to
revenue.
If the Company had closed the Ellis acquisition on September 19,
1994, the date it closed its acquisition of Paxxon Services and Nurse
Connection, the Company's revenues and gross margin for Fiscal Year
1995 would have been increased by approximately $1,800,000 and
$571,000, respectively and gross margin percentage would have
improved from 21% to 22%. Accordingly, the Company's operations were
negatively impacted by the fact that regulatory approval had not yet
been obtained and the closing of the Ellis acquisition had not yet
occurred. See Footnote 2 of the consolidated financial statements
for the unaudited results of operations of the Company after giving
effect to the Ellis acquisition as if it had been acquired as of
January 1, 1994.
Selling, general and administrative expenses increased
approximately 204% from $1,741,000 in the 1994 Fiscal Year to
$5,296,000 in the 1995 Fiscal Year. Approximately half of the
increase in selling, general and administrative expenses corresponds
with the increase in net revenues and reflects increased selling,
general and administrative expenses associated with the above-
described acquisitions and increased revenues from home care
services. As explained further below, the remaining increase is due
to the financial consulting fees, acquisition, legal, and accounting
fees, and increased financing costs.
During fiscal 1995, the Company incurred certain expenditures
that are not expected to be incurred in fiscal 1996 as follows:
Financial consultants were engaged in December 1995 to provide
financial consulting services. The Company issued 500,000 shares of
its Common Stock to the consultants which were valued at $2.00 per
share which represented the fair market value at the time of the
issuance. The $1,000,000 included in consulting expense is not
expected to be incurred in fiscal 1996.
The Company attempted to acquire two different entities in fiscal
1995 which were not completed and two mergers which were also
abandoned. The Company incurred approximately $250,000 legal and
accounting costs in connection with these failed transactions which
are expected to be incurred in fiscal 1996.
Due to the difficult financial situation that the Company faced in
fiscal 1994 and fiscal 1995, the Company was forced to finance its
accounts receivable through a factoring arrangement. The terms of
this type of financing are significantly more expensive than the
Company hopes to obtain in fiscal 1996. A more attractive non-
factoring receivables financing arrangement should reduce the
Company's interest expense. The Company is currently in negotiations
with two different financing companies which have expressed an
intention to finance the Company's accounts receivable balances. The
Company has been informed by one of the financing companies that if
the Company's March 31, 1996 balance sheet approximates its projected
balance sheet and no other significant material adverse events occur,
an agreement should be able to be reached. In addition, the Company
is holding discussions with an investment bank regarding a secondary
offering of securities. No assurances can be given that these
conditions will be met or that all the terms and conditions of the
final agreement will be satisfactory to the Company or that any
alternative financing agreement will be consummated by the Company.
The Company's preferred stock automatically converted into common
stock in January 1996. Preferred dividends are not expected to be
paid in fiscal 1996. While preferred dividends are not charged to
expense in the Statement of Operations and do not impact that Net
Loss, these dividends increase the net loss applicable to common
shareholders.
The Company impaired $1,300,000 of its goodwill in fiscal 1995.
This goodwill was originally recorded in connection with two
acquisitions completed in fiscal 1994.
The Company reduced its administrative personnel from 42 employees
in March 1995 to 39 in March 1996, while doubting its revenue base.
In addition, several higher paid management employees were terminated
during 1995 and will either not be replaced or will be replaced with
lower salaried employees.
Income from operations decreased $3,982,000 from income from
operations of $86,000 in the 1994 Fiscal Year to a loss from
operations of ($3,896,000) in the 1995 Fiscal Year. The decrease
reflects decreases in gross margins from 27% to 21% and items
discussed in the preceding paragraph.
During 1995, the Company adopted the provisions the SFAS 121 and
the company evaluated the amounts recorded as goodwill for the Paxxon
Services and Nurse Connection acquisitions. The Company analyzed
future expected undiscounted cash flow and determined it was
necessary to write down the assets as they had been significantly
impaired due to future cash flow being less than projected. This was
recognized in the 4th quarter when the Company prepared its 1996
business plan after reviewing 1995 operations for the first three
quarters. The Company spent the 1995 year integrating these
businesses which included replacing employees, identifying new
markets and stabilizing client relationships. The Company wrote down
the Paxxon Services goodwill by approximately $758,000 and the Nurse
Connection goodwill by approximately $542,000. After the writedowns,
the remaining unamortized asset balances were approximately $934,000
for Paxxon Services and $525,000 for Nurse Connection.
Interest expense increased 179% from $256,000 in the 1994 Fiscal
Year to $715,000 in the 1995 Fiscal Year. The increase represents
additional interest expense incurred to finance the Company's
acquisitions and the change in the Company's funding of its accounts
receivable. The Company began utilizing a factoring agent in late
1994 and continued using this receivables financing arrangement
throughout 1995. The 1995 Statement of Operations include a full
year of this additional interest cost. In addition, the Company
closed two acquisitions in September 1994 in which debt was issued to
finance part of the cost of the acquisitions. In the Paxxon Services
acquisition, the Company issued a promissory note for $937,500 with
an interest rate of 7% which was outstanding for approximately four
months in 1994 and twelve months in 1995. In the Nurse Connection
acquisition, the Company issued a non-interest bearing promissory
note for $35,000.
Net loss increased from ($170,000) in the 1994 Fiscal Year to
($4,611,000) in the 1995 Fiscal Year.
Going Concern Issues
The Company has suffered recurring losses for the past several
years and incurred a net loss for the year ended December 29, 1996 of
$858,000. In addition, the Company had a working capital deficit of
$1,338,000. These factors, among others, raise a substantial doubt
about the ability of the Company to continue as a going concern. The
accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
The Company is pursuing a number of alternatives for additional
financing which include a public and/or private offering of the
Company's securities, attempting to obtain an asset based line of
credit to replace its current accounts receivable factoring
arrangement, considering calling for redemption of certain
outstanding warrants or the making of an offer to reduce the exercise
price of its outstanding warrants for a period of time to induce
exercise and raise cash for the Company. There can be no assurance
that the Company will undertake such financings, or that the Company
will be able to obtain any additional financing on terms acceptable
to the Company.
Liquidity and Capital Resources
Management of the Company believes that cash flow from
operations should be sufficient to fund the Company's working capital
needs through fiscal 1997. However, if the Company is unable to meet
its revenue projections, or costs exceed the Company's projections,
or its receivables financing arrangement is terminated and the
Company is unable to replace the facility with a comparable line of
credit, the Company's cash flow from operations may be insufficient
to meet its working capital needs. In the past, the Company has
successfully met its funding needs by issuing debt and equity
instruments in private placements or public offerings. Should the
Company's cash flow from operations be insufficient to meet its cash
needs, the Company will pursue a private placement or public offering
of debt or equity securities, will consider a reduced exercise price
warrant offering and/or will reduce operations to a level at which
cash flow from operations can meet the cash needs of the Company.
There can be no assurances that any such capital raising
alternatives, if pursued, will be consummated.
The Company has historically released certain of its checks in
anticipation of receiving cash proceeds from its receivable financing
agreement. The Company does not have an arrangement with its banks
to cover checks presented in excess of its collected cash balance;
however, this situation has not occurred as the Company releases its
checks as close as possible to its funding date.
1996 Private Placement
In July and September 1996, the Company completed a private
placement of 244 units, each unit consisting of a share of
convertible preferred stock, $10,000 par value ("1996 Preferred
Stock"), a warrant to purchase 8,000 shares of the Company's common
stock at $2.50 per share and a unit purchase option to purchase an
additional unit at $10,000 per unit. The convertible preferred stock
carries a 10% dividend and is convertible at the lesser of $1.25 or
75% of the average sales price for the five trading days prior to
conversion. The private placement raised gross proceeds to the
Company of approximately $2,440,000.
Approximately $1,550,000 of the proceeds raised was used to fund
the cash purchase portion of STAT. A shareholder who participated in
the placement of the private placement was paid a commission of
$117,000 in 1996 and issued a warrant to purchase 100,000 shares of
common stock at $2.00 per share. The warrant price was subsequently
reduced to $1.00 per share in January 1997.
During 1996, 88.5 units (with accrued dividends) were converted to
923,111 shares of common stock. In addition, a Unit holder who held
17 units was allowed to reduce their purchase price on their warrants
to $1.00 per share from $2.50 per share, resulting in gross proceeds
to the Company of $136,000 in November 1996. Subsequent to year end,
an additional 100 units have been converted through March 3, 1997
resulting in the issuance of an additional 1,388,723 shares of common
stock in 1997. Also in 1997, a Unit Holder who held 20 Units
exercised their Unit purchase option resulting in gross proceeds to
the Company of $200,000. The Unit holder immediately converted the
preferred to common resulting in the issuance of 257,028 shares of
common stock in January 1997.
1997 Private Placement
In January and February 1997, the Company completed a private
placement of 167.15 Units, each unit consisting of one share of
convertible preferred stock, $10,000 par value, "1997 Preferred
Stock", and a warrant to purchase 10,000 shares of common stock at
$1.00 per share. The convertible preferred stock carries no dividend
if the underlying common stock is included in an effective
registration statement within 90 days of the date of the agreement.
After 90 days, if the underlying shares are not included in an
effective registration statement, the dividend rate becomes 18%. The
Company raised gross proceeds of $1,671,500 from this private
placement. Commissions of $99,540 were paid to individuals who
assisted in the private placement who are also shareholders of the
Company. Substantially all of the proceeds were used to purchase
TherAmerica.
