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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act Of 1934 for the fiscal year ended December 31, 1996
Or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act Of 1934 for the transition period from to
COMMISSION FILE NO. 0-24542
CONTINENTAL CHOICE CARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEW JERSEY 22-3276736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25-B VREELAND ROAD, FLORHAM PARK, NEW JERSEY 07932
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 593-0500
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock
Warrants, each to purchase one share of Common Stock
Units, each comprised of one share of Common Stock and one Warrant
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not 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 issuers's revenues for its most recent fiscal year: $5,751,896
As of March 3, 1997, 3,237,500 common shares were outstanding, and the aggregate
market value of the common shares of Continental Choice Care, Inc. held by
non-affiliates was approximately $2,559,000.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED PART OF REPORT
BY REFERENCE INTO WHICH INCORPORATED
Proxy Statement for 1997 Annual Meeting of Shareholders Part III
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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ITEM 1. BUSINESS
This Annual Report on Form 10-KSB, including this Item, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements
as a result of known and unknown risks, uncertainties and other factors.
Certain factors which could cause actual results to differ and which are known
to the Company are set forth in this Item, including without limitation under
the headings "Recent Developments," "New York Operations," "Consulting Services
and Subcontracting," "Physician Relationships," "Third Party Reimbursement,"
"Governmental Regulation," and "Competition," as well as under "Item 6.
Management's Discussion and Analysis."
GENERAL
Continental Choice Care, Inc. is a New Jersey corporation incorporated
in December 1993 in connection with the reorganization of the health care
related subsidiaries and affiliated companies of TechTron, Inc., a Delaware
corporation ("TechTron"). Continental Choice Care, Inc. and its subsidiaries are
referred to collectively as the "Company." The Company is engaged primarily in
the business of providing dialysis related equipment, services and supplies to
individuals in their homes and other residential alternative sites, including
prisons and nursing homes. During fiscal year 1995, the Company owned and
operated an In-Center Facility in Cape May Court House, New Jersey, for the
provision of in-center dialysis for the Company's clients. See "Recent
Developments". During fiscal year 1995, the Company commenced operations at a
training center owned by the Company in Linden, New Jersey. Training centers are
freestanding centers to train individual clients in the self- administration of
dialysis treatments ("Training Centers"). The Company has also been engaged in
the provision of consulting and administrative services, infusion therapy
services and acute care dialysis nursing placement services. The Company
discontinued infusion services in 1995 and does not intend to provide such
services in the future.
RECENT DEVELOPMENTS
On February 12, 1997, the Company, other than Renal Management, Inc.
("RMI") signed a definitive agreement to sell substantially all of its operating
assets to IHS of New York, Inc., a privately held company ("IHS"). In addition,
Alpha Administration Corp. ("Alpha") and Continental Dialysis Center of the
Bronx, Inc. ("CDBI"), each a New York corporation, a consulting customer of the
Company and wholly-owned by the Company's Chairman, President and/or Corporate
Medical Director ("Certain Executive Officers"), signed the definitive
agreement, thereby agreeing to sell substantially all of their operating assets
to IHS. Upper Manhattan Dialysis Center, Inc. ("UMDC"), a New York corporation
which is 50% owned by officers and directors of the Company is a signatory to
the definitive agreements but has not executed the same. Certain Executive
Officers granted an option to IHS to acquire their interests in UMDC in the
event UMDC does not approve the transaction, subject to restrictions contained
in certain existing agreements. Alpha, CDBI and UMDC are referred to
collectively herein as the "Consulting Customers."
The purchase price for the assets to be sold, including the assets of
the Consulting Customers, is $13,120,000. The Purchase Price will be allocated
as of the closing of the transaction. In addition, the Company and IHS will
enter into a Consulting Agreement pursuant to which Certain Executive Officers
will provide consulting services to IHS in exchange for payments to the Company
aggregating $1,000,000 over the three year term of the agreement. $1,000,000 of
the purchase price will be placed in an escrow at the closing of the proposed
transactions to secure certain indemnity obligations of the Company to IHS. The
funds placed in escrow will, unless used to satisfy indemnity obligations to
IHS, be released to the Company over an 18 month period. The definitive
agreements are subject to approval by the shareholders of the Company. The
closing of the transaction is subject
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to certain conditions, including without limitation, completion of due diligence
by IHS on or before March 15, 1997 (or 15 days following delivery to IHS of
certain financial statements for the fiscal year ended December 31, 1996,
if later), governmental approvals, completion of certain transactions involving
Consulting Customers and the continuing accuracy of certain representations
and warranties contained in the definitive agreement among the parties.
The Company and Certain Executive Officers will agree not to compete
with IHS in the dialysis treatment and certain related businesses for a period
of five years following the closing of the proposed transactions. The covenant
not to compete does not restrict RMI from engaging in the renal disease state
management and physician practice management businesses. TechTron, Inc., the
holder of approximately 48% of the outstanding common stock of the Company has
agreed to vote in favor of the proposed transaction. International Health
Specialists, Inc., a privately held company affiliated with IHS guaranteed the
obligations of IHS under the terms of the definitive agreement. Continental
Choice Care, Inc. will continue in business following the closing of the
proposed transactions.
In March 1996, Courthouse Dialysis, Inc. sold substantially all of its
assets, including the Company's Cape May Court House, New Jersey in-center
dialysis treatment facility ("In-Center Facility") to Renal Treatment Centers -
New Jersey, Inc. ("RTC - NJ"). In the same transaction, Continental Dialysis,
Inc. sold its rights to provide certain services to designated patients in the
Cape May Court House area to RTC Supply, Inc. The respective buyers of the
assets are subsidiaries of Renal Treatment Centers, Inc. ("RTC"). The prices
paid in the all-cash transaction were approximately $1,360,000 to Courthouse
Dialysis, Inc. and approximately $640,000 to Continental Dialysis, Inc. In
connection with the transaction, the Company and Alvin S