Management of the Company intends to pursue other acquisitions
in the future and anticipates needing cash to fund future
acquisitions. Cash for future acquisitions is anticipated to be
provided from warrant exercises and additional equity offerings.
ITEM 7. FINANCIAL STATEMENTS
Attached hereto and filed as a part of this Form 10-KSB are the
Consolidated Financial Statements of the Company.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The directors and executive officers of the Company are set
forth below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
John P. Yeros 46 Chairman of the Board and Chief
Executive Officer
Robin M. Bradbury 40 Chief Financial Officer, Treasurer
and Secretary
Barry J. McDonald 39 Medical Division President and
President of TherAmerica, Inc.
Thomas J. Oberle(2) 51 Director
Charles Powell(1)(2) 41 Director
</TABLE>
_______________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Each director is serving a term of office which will continue
until the next annual meeting of shareholders and until the election
and qualification of his respective successor. All of the Company's
officers devote full-time to the Company's business and affairs.
John P. Yeros. Mr. Yeros, the founder of the Company, served as
President and a Director of the Company from the Company's
incorporation in April 1988 through September 1993. Mr. Yeros has
since served as Chairman of the Board and Chief Executive Officer of
the Company.
Robin M. Bradbury. Mr. Bradbury has served as Chief Financial
Officer of the Company since February 1996 and as its Treasurer and
Secretary since January 1997. From 1991 to September 1995, Mr.
Bradbury served as the Chief Financial Officer of InfoNow
Corporation, a publicly-traded internet provider of multi-media
solutions in Denver, Colorado. From 1987 to 1991, Mr. Bradbury owned
and operated an interim Chief Financial Officer/Controller service
which served private and public companies. During this period, Mr.
Bradbury served as the Chief Financial Officer of Top Source, Inc., a
publicly-traded automotive accessory distributor in Colorado. From
1980 to 1987, Mr. Bradbury was an audit manager with Deloitte Haskins
& Sells (Deloitte Touche) in Denver and Colorado Springs, Colorado.
Barry J. McDonald Mr. McDonald has served as the Company's
Medical Division President since February 1997. From 1994 to 1996,
Mr. McDonald served as Senior Vice President of TherAmerica. From
1991 to 1993, Mr. McDonald served as the managing partner for
Colorado Therapists On Call, Inc. and Colorado Orthopedic and
Rehabilitation Equipment, Inc. Prior experience also includes three
years as an area manager for Olsten Healthcare Services.
Thomas J. Oberle. Mr. Oberle has been a Director of the Company
since its inception. Since January 1993, Mr. Oberle has been the
director of the Colorado Dental Association. From January 1991 to
January 1993, he served as an independent insurance agent in Denver,
Colorado. From October 1989 to December 1991, Mr. Oberle was the
vice president of Equicor, a health maintenance organization. From
May 1987 to October 1989, he served as president of RMS Inc., a
corporation involved in organizing various companies associated with
the Childrens Hospital. Mr. Oberle devotes only such time as may be
necessary to the business of the Company.
Charles Powell. Mr. Powell has served as a Director of the
Company since September 1994. Mr. Powell co-founded KAPRE Software,
Inc., Boulder, Colorado in 1992 and served as its Vice President of
Finance and Vice President of International Operations. From March
1992 through June 1993, Mr. Powell also served as Chief Executive
Officer of Generation 5 Technology, Inc., Denver, Colorado, a public
software development company. Mr. Powell devoted approximately 50%
of his time to each of KAPRE Software, Inc. and Generation 5
Technology, Inc. from March 1992 through March 1993. From January
1989 to March 1992, Mr. Powell served as a vice President of
International operations for J.D. Edwards, Inc., Englewood, Colorado
a software applications developer for the mainframe computer market.
Mr. Powell currently serves on the Board of Directors of Milestone
Capital, Inc. and Kinetics-Com both public companies located in
Denver, Colorado, and the Rockies Fund, Inc., a public company
headquartered in Colorado Springs, Colorado. Mr. Powell devotes only
such time as may be necessary to the Company's business.
Section 16. Compliance
During fiscal 1995, John P. Yeros did not file on a timely basis
a Form 4 concerning the grant of certain options, Colleen Dougherty-
Gray did not file a Form 4 concerning the grant of certain options
and Robin Bradbury did not file on a timely basis a Form 4 concerning
the grant of certain options.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
annual and long-term compensation for services in all capacities to
the Company for, the three years ended December 29, 1996 of Mr.
Yeros, the Chief Executive officer of the Company and Ms. Dougherty-
Gray, the former Chief Operating Officer of the Company, (the "Named
officers"). No officer of the Company other than Mr. Yeros and Ms.
Dougherty-Gray received annual salary and bonus exceeding $100,000 in
1996.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Securities
Underlying
Name and Principal Fiscal Options/
Position Year Salary Bonus (Shares)
<S> <C> <C> <C> <C>
John P. Yeros 1996 $154,000 $ - 116,187(4)
Chief Executive
Officer and
Chairman of the 1995 130,000 10,000 300,000(3)
Board 1994 109,000(2) - 403,813
Colleen Dougherty-
Gray 1996 $108,000 $ - 100,000
Former Chief
Chief Operating 1995 96,000 5,000 100,000(3)
Officer and Former
Director 1994 96,000 - 100,000(3)
</TABLE>
(1) With respect to each Named Officer, the aggregate amount of
perquisites and other personal benefits, securities or property
received was less than either $50,000 or 10% of the salary and
bonus reported.
(2) Notwithstanding the terms of his employment agreement, Mr.
Yeros agreed to reduce his annual salary for Fiscal Year 1994 to
$109,000 rather than $120,000.
(3) The options to purchase 400,000 shares of common stock granted
to Mr. Yeros and Ms. Dougherty-Gray were granted with an
exercise price of $.63 per share which represented the fair
market value of the common stock at the time of the issuance.
(4) The options to purchase 116,187 shares of common stock granted
to Mr. Yeros at $1.88 per share which represented the fair
market value of the common stock at the date of grant were
replacing previously granted options to purchase 36,363 and
79,824 shares of common stock at $2.75 and $2.50, respectively.
Option Grants Table. The following table sets forth information
on grants of stock options pursuant to the Company's 1996 Plan to the
Named Officers.
<TABLE>
<CAPTION>
Percent of
total options/
Options/ warrants Exercise
Warrants granted to or base
Granted Employees Price Expiration
Name (Shares) in 1996(1) ($/share) Date
<S> <C> <C> <C> <C>
John P. Yeros 116,187(2) 28% $ 1.88 August 2006
Colleen Dougherty
-Gray 100,000(2) 24% 1.88 August 2006
</TABLE>
(1) The Company issued options to acquire a total of 416,187 shares
of its common stock to employees in 1996.
(2) Such options were granted pursuant to the 1996 Plan and are
exerciseable immediately. See "Stock Option Plans."
Fiscal Year-End Options & Warrants - Option/Warrant Value Table. The
following table sets forth information on year-end values of stock
options and warrants for the Named Officers.
<TABLE>
<CAPTION>
Number of securities under-
lying unexercised options/ Value of unexercised in-the-money
warrants at fiscal year-end options at fiscal year-end
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
John P. Yeros 736,313 $111,000
Colleen Dougherty-
Gray 215,000 37,000
</TABLE>
(1) The dollar values are calculated by determining the difference
between $1.00 per share, the fair market value of the common
stock at December 29, 1996, and the exercise price of the
options.
No employee-director of the Company receives any additional
compensation for services as a director. Nonmanagement directors
receive no salary for their services as such, but receive a fee of
$500 per Board of Directors or committee meeting attended. The Board
of Directors has also authorized payment of reasonable travel or
other out-of-pocket expenses incurred by non-management directors for
attending meetings of the Board of Directors or committee thereof.
The Company has no retirement, pension or profit sharing program
for the benefit of its directors, officers or other employees, but
the Board of Directors may recommend one or more such programs for
adoption in the future.
Employment Agreements. Mr. Yeros initially entered into a three-
year employment agreement with the Company effective October 15,
1993. On January 7, 1997, Mr. Yeros entered into a five-year
employment agreement with the Company effective January 1, 1997. The
current agreement provides a salary of $165,000 per year for the
first year adjusted upward at a minimum of 10% annually after 1997.
The agreement may be terminated by Mr. Yeros with 90 days notice and
the agreement may be terminated by the Company "for Cause" at any
time after the first year. In January 1997, Mr. Yeros agreed to
reduce his salary to an annual rate of approximately $102,000 for the
first quarter of 1997.
Ms. Dougherty-Gray initially entered into a two-year employment
agreement with the Company effective November 21, 1994 which was
canceled and replaced with a two-year employment agreement effective
March 1, 1996. Ms. Doughtery-Gray's agreement provided for a salary
of $108,000 per year. Ms. Dougherty-Gray resigned from the Company
effective December 29, 1996 and in exchange for a release of all
claims against the Company was given severance of six months pay.
Mr. Bradbury entered into a two-year employment agreement with
the Company effective February 13, 1996. The agreement provides for
a base salary of $110,000. The agreement may be terminated by Mr.
Bradbury with 90 days notice and the agreement may be terminated by
the Company "for Cause" at any time after the first year. In January
1997, Mr. Bradbury agreed to reduce his salary to an annual rate of
approximately $88,000 for the first quarter of 1997.
In November 1996, the Company entered into a one-year employment
agreement with Art Shiffey, who was hired as the National Travel
Manager. The agreement provides for a $70,000 annual salary and the
grant of options to purchase 50,000 shares of common stock at $1.00
per share.
In connection with the purchase of TherAmerica, Inc., Mr. Barry
McDonald entered into a two-year employment agreement with the
Company effective February 1, 1997. The agreement provides for a
$100,000 annual salary and the issuance of 100,000 options to
purchase common stock at $1.00 per share vesting over three years.
Each employment agreement contains provisions which provide
that, upon the occurrence of a "Triggering Event" (defined to include
a non-negotiated change in ownership of between 50% and 80% of more
of the outstanding shares of the Company or a non-negotiated merger
of the Company into another corporation) during the period that such
persons are acting as officers or directors for the Company, the
executive will receive a lump sum payment equal to between 1 times
the previous year's base pay and the remaining amount due under the
contract in the event of termination other than for just cause. Each
employment agreement also contains a non-compete agreement which
extends for a period of one year after termination or resignation of
the employee, and confidentiality provisions.
Stock Option Plans
The Company adopted an Incentive Stock Option Plan in 1988 (the
"Incentive Plan"). The Incentive Plan covers an aggregate of 100,000
shares of common stock. The Incentive Plan is administered by the
Compensation Committee of the Board of Directors, of which Messrs.
Oberle and Powell are members. The Incentive Plan provides that no
options may be granted at an exercise price less than the fair market
value of the common stock of the Company on the date of grant.
Unless otherwise specified, the options expire ten years from the
date of grant and may not be exercised during the initial one-year
period from the date of grant. Thereafter, the options may be
exercised in whole or in part, depending on terms of the particular
option. As of March 1997, 77,500 options were outstanding pursuant
to the Incentive Plan at exercise prices ranging from $.63 to $2.50.
None of such options have been exercised. The Company intends to
continue to grant options under the Incentive Plan to the extent of
the shares reserved thereunder.
The 1994 Omnibus Stock Plan (the "Omnibus Plan") was adopted by
the Company's Board of Directors effective January 1, 1994, subject
to shareholder approval which must be received within one year of the
date the Company's Board adopted such plan. The purpose of the
Omnibus Plan is to provide a vehicle under which a variety of equity
based awards may be granted to employees, nonaffiliated individuals
(as defined in the Omnibus Plan), and nonemployee directors of the
Company in order to promote the Company's development and success.
The Omnibus Plan permits the award of non-qualified stock options,
incentive stock options, restricted shares, performance units,
performance shares, share appreciation rights, and other forms of
awards, including deferrals of earned awards, as approved by the
Compensation Committee of the Board of Directors. A maximum of
500,000 shares of common stock are reserved and available for grants
of any kind under the Omnibus Plan. As of March 1997, 316,188
options were outstanding under the Omnibus Plan at exercise prices
ranging from $1.34 to $6.00.
The 1996 Stock Incentive Plan (the "1996 Plan") was adopted by
the Company's Board of Directors effective November 22, 1995. The
purpose of the 1996 Plan is to provide a vehicle under which a
variety of equity based awards may be granted to employees, non
affiliated individuals (as defined in the 1996 Plan), and nonemployee
directors of the Company in order to promote the Company's
development and success. The 1996 Plan permits the award of non-
qualified stock options, incentive stock options, stock awards and
purchases, as approved by the Compensation Committee of the Board of
Directors. A maximum of 3,000,000 shares of common stock are
reserved and available for grants of any kind under the 1996 Plan.
As of March 1997, 1,393,185 options were outstanding under the 1996
Plan at exercise prices of between $.63 and $1.88.
Warrant Issuances
In November 1994, the Board of Directors issued warrants to
Messrs. Yeros and Hendricks entitling each of them to acquire 287,626
shares of common stock. The warrants have an exercise price of
$1.75, the fair market value at the date of grant. The warrants vest
immediately and are exerciseable when the Company's consolidated
revenues, on a proforma basis, equal or exceed $20 million, or at the
end of seven years, whichever comes first. The warrants expire at
the end of seven years if not exercised. The Compensation Committee
of the Board of Directors approved the granting of these warrants.
In connection with Mr. Hendricks termination of employment, his
warrant was canceled.
In July 1996, the Company issued the following warrants:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Warrant Holder Shares Price Date Reason
<S> <C> <C> <C> <C>
STAT Health Care
Services 125,000 $1.88 July 17, 1997 Purchase of STAT
Private placement
participants 1,952,000 $2.50 July 18, 1999 Private placement
Private placement
participants 1,952,000(1) $1.25 December 31, 1997 Private
placement
David Klugman 100,000(2) $1.88 July 18, 1999 Private
placement
commission
David Watamull 20,000 $1.88 August 21, 1999 Consultant
Jim Gumina 20,000 $1.88 August 21, 1999 Consultant
</TABLE>
1) Represents option to purchase an additional unit identical to the
Unit issued in the July/September private placement. Each $10,000
unit consists of one share of convertible preferred (convertible at
the lesser of $1.25 or 75% of the closing price on the five trading
days prior to conversion) and a warrant to purchase 8,000 shares of
common stock at $2.50 per share for three years.
2) Subsequent to year-end, the exercise price of this warrant was
reduced to $1.00 per share.
Subsequent to December 31, 1996, the Company issued the following
warrants:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Warrant Holder Shares Price Date Reason
<S> <C> <C> <C> <C>
Private placement
participants 1,671,500 $1.00 January 15, 2000- Private
February 21,2000 placement
Bridge loan participant 200,000 $1.19 July 31, 1999 Bridge loan
</TABLE>
Conflicts of Interest
The Company has adopted a policy that any transactions with
directors, officers or entities of which they are also officers or
directors or in which they have a financial interest, will only be on
terms which would be reached in an arms-length transaction,
consistent with industry standards and approved by a majority of the
disinterested directors of the Company's Board of Directors. This
policy, which is set forth in the minutes of the Board of Directors,
provides that no such transaction by the Company shall be either void
or voidable solely because of such relationship or interest of
directors or officers or solely because such directors are present at
the meeting of the Board of Directors of the Company or a committee
thereof which approves such transaction or solely because their votes
are counted for such purpose. In addition, interested directors may
be counted in determining the presence of a quorum at a meeting of
the Board of Directors of the Company or a committee thereof which
approves such a transaction. No such transactions, other than as
described under "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," are
currently contemplated.
Limitation of Liability and Indemnification
Colorado law provides that a corporation may not indemnify a
director in connection with any proceeding charging improper personal
benefit to the director or in connection with a proceeding by or in
the right of the corporation in which the director was adjudged
liable to the corporation. Additionally, a director shall be liable
in certain circumstances unless he complies with the standards set
forth in the Colorado Business Corporation Act.
The Company's Articles of Incorporation provide that the Company
shall indemnify its officers, directors, employees and other agents
to the fullest extent permitted by law. The Company believes that
indemnification under its Articles of Incorporation is sufficiently
broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Act"). At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company
where indemnification will be required or permitted. The Company is
not aware of any threatened litigation or proceeding which may result
in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of common stock as of March 1, 1997 by (i) each
person known by the Company to own beneficially more than 5% of the
outstanding common stock, (ii) each director and each Named Officer,
and (iii) all executive officers and directors as a group. Shares
not outstanding but deemed beneficially owned by virtue of the right
of any individual to acquire them within sixty days are treated as
outstanding only when determining the amount and percentage of common
stock owned by such individual. Each person has sole voting and sole
investment power with respect to the shares shown except as noted.
<TABLE>
<CAPTION>
March 1, 1997
Number of Percent of
Name Shares Class
<S> <C> <C>
John P. Yeros (1) 1,139,768(2) 13.7%
Colleen Dougherty-Gray (1) 215,000(3) 2.8%
Robin Bradbury (1) 260,154(3) 3.4%
Barry McDonald 34,000 .5%
Thomas J. Oberle(1) 113,250(3) 1.5%
Charles Powell(1) 110,000(3) 1.5%
All directors and officers as a group
(six persons) 1,872,172(4) 20.6%
Laura Huberfeld(5) 755,342 9.5%
Naomi Bodner(5) 859,342 10.8%
Newark Sales Corp.(5) 720,604 9.1%
</TABLE>
(1) The address for the named individual is Suite 400, 360 South
Garfield Street, Denver, Colorado 80209.
(2) Includes 1,009,768 shares subject to currently exerciseable
options or options exerciseable within sixty days.
(3) Represents shares subject to currently exerciseable options or
options exerciseable within sixty days.
(4) Includes 1,742,172 shares subject to currently exerciseable
options or options exerciseable
within sixty days.
(5) The address for the named individual is c/o Broad Capital, 152
West 57th Street, 54th Floor, NY, NY 10019
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted policies that any loans to officers,
directors and 5% or more shareholders ("Affiliates") are subject to
approval by a majority of the disinterested directors and that future
transactions with Affiliates will be on terms no less favorable than
could be obtained from unaffiliated parties and approved by a
majority of the disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Except as otherwise noted, the Exhibits listed below have
previously been filed as an exhibit to the Company's Registration
Statement on Form SB-2 File No. 33-81582-D (the "Registration
Statement"), and is incorporated herein by reference to such
exhibits. The exhibit numbers shown below for such items correspond
to those shown in the Registration Statement.
Exhibit No. Description
3.1.1 Articles of incorporation of the Company as filed on
April 22, 1988 with the Secretary of State of the State of
Colorado.
3.1.2 Articles of Amendment to Articles of Incorporation of
the Company as filed on May 24, 1988 with the Secretary of
State of the State of Colorado.
3.1.3 Articles of Amendment to Articles of Incorporation of
the Company as filed on February 16, 1990 with the
Secretary of State of the State of Colorado.
3.1.4 Articles of Amendment to Articles of Incorporation of
the Company as filed on August 12, 1994 with the Secretary
of State of the State of Colorado.
3.1.5 Articles of Amendment to Articles of Incorporation of
the company as filed on September 12, 1994 with the
Secretary of State of the State of Colorado.
3.1.6 Articles of Designation of 1996. Convertible
Preferred Stock incorporated by reference to Form S-3 filed
October 10, 1996.
3.1.7 Articles to Amendment to Articles of Incorporation
filed October 10, 1996 incorporated by reference to Form S-
3 filed October 10, 1996.
3.1.8 Articles of Amendment containing Articles of
Designation of 1997 Convertible Preferred Stock.*
3.2.1 By-Laws of the Company.
3.2.2 Amendment and Restated By-Laws of the Company.
4.1.1 Form of specimen certificate for common stock of the
Company.
4.1.2 Form of specimen certificate for preferred stock of
the Company.
4.2 Form of Representative`s Warrants issued by the
Company to the underwriters' representative in connection
with the Company's 1994 public offering.
4.3.1 Form of 1992 Warrant issued by the Company to 1992
private placement purchasers.
4.3.2 Form of Conversion Agreement granting registration
rights to holders of 1992 Warrants.
4.4 Form of Warrant issued by the Company in the 1994
private placement.
4.5 Form of Sales Agent Warrant issued by the Company in
the 1994 private placement.
4.6 Form of Note and Unit Warrant issued in connection
:with the bridge financing undertaken by the Company in
June, 1994.
4.7.1 Warrant dated December 22, 1992 issued by the Company
to Staff Builders, Inc.
4.8 Form of 1996 Unit Warrant incorporated by reference to
Form S-3 filed October 10, 1997.
4.9 Warrant issued January 28, 1997 to Millenco, L.P.*
4.10 Convertible Note made January 28, 1997 to Millenco, L.P.*
4.11 Form of 1997 Unit Warrant.*
7. Opinion and consent of LeBoeuf, Lamb, Greene, & MacRae,
L.L.P. regarding the
liquidation preference of the 12% Cumulative Convertible
Preferred Stock.
10.1.6 Employment Agreement, dated November 21, 1994, by and
between Colleen Dougherty-Gray and the Company.
10.1.7 Employment Agreement, dated February 13, 1996, by and
between Robin
Bradbury and the Company.
10.1.9 Employment Agreement, dated March 1, 1996, by and
between Colleen
Dougherty-Gray and the Company.
10.1.10 Employment Agreement, dated March 1, 1996, by and between
John Yeros and the Company.
10.2.1 Incentive Stock Option Plan, adopted May 5, 1988,
authorizing 100,000 shares of common stock for issuance
pursuant to the Plan.
10.2.2 Omnibus Stock option Plan, adopted effective January
1, 1994, authorizing 500,000 shares of common stock for
issuance pursuant to the Plan.
10.3.1 Office Lease, dated February 20, 1991 by and between
POCOL Investments, a Delaware partnership, as landlord, and
the Company, as tenant.
10.3.2 First Amendment to office Lease, dated September 21,
1992 by and between POCOL Investments, a Delaware
partnership, at landlord, and the Company, as tenant.
10.3.3 Second Amendment to Office Lease, dated August 9, 1993
by and between POCOL Investments, a Delaware partnership,
as landlord, and the Company, as tenant.
10.5 Lease, dated June 7, 1992, and amendment dated June 7,
1992, by and between State Mutual Life Assurance Company of
America and Nurse Connection.
10.6 Lease, dated May 27, 1994, by and between Koger Equity,
Inc. and Nurse Connection.
10.7 Lease, executed October 6, 1988 and First Amendment to
Lease dated April 7, 1993, by and between Robert Martin
Company and Paxxon Services, Inc.
10.8.1 Series 1990 Note, dated June 21, 1991, payable to
Leslee Boss.
10.8.2 Royalty Agreement, dated May 8, 1990, by and between
Leslee Boss and the Company.
10.10 Forms of contract with health care providers.
10.11 Asset Purchase and Sale Agreement, dated May 2, 1994
and as amended June 1, 1994, by and between the Company and
Paxxon Services, Inc. (Schedules and attachments are listed
in the index to the Agreement. Schedules and attachments
omitted from this filing will be furnished to the
Commission upon request.) Incorporated by reference to
Exhibit 2.2 to the Registration Statement.
10.12 Asset Purchase and Sale Agreement, dated May 2, 1994
and as amended June 1, 1994, by and between the Company and
Ellis Home Care, Inc. (Schedules and attachments are
listed in the index to the Agreement. Schedules and
attachments omitted from this filing will be furnished to
the Commission upon request.) Incorporated by reference to
Exhibit 2.3 to the Registration Statement.
10.13 Asset Purchase and Sale Agreement dated April 15, 1994
and as amended June 1, 1994, by and between the Company and
Mint Energy Corporation, d/b/a the Nurse Connection.
(Schedules and attachments are listed in the index to the
Agreement. Schedules and attachments omitted from this
filing will be furnished to the commission upon request.)
Incorporated by reference to Exhibit 2.4 to the
Registration Statement.
10.14 Agreement and Plan of Reorganization dated October 6,
1995 entered into by and among NuMED Home Health Care,
Inc., NuMED Acquisition, Inc. and International Nursing
Services, Inc.
10.15 Management and Consulting Agreement with PWG Trading
Corp. dated as of December 8, 1995.
10.16 Consulting Agreement with James LaBate dated as of
December 8, 1995.
10.17 Consulting Agreement with The Paris Group, Ltd. dated
as of December 8, 1995.
18 Asset Purchase Agreement between the Company and STAT Home Health
Services, Inc. dated January 10, 1996.
19 Form of Registration Rights/Purchase Agreement relating to 1996
Unit Offering incorporated by reference to Form S-3 filed October 10,
1996.
10.20 TherAmerica Asset Purchase Agreement. Incorporated by
reference to Form 8-K filed February 14, 1997.
10.21 Form of Registration Rights/Purchase agreement
relating to 1997 unit offering.*
10.22 Employment agreement, dated January 7, 1997, by and
between John Yeros and the Company.*
21. Subsidiaries of the Company.*
27. Financial Data Schedule
*Filed herewith
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed
on behalf by the undersigned, thereunto duly authorized on March __,
1997.
INTERNATIONAL NURSING SERVICES, INC.
By: /s/ John P. Yeros
John P. Yeros,
Chairman of the Board and Chief
Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates
indicated.
Signature Title Date
[S] [C] [C]
/s/ John P. Yeros May 21, 1997
John P. Yeros Chairman of the Board
and Chief Executive
Officer (Principal
Executive Officer)
/s/ Robin M. Bradbury May 21, 1997
Robin M. Bradbury Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Barry J. McDonald May 21, 1997
Barry J. McDonald Chief Operating Officer
/s/ Thomas J. Oberle May 21, 1997
Thomas J. Oberle Director
/s/ Charles Powell May 21, 1997
Charles Powell Director
INTERNATIONAL NURSING
SERVICES, INC. AND SUBSIDIARIES
Financial Statements
December 29, 1996
Table of Contents
Page
Independent Auditors' Report F-1
Financial Statements
Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Financial Statements F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
International Nursing Services, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of
International Nursing Services, Inc. and Subsidiaries, as of December
29, 1996, and the related consolidated statements of operations and
changes in stockholders' equity, and cash flows for the years ended
December 29, 1996 and December 31, 1995. These consolidated
financial statements are the responsibility of the management of
International Nursing Services, Inc. and Subsidiaries. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of International Nursing Services, Inc. and
Subsidiaries, as of December 29, 1996, and the results of their
operations and their cash flows for the years December 29, 1996 and
December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
further discussed in Note 1 to the consolidated financial statements,
the Company has incurred operating losses for the past several years
and has a deficit in working capital which raises substantial doubt
about its ability to continue as a going concern. Current
management's plans in regards to this matter are also discussed in
Note 1. The consolidated financial statements do not include any
adjustments that might result from this uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
March 21, 1997, except for Note 12, as to which the date is May 12,
1997
Denver, Colorado
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 29, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets
Accounts receivable, net of allowance of $152,000 $4,458,000
Prepaid expenses and other 19,000
Total current assets 4,477,000
Property and equipment, net 355,000
Other assets
Intangible assets, net 4,080,000
Total $8,912,000
Liabilities and Stockholders' Equity
Current liabilities
Checks written in excess of bank balance $ 65,000
Current portion of long-term debt 145,000
Current portion of capital lease obligation 50,000
Advances under financing agreement 3,318,000
Accounts payable 617,000
Accrued expenses 1,620,000
Total current liabilities 5,815,000
Long-term debt
Long-term portion of capital lease obligation 50,000
5,865,000
Commitments and contingency
Stockholders' equity
Preferred stock, 10% cumulative convertible, $10,000
par value 488 shares authorized, 155 issued and
outstanding, liquidation preference $1,555,000 1,234,000
Common stock, $.001 par value, 25,000,000 shares
authorized, 5,688,292 issued and outstanding 6,000
Dividends payable with common stock 66,000
Additional paid-in capital 8,965,000
Accumulated deficit (7,224,000)
Total stockholders' equity 3,047,000
Total $8,912,000
</TABLE>
See notes to consolidated financial statements.
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
December 29, December 31,
1996 1995
<S> <C> <C>
Revenues $14,259,000 $12,978,000
Direct costs of services 10,831,000 10,278,000
Gross margin 3,428,000 2,700,000
Selling, general, and administrative 4,083,000 5,296,000
expenses
Impairment of goodwill - 1,300,000
Loss from operations (655,000) (3,896,000)
Interest expense 552,000 715,000
Net loss (1,207,000) (4,611,000)
Loss per common share, restated (Note 12) $ (.57) $ (5.05)
Weighted average common shares 4,517,111 1,086,147
outstanding
</TABLE>
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement Of Changes In Stockholders' Equity
For the Years Ending December 29, 1996 and December 31, 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Number of Number of Paid-in
Shares Amount Shares Amount Capital
<S> <C> <C> <C> <C> <C>
Balance, December 1,002,287 $ 1,000 492,552 $ 493,000 $4,674,000
31, 1994 -
Regulation S 1,000,000 1,000 - - 499,000
offering
Issuance of common
stock
Preferred stock 259,736 - - - 435,000
dividend
Stock issued for
services 500,000 1,000 - - 1,030,000
Stock issued for
services 75,000 - - - 94,000
Conversion of
preferred stock 57,750 - (23,100) (23,000) 23,000
Net loss - - - - -
Dividends - - - - (876,000)
Balance December
31, 1995 2,894,773 3,000 469,452 470,000 5,879,000
Automatic
conversion of
preferred stock 1,173,631 1,000 (469,452) (470,000) 469,000
Acquisition of
assets (Ellis) 256,250 1,000 - - 1,058,000
Guaranteed value
of common stock
issued in Ellis
acquisition - - - - (560,000)
Conversion of
notes payalbe to
common stock 41,903 - - - 151,000
Preferred stock,
net of imputed
discount, restated
(Note 12) - - 244 703,000 1,737,000
Amortization of
preferred stock
discount, restated
(Note 12) - - - 737,000 (1,737,000)
Common stock options
issued in connection
with finder on
preferred stock - - - - 125,000
Acquisitions of
assets (STAT) 220,133 - - - 467,000
Conversion of preferred
stock and accrued
dividends of
$26,000 923,000 1,000 (89) (885,000) 910,000
Common stock options
issued for services - - - - 48,000
Exercise of
warrants 178,491 - - - 255,000
Offering costs
related to 1996
stock issued - - - (321,000) (186,000)
Net loss - - - - -
Dividends - - - - 349,000
Balance December 29,
1996 5,688,292 $ 6,000 155 $1,234,000 $8,965,000
</TABLE>
See notes to consolidated financial statements.
Continued below
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the years ended December 29, 1996 and December 31, 1995
<TABLE>
<CAPTION>
Dividend
Payable with Accumulated
Common Stock Deficit Total
<S> <C> <C> <C>
Balance, December 31,
1994 $ - $ (1,406,000) $3,762,000
Regulation S offering - - 500,000
Issuance of common
stock
Preferred stock
dividend - - 435,000
Stock issued for
services - - 1,031,000
Stock issued for
services - - 94,000
Conversion of preferred
stock - - -
Net loss - (4,611,000) (4,611,000)
Dividends 441,000 - (435,000)
Balance December 31,
1995 441,000 (6,017,000) 776,000
Automatic conversion of
preferred stock (441,000) - (441,000)
Acquisition of assets
(Ellis) - - 1,059,000
Guaranteed value of
common stock issued in
Ellis acquisition - - (560,000)
Conversion of notes payable
to common stock - - 151,000
Preferred stock, net of
imputed discount, restated
(Note 12) - - 2,440,000
Amortization of preferred
stock discount, restated
(Note 12) - - -
Common stock options issued
in connection with finder
on preferred stock - - 125,000
Acquisitions of assets
(STAT) - - 467,000
Conversion of preferred
stock and accrued
dividends of $26,000 - - 26,000
Common stock options
issued for services - - 48,000
Exercise of warrants - - 255,000
Offering costs related
to 1996 stock issued - - (507,000)
Net loss - (1,207,000) (1,207,000)
Dividends 66,000 - 415,000
Balance, December 29,
1996 $66,000 $(7,224,000) $3,047,000
</TABLE>
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
December 29, December 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,207,000) $(4,611,000)
Adjustments to reconcile net loss to net
cash from operating activities -
Depreciation and amortization 371,000 370,000
Common stock issued for services 48,000 1,124,000
Impairment of goodwill - 1,300,000
Checks written in excess of bank (179,000) 244,000
balance
Change in assets and liabilities -
Accounts receivable, net (1,960,000) 1,119,000
Prepaid expenses and other (33,000) 30,000
Accounts payable and accrued 591,000 609,000
expenses
(1,162,000) 5,074,000
Net cash (used in) provided by (2,369,000) 463,000
operating activities
Cash flows from investing activities
Business acquisition (1,618,000) -
Purchase of property and equipment (112,000) (52,000)
Deposits - 176,000
Acquisition costs of intangible assets (5,000) -
Net cash (used in) provided by (1,735,000) 124,000
investing activities
Cash flows from financing activities
Proceeds from issuance of debt and - 104,000
notes payable
Advances under financing agreement 11,618,000 10,906,000
Payments under financing agreement (9,478,000) (11,681,000)
Principal payments on debt and notes (588,000) (397,000)
payable
Issuance of preferred and common stock, 2,593,000 500,000
net of offering costs
Dividends paid (60,000) -
Net cash provided by (used in) 4,085,000 (568,000)
financing activities
Net increase (decrease) in cash (19,000) 19,000
Cash, beginning of period 19,000 -
Cash, end of period $ - $ 19,000
</TABLE>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest was $655,000 and $686,000
for December 29, 1996 and December 31, 1995, respectively.
Non-cash investing and financing activities:
Acquisition of equipment and vehicle under a capital lease was
$90,000 during 1995.
Dividend declared was $66,000 and $435,000 for December 29, 1996
and December 31, 1995, respectively.
Conversion of preferred stock into common stock for $23,000 during
1995.
Acquisition of equipment under capital lease was $56,000 in 1996.
During 1996, $400,000 of receivables and $10,000 of fixed assets
were acquired in business combination through the issuance of
476,383 shares of common stock with an equivalent value of
$1,526,000. The excess of purchase price over the identifiable
assets of $1,116,000 has been allocated to goodwill.
During 1996, all shares of the 12% preferred stock outstanding at
December 31, 1995 were automatically converted into 1,173,631
shares of common stock.
In conjunction with the automatic conversion of the 12% preferred
stock accrued dividends outstanding of 441,000 were recaptured.
In 1996, 89 shares of the 10% convertible preferred stock issued
plus $26,000 of accrued dividends were converted into 923,111
share of common stock.
During 1996, $151,000 in notes payable were converted into 41,903
shares of common stock to cover the guaranteed value of certain
shares issued in a business acquisition during the year.
During 1996, the Company recorded a liability of approximately
$500,000 to cover the guaranteed value of certain shares issued in
a business acquisition during the year.
Options with an imputed value of $125,000 were issued as a finders
fee for preferred stock placements in 1996.
The Company recorded imputed dividends on preferred stock of
$1,737,000 associated with the 1996 private placements (Note 12)
INTERNATIONAL NURSING SERVICES, INC. AND SUBSIDIARIES
Notes to Financial Statements
Note 1 - Organization and Significant Accounting Policies
Organization
International Nursing Services, Inc. and subsidiaries (the Company)
provide temporary nurses (registered and/or licensed), therapists,
nurse assistants, and other caregivers to nursing homes, other long-
term health-care facilities, hospitals, and private residences.
During 1996, the Company adopted a 52-53 week fiscal year for
financial reporting purposes.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of International Nursing Services, Inc. and its wholly-owned
subsidiaries, National Care Resources - Colorado, Inc. National Care
Resources - New York, Inc., National Care Resources - Texas, Inc. and
JJ Care Resources, Inc. All intercompany transactions have been
eliminated.
Checks Issued in Excess of Bank Balance
As disclosed in Note 5, the Company assigns its receivables with
recourse to financial institutions. These assignments are done and
cash is received weekly. The Company in anticipation of this funding
issues checks which are in excess of recorded deposits. Checks are
never issued in excess of the expected funding amounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk
The Company maintains cash in depository accounts which, at times,
may exceed FDIC insurance limits. At December 29, 1996 balances in
excess of FDIC limits were approximately $102,000.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts
receivable. The Company grants credit to health-care facilities
primarily in Colorado, New York, and Texas; however, travel nurses
are made available throughout the United States. The Company
periodically performs credit analysis and monitors the financial
condition of its clients in order to minimize credit risk.
Both the supplemental staffing services and home care staffing
services are subject to third party reimbursement arrangements. Such
third-party payers maintain standards which providers must satisfy to
remain eligible for participation and reimbursement; thus a certain
portion of the Company's future operating results are dependent on
its ability to remain eligible for participation in such third-party
payer programs. Approximately 6% and 12% of the Company's revenues
are dependent upon the Medicare and Medicaid third-party payers
programs for the years ended December 29, 1996 and December 31, 1995,
respectively.
Financial Instruments
The carrying value of the Company's accounts receivable, accounts
payable and accrued expenses approximate their fair values due to the
short-term nature of the financial instruments.
Due to current interest rates available to the Company for debt being
similar to rates on the Company's remaining maturities, the fair
value of existing debt approximates its carrying value.
Revenue Recognition
Revenue is recognized when services are rendered at the net
realizable amounts expected to be received from payers, patients and
others. Amounts reimbursed by certain payers of healthcare services
are subject to examination and adjustment. These adjustments are
accrued throughout the year and adjusted in future periods as the
final settlements are determined. At December 29, 1996, the Company
has recorded a liability of $535,000 for the amount due for the
difference between actual costs and costs to be reimbursed. This
liability was recorded as a reduction in revenue.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on
the differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements that will result
in taxable or deductible amounts in future years. The Company's
temporary differences result primarily from the cash to accrual
transition adjustment due to a required change from the cash to
accrual basis and depreciation and amortization.
Loss Per Common Share
Loss per common share is based upon the weighted average number of
shares outstanding during each of the respective years. The common
stock equivalents are not included in the computation as their effect
would be anti-dilutive.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful
lives of the related assets which range from five to seven years.
Intangible Assets
Intangible assets are stated at cost, and consist of goodwill, non-
compete agreements and acquisition costs. Goodwill and non-compete
agreements are amortized using the straight-line method over fifteen
and three years, respectively.
Acquisition costs represents costs incurred in connection with the
Company's proposed acquisitions. Acquisition costs will be included
in the purchase price of the acquisitions if successful, or expensed
in operations if the acquisitions are unsuccessful.
The Company adopted the provisions of SFAS 121 in 1995. Under SFAS
121, the Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recovered. The Company looks
primarily to the undiscounted future cash flows of its acquisition in
its assessment of whether or not goodwill has been impaired. At
December 31, 1995, the Company determined an impairment of goodwill
was appropriate (Note 2). The impairment was computed based on
future discounted cash flows.
Reclassifications
Certain amounts in the 1995 consolidated financial statements have
been reclassified to conform to the 1996 presentation.
Continued Existence
The Company has suffered recurring losses for the past several years
and incurred a net loss for the year ended December 29, 1996 of
$1,207,000. In addition, the Company had a working capital deficit
of $1,338,000. These factors, among others, raise substantial doubt
about the ability of the Company to continue as a going concern.
Management's plans in regard to these matters include pursuing a
number of alternatives for additional financing which may include a
public and/or private offering of the Company's securities. The
Company is currently holding discussions with investment bankers and
financial institutions related to an offering of securities and new
debt financing. No agreements have been reached to date. There can
be no assurance that the Company will undertake such financings or
that the Company will be able to obtain any additional financing on
terms acceptable to the Company.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
assets carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note 2 - Acquisitions
Ellis Health Services, Inc.
In April 1996, the Company signed an amended Asset Purchase and Sale
Agreement to acquire certain assets of Ellis Health Services, Inc.
("Ellis"). The purchase price for the Ellis assets was paid through
the issuance of 256,250 shares of the Company's common stock. The
Company agreed to guarantee the value of the stock issued at $4.25
per share on the first 12,000 shares sold each month and $4 per share
thereafter. If the price at which the former owner of Ellis sold the
common stock was less than the guaranteed value, the Company agreed
to issue additional stock or cash to make up the difference. Through
December 29, 1996, the former owner of Ellis sold 284,453 shares of
the Company's common stock for proceeds of approximately $600,000.
Additionally, the Company paid $60,000 in cash to the former owner.
Due to the deficiency in realized value, the Company has accrued
$500,000 as a liability at December 29, 1996 which will be paid to
the former owner of Ellis in either stock or cash. An officer,
director and shareholder of the Company transferred 100,000 shares of
common stock to the former owner of Ellis to cover a portion of
deficiency. The shares were sold in 1997 by the former owner for
proceeds of approximately $100,000 which will be recorded as
additional paid in capital in 1997. The acquisition was accounted
for as a purchase with the result of operations included since the
date of acquisition. The purchase of $1,059,000 was allocated to
Goodwill and is being amortized over fifteen years.
STAT Health Care Services, Inc.
The Company acquired certain assets of STAT Health Care Services,
Inc. ("STAT") in July 1996. The purchase price was paid $1,550,000
in cash, 125,000 warrants to purchase common stock at $1.88 per share
with an imputed value of $92,500 using the black scholes valuation
method, and 200,000 shares of common stock of the Company valued at
$1.88 of the date of acquisition. The acquisition was accounted for
by purchase with the result of operations included since August 1996
(date of acquisition). The purchase price of $2,145,000 was
allocated to goodwill.
A shareholder who participated in the preferred stock private
placement in which the proceeds were used to fund the cash portion of
the STAT acquisition was paid a commission of $117,000 in 1996 and
issued a warrant to purchase 100,000 shares of common stock at $2.00
per share. The warrant price was subsequently reduced to $1.00 per
share in January 1997.
TherAmerica
In January 1997, the Company acquired certain assets of Colorado
Therapists On Call, Inc. ("CTOC") and Professional Healthcare
Providers, Inc. ("PHP"), together doing business under the name
Theramerica. The Company paid $2,000,000 cash and assumed
approximately $175,000 of liabilities for the acquisition which was
effective January 1, 1997. The Company accounted for the transaction
as a purchase.
The purchase price was allocated to the assets based upon the
following estimated fair values at the acquisition date:
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets $ 160,000
Non compete 50,000
Excess of cost over net assets acquired
(goodwill) 1,965,000
$2,175,000
</TABLE>
The following table depicts the unaudited historical and pro forma
results of the Company's 1996 and 1997 acquisitions.
(Unaudited)
<TABLE>
<CAPTION>
Recorded Consolidated
Amounts Ellis STAT Theramerica Adjustments(4) Balances
<S> <C> <C> <C> <C> <C> <C>
Year Ended
December 31,
1995
Revenues $12,978,000 $1,802,000 $5,625,000 $9,653,000 $ - $30,058,000
Net
income
(loss) $(4,611,000)$ 56,000 $ 514,000 $ (71,000)$ 233,000 $(3,879,000)
Preferred
stock
divid-
ends (876,000) - - - (190,000) (1,066,000)
Net income
(loss) applicable
to common
share-
holders $(5,487,000)$ 56,000 $ 514,000 $ (71,000) $ 43,000 $ (4,945,000)
Net income
(loss) per
common
share (5.05) .05 .47 (.06) .04 (4.55)
Year
Ended
December
29, 1996
Revenues $14,259,000 $ 600,000 $2,658,000 $8,378,000 $ - $25,895,000
Net income
(loss) $(1,207,000) $ 60,000 $ 133,000 $ (62,000) $247,000 $(829,000)
Preferred
stock
dividends 349,000 - - - - 349,000
Net income
(loss) applicable
to common
share-
holders $ (858,000) $ 60,000 $133,000 $ (62,000) $247,000 $(480,000)
Net income
(loss) per
common
share $ (.19) $ .01 $ .03 $ (.01) $ .05 $ (.11)
</TABLE>
(1) Includes the results of operations for Ellis from April 1, 1996
and for STAT from August 1, 1996.
(2) Represents activity for three months ended March 31, 1996.
(3) Represents activity for the seven months ended July 31, 1996.
(4) Adjustments relate to amortization of goodwill and interest
expense on acquisition debt which would have been required had the
Company completed the acquisition at the beginning of the period, and
the elimination of certain corporate expenses which would not have
been incurred.
Note 3 - Balance Sheet Disclosures
Property and equipment consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 51,000
Computer hardware and software 560,000
611,000
Less accumulated depreciation (256,000)
$ 355,000
</TABLE>
Depreciation expense was $105,000 and $90,000 for the years ended
December 29, 1996 and December 31, 1995, respectively.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $5,687,000
Non-compete agreements 200,000
Acquisition costs 20,000
5,907,000
Less accumulated amortization and
impairment (1,827,000)
4,080,000
</TABLE>
Amortization expense was $266,000 and $190,000 for the years ended
December 29, 1996 and December 31, 1995, respectively. In 1995,
management of the Company assessed several factors relating to
goodwill recorded on two acquisitions made in 1994 and determined
that an impairment of $1,300,000 was appropriate.
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Amount due under Ellis acquisition $ 500,000
Amounts due Medicare 535,000
Other 585,000
$1,620,000
</TABLE>
Note 4 - Notes Payable and Long-Term Debt
Notes payable for December 29, 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable, interest at 8%, interest payable monthly.
Principal and interest are due monthly beginning
February 15, 1997 through final payment on July 15,
1997. Collateralized by certain intangibles. The note
is personally guaranteed by a stockholder, officer, and $145,000
director.
Less current portion (145,000)
Total long-term debt $ -
</TABLE>
Note 5 - Advances Under Financing Agreements
The Company has entered into an agreement with a financial
institution whereby all of the Company's subsidiaries assign
substantially all of the subsidiaries' accounts receivable (with
recourse) to the financial institution. The Company receives
advances of 85% on eligible receivables and pays a fee of 3% above
the bank's prime rate (11.5% at December 29, 1996) on outstanding
advances limited to $5,000,000. The outstanding balance owed to this
financial institution at December 29, 1996, was approximately
$3,318,000. Fees paid to this financial institution for the year
ended December 29, 1996 and December 31, 1995, approximated $441,000
and $401,000, respectively. This agreement can be terminated by the
financial institution upon thirty days notice to the Company.
The Company is unable to reasonably estimate the accounts that are
ultimately charged back to the Company and therefore, the Company
presents the advance arrangements as debt.
Note 6 - Capital Leases
The Company leases a portion of their computer equipment. the
Company leases the equipment under various leases all that have a 36
month term and contain a bargain purchase option. Property and
equipment includes approximately $150,000 of leased equipment. The
future minimum lease payment as of December 29, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 66,000
1998 50,000
1999 5,000
121,000
Interest 21,000
100,000
Current portion 50,000
Long-term portion $ 50,000
</TABLE>
Net book value of the leased equipment was $114,000 at December 29,
1996.
Note 7 - Commitments and Contingencies
Operating Leases
The Company leases office facilities and equipment under non-
cancelable operating leases. One of the office leases is personally
guaranteed by an officer, director, and stockholder. Rent expense
for the years ended December 29, 1996 and December 31, 1995 was
$188,000 and $140,000, respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year Ended December
Amount
1997 $ 295,000
1998 226,000
1999 180,000
2000 138,000
2001 34,000
$ 873,000
</TABLE>
Litigation
In 1997, a former patient filed a complaint in Texas against the
Company alleging that an employee/therapist of the Company was
negligent. The Company believes that there was no wrong doing and
intends to defend itself vigorously against the charges. The
client/hospital where the employee was working at the time of the
alleged incident paid the plaintiff $100,000 in settlement and
release from further claims. The client/hospital has now demanded
that the Company indemnify them for the $100,000 as the
client/hospital alleges this is stipulated in a contract between the
Company and the client/hospital. The Company does not believe that
it has a contractual obligation to indemnify the client/hospital in
this situation and intends to vigorously defend against this demand.
The Company believes that it will not incur any material losses in
excess of accrued amounts.
Ellis Guarantee
The Company purchased Ellis Health Services, Inc. by issuing 256,250
shares of the Company's common stock and guaranteeing that the former
owner of Ellis would realize at least $4.25 per share upon the sale
of the first 12,000 shares each month and 4.00 per share thereafter.
The Company agreed to issue additional shares or stock to make up any
shortfall and the Chairman and CEO of the Company pledged 100,000 of
his personal shares as collateral. At December 29, 1996, the former
owner of Ellis had a shortfall of approximately $500,000 from the
sales of stock to that date. In January 1997, the former owner of
Ellis exercised his right to take the security pledged by the
Chairman and CEO of the Company. The Board of Directors of the
Company approved the issuance to the Chairman and CEO 100,000 shares
of common stock and options to purchase 250,000 shares of common
stock at $1.00 per share to compensate the Chairman and CEO for the
loss of his personal shares. The $1.00 per share represented the
fair market value of the shares at the date of the grant. In March
1997, the former owner of Ellis presented a demand letter to the
Company requesting immediate payment of the remaining short fall of
approximately $400,000. The letter also stated that if the Company
is unable to pay such amount by April 7, 1997 legal action will be
pursued with the former owner seeking recovery of the shortfall,
interest, attorney fees, and other related expenses incurred. The
Company has begun negotiations with the former owner in an attempt to
resolve this matter.
Note 8 - Stockholders' Equity
Public Offering
In September 1994, the Company completed an equity offering whereby
the Company sold 225,000 units at $23.50 per unit, each unit
consisting of two shares of 12% cumulative convertible preferred
stock, one share of common stock, and three warrants (the "1994
Warrants") to purchase common stock. The Company received
approximately $4,034,000, net of offering costs of $1,253,000. The
preferred stock is convertible into 2.5 shares of the Company's
common stock at any time and will convert automatically into the
Company's common stock if the closing bid price of the common stock
equals or exceeds $6.00 for 10 consecutive trading days.
Subsequent to December 31, 1995, all of the preferred stock and
interest automatically converted into 1,173,631 shares of common
stock.
The 1994 Warrants entitle the holder to purchase one share of common
stock at an exercise price of $5.00 and expire in September 1999.
The 1994 Warrants may be redeemed by the Company for $.25 per
warrant upon 30 day's written notice at any time on or after
September 12, 1995, or earlier if the closing bid price for the
common stock equals or exceeds $7.50 for ten consecutive trading
days.
1996 Private Placement
In July and September 1996, the Company completed a private placement
of 244 units, each unit consisting of a share of convertible
preferred stock, $10,000 par value ("1996 Preferred Stock"), a
warrant to purchase 8,000 shares of the Company's common stock at
$2.50 per share and a unit purchase option to purchase an additional
unit at $10,000 per unit. The convertible preferred stock carries a
10% dividend and is convertible at the lesser of $1.25 or 75% of the
average sales price for the five trading days prior to conversion.
The private placement raised gross proceeds to the Company of
approximately $2,440,000.
Approximately $1,550,000 of the proceeds raised was used to fund the
cash purchase portion of STAT. A shareholder who participated in the
placement of the private placement was paid a commission of $117,000
in 1996 and issued a warrant to purchase 100,000 shares of common
stock at $2.00 per share. The warrant price was subsequently reduced
to $1.00 per share in January 1997.
During 1996, 88.5 units (with accrued dividends) were converted to
923,111 shares of common stock. In addition, a Unit holder who held
17 units was allowed to reduce their purchase price on their warrants
to $1.00 per share from $2.50 per share, resulting in gross proceeds
to the Company of $136,000 in November 1996. Subsequent to year end,
an additional 100 units have been converted through March 3, 1997
resulting in the issuance of an additional 1,388,723 shares of common
stock in 1997. Also in 1997, a Unit Holder who held 20 Units
exercised their Unit purchase option resulting in gross proceeds to
the Company of $200,000. The Unit holder immediately converted the
preferred to common resulting in the issuance of 257,028 shares of
common stock in January 1997.
1997 Private Placement
In January and February 1997, the Company completed a private
placement of 167.15 Units, each unit consisting of one share of
convertible preferred stock, $10,000 par value, "1997 Preferred
Stock", and a warrant to purchase 10,000 shares of common stock at
$1.00 per share. The convertible preferred stock carries no dividend
if the underlying common stock is included in an effective
registration statement within 90 days of the date of the agreement.
After 90 days, if the underlying shares are not included in an
effective registration statement, the dividend rate becomes 18%. In
addition, the preferred stock contains a redemption feature whereby
if the underlying common stock which the preferred shares are
convertible into is not effectively registered by the second
anniversary date of each respective unit, the holder at their option
may redeem the preferred shares for $10,000 back plus all accrued
unpaid dividends. The Company raised gross proceeds of $1,671,500
from this private placement. Commissions of $99,540 were paid to
individuals who assisted in the private placement who are also
shareholders of the Company. Substantially all of the proceeds were
used to purchase TherAmerica (Note 2).
Stock Options and Warrants
In May 1988, the Company adopted an incentive stock option plan
(ISO), which provides for the grant of options representing up to
100,000 shares of the Company's common stock to officers and
employees of the Company upon terms and conditions determined by the
Board of Directors. Options granted under the plan are generally
exercisable immediately and expire up to ten years after the date of
grant. Options are granted at a price equal to the market value at
the date of grants, or in the case of a stockholder who owns greater
than 10% of the outstanding stock of the Company, the options are
granted at 110% of the fair market value. At December 29, 1996
options to purchase 50,000 shares of common stock at between $1.20
and $2.50 remain outstanding. These options expire between 2002 and
2004.
In 1994, the Board of Directors established, the Omnibus Stock Plan
of 1994 (1994 Plan) and reserved 500,000 shares of the Company's
common stock for grant under terms which could extend through January
2004. All options and warrants issued under this plan are non-
qualified. Grants under the 1994 Plan may be to employees, non-
employee directors, and selected consultants to the Company, and may
take the form of non-qualified or incentive stock options, not lower
than 50% of fair market value. To date, the Company has not issued
any options below fair market value at the date of grant. Incentive
stock options and options to directors may be granted only at fair
market value, except that incentive stock options granted to
employees who are also owners of 10% or more of the Company's
outstanding common stock must be at prices no lower than 110% of fair
market value.
In November 1994, the Board of Directors issued 575,252 warrants to
two officers, directors, and stockholders. The warrants have an
exercise price of $1.75, the fair market value at the date of grant.
The warrants vest immediately and are exercisable when the Company's
consolidated revenues, on a proforma basis, equal or exceed $20
million, or at the end of seven years, whichever comes first. In
1995, 287,626 of the warrants were canceled.
In 1996, the Board of Directors established the 1996 Stock Option
Plan (the "1996 Plan") with terms similar to the 1994 Plan. During
1996, the Company issued 300,000 options to purchase the Company's
common stock at $1.88 expiring in 2006. The Board of Directors of
the Company reserved 3,000,000 shares of common stock for issuance
under the 1996 Plan.
Also during 1996, the Company canceled and reissued certain options
to certain officers and directors of the Company. Options to
purchase 224,187 shares of common stock at exercise prices ranging
from $1.20 to $2.75 which were issued to certain officers and
directors under the 1994 Plan were canceled. Options to purchase
239,437 shares of common stock at $1.88 (which represented the fair
market value of the common stock at the time of grant) were issued as
replacement for the canceled options. The additional 15,250 options
were issued to replace the loss in value for those option holders who
held options at exercise prices which were less than $1.88.
Stock Options and Warrants
In addition, in January 1997, the Company canceled and reissued
150,000 options to purchase the Company's common stock to an officer
of the Company. The options were originally exercisable at $1.88
(100,000 options) and $3.25 (50,000 options). The option exercise
price was reset to $1.00 which represented the fair market value of
the options at the time of the grant.
Subsequent to year end, the Company granted 443,748 options to
purchase common stock at $1.00 per share under the "1996 Plan",
133,609 of which were granted to officers and directors.
The following is summary of options and warrants granted, all of
which expire at various times through 2004.
<TABLE>
<CAPTION>
Number of Options
Exercise Exercise
Price Number Price
Per of Per
ISO Non-Plan Share Warrants Share
<S> <C> <C> <C> <C> <C>
Outstanding December 527,375 15,500 $1.00-$2.75 1,887,356 $1.75-$5.00
31, 1994
Options/warrants 600,000 - $0.63-$6.00 - -
granted
Warrants canceled - - - (372,752) $1.75-$6.00
Options canceled (6,000) - - - -
Outstanding December 1,121,375 15,500 $0.63-$6.00 1,514,604 $1.75-$5.00
31, 1995
Option/warrants
granted 539,437 - $1.88 2,217,000 $1.00-$2.50
Warrants canceled - - - - 20
Unit options granted
(1) - - - 1,952,000 -
Options canceled (317,687) (8,000) $0.63-$6.00 (178,491) $1.49
Options/warrants
canceled - - - (180,450)$1.00-$4.00
Outstanding December
29, 1996 1,343,125 7,500 $.63-$6.00 5,324,663 $1.00-$5.00
</TABLE>
(1) Represents option to purchase an additional unit identical to
the Unit issued in the July/September private placement. Each
$10.000 unit consists of one share of convertible preferred
(convertible at the lesser of $1.25 or 75% of the closing price on
the five trading days prior to conversion) and a warrant to purchase
8,000 shares of common stock at $2.50 per share for three years.
The Corporation has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost
for the Corporation's two stock option plans been determined based on
the fair value at the grant date for awards in 1995 consistent with
the provisions of SFAS No. 123, the Corporation's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net loss - as reported $ (858,000) $(5,487,000)
Net loss - pro forma (1,792,000) (5,836,000)
Loss per share - as reported (.19) (5.05)
Loss per share - pro forma (.40) (5.37)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: dividend yield of 0%;
expected volatility of 93%; discount rate of 11.5%; and expected
lives of 10 years.
Dividends
In 1995, the Board of Directors declared a stock dividend on the
preferred stock to be paid in common stock. Under the terms of the
preferred stock, if the Company does not have $750,000 cash or cash
equivalents then the dividend may be paid by issuing common stock at
the rate of $1.80 per share annualized. The Company accrued
dividends at the $1.80 level for 1995 as the Company did not have
$750,000 in cash and cash equivalents. The dividends on the
preferred stock for the year ended December 31, 1995 were $876,000 of
which $435,000 was paid in common stock of the Company. The
remaining dividends of $441,000 were accrued at year end and recorded
as a dividend payable in common stock.
During January 1996, the outstanding 12% preferred stock at December
31, 1995 was automatically converted into common stock. All unpaid
dividends on that preferred stock were void and no longer payable.
Since the dividends were previously reflected in the statement of
operations as a component of the net loss applicable to common
stockholders, the recovery of the accrued dividends has been
reflected as a credit in determining the net loss applicable to
common stockholders in 1996 on the statement of operations in the
accompanying financial statements.
Regulation S Offering
On November 22, 1995, the Board of Directors of the Company approved
the issuance of one million shares of Common Stock to non-U.S.
persons at a cash purchase price of $.50 per share in an offering
made pursuant to Regulation S under the 1933 Act. $200,000 of these
subscriptions were paid on December 15, 1995 and, after certain
wiring delays, $300,000 on January 3, 1996.
Stock for Services
As of December 8, 1995, the Company engaged the services of three
consultants to provide the Company with various business services
related to the expansion of the Company's business. These
consultants were issued an aggregate of 500,000 shares of Common
Stock pursuant to transactions exempt from the registration
requirements of the Act for services rendered prior to December 8,
1995. The consultants were also issued warrants to purchase an
aggregate of 100,000 shares of Common Stock at a price of $6.00 per
share for services to be rendered after December 8, 1995. The
warrants expire twenty-four months from the date of issuance or upon
termination or breach of the consulting agreements. The stock was
valued at $2 which was the bid at the date of the agreement issuance.
In July 1995 the Company issued 75,000 shares of stock for services
to an individual for consulting related services. The stock was
valued at $1.24 which represented the bid price at the date of
issuance.
Stock Payoff of Note Payable
In February 1996, the Company paid off a note payable consisting of
principal of $25,000 and accrued interest payable of approximately
$23,000 with issuance of 13,700 shares of common stock. The common
stock was valued at $3.50 which represented the fair market value of
the common stock at the time of the payoff.
Settlement of Stock for Services
In September 1996, the Company settled a dispute with a former
investment banker who claimed that the Company owed the investment
banker approximately $53,000. The Company settled the dispute by
issuing 20,133 shares of common stock.
Note 9 - Significant Fourth Quarter Adjustments
During the fourth quarter of 1996, the Company recorded the following
adjustments:
<TABLE>
<CAPTION>
<S> <C>
Termination, vacation and other payroll $156,000
adjustments
Litigation accrual 100,000
Medicare adjustments 100,000
Eleventh Hour acquisition costs written
off 86,000
Warrants issued for services 48,000
Increase in allowance for uncollectible
accounts receivable 83,000
$573,000
</TABLE>
Note 10 - Income Taxes
The temporary differences between the tax basis of assets and their
financial reporting amounts that give rise to a deferred tax asset
are primarily due to a cash to accrual transition adjustment due to
the Company being required to adopt the accrual basis for income tax
filing purposes.
The components of deferred tax assets (liabilities) in the balance
sheet, which are fully limited by a valuation allowance, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Accounting method differences $ 281,000
Net operating loss carryforward 1,676,000
1,957,000
Less valuation allowance (1,957,000)
Net deferred tax asset $ -
</TABLE>
The deferred tax asset valuation allowance decreased $34,000 during
1996.
The Company has incurred net losses for federal tax reporting
purposes since inception of approximately $4,934,000. The tax net
operating loss (NOL) carryforwards expire in years 2003 through
2010. The utilization of $4,718,000 of the NOL carryforward is
limited to $469,000 on an annual basis due to an effective change in
control which occurred as a result of the 1996 private placement.
Due to the existence of net operating losses incurred by the Company
which raise substantial doubt about the Company's ability to continue
as a going concern, the Company has concluded it is more likely than
not that it will not realize its deferred tax asset and accordingly
has established a valuation allowance of $1,957,000.
Note 11 - Subsequent Events
On January 28, 1997, the Company executed a convertible note
receiving proceeds of $1,000,000 from a shareholder of the Company.
Interest accrues on the note at 12.5% and the note matures on January
27, 1998. If the note is not paid off by May 28, 1997, the note
becomes convertible to common stock until January 27, 1998 at the
lower of $1.50 or 65% of prior five trading days closing price of the
common stock. The proceeds of the note were used to fund the
acquisition costs related to TherAmerica.
Note 12 - Loss Per Common Share
In accordance with the SEC's position on preferred stock with
convertible features that are in the money at the time of issuance,
the Company has imputed a value associated with such conversion
features and has recorded the value as a discount on the preferred
stock. The Company amortizes the imputed discount on the preferred
stock over the period from issuance of the preferred stock to the
earliest period at which the preferred stock becomes convertible. As
the Company's 1996 preferred stock issuances are immediately
convertible, the Company has amortized the entire imputed discount as
a component of dividends on preferred stock. The Company recorded
additional dividends to preferred stockholders of approximately
$1,737,000 for the year ended December 29, 1996, which represents an
imputed increase to the dividend yield and not a contractual
obligation on the part of the Company to pay such imputed dividends.
Loss per share applicable to common stockholders is calculated as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net loss $1,207,000 $4,611,000
Preferred stock dividends based on stated
rate 92,000 876,000
Preferred stock dividends based on 1,737,000 -
imputed discount at issuance
Preferred stock dividends recaptured (441,000) -
(Note 8)
Net loss applicable to common $2,595,000 $5,487,000
stockholders
Net loss per common share $ (.57) $ (5.05)
Weighted average shares outstanding 4,517,111 1,086,147
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-29-1996 DEC-31-1996
<PERIOD-END> DEC-29-1996 DEC-31-1996
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 4,458,000 4,458,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,477,000 4,477,000
<PP&E> 355,000 355,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 8,912,000 8,912,000
<CURRENT-LIABILITIES> 5,815,000 5,815,000
<BONDS> 0 0
0 0
1,234,000 1,234,000
<COMMON> 6,000 6,000
<OTHER-SE> 1,807,000 1,807,000
<TOTAL-LIABILITY-AND-EQUITY> 8,912,000 8,912,000
<SALES> 0 0
<TOTAL-REVENUES> 14,259,000 12,978,000
<CGS> 10,831,000 10,278,000
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,083,000 5,296,000
<LOSS-PROVISION> 0 1,300,000
<INTEREST-EXPENSE> 552,000 715,000
<INCOME-PRETAX> (1,207,000) (4,611,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,207,000) (4,611,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,207,000) (4,611,000)
<EPS-PRIMARY> (.57) (.57)
<EPS-DILUTED> (.57) (.57)
</TABLE>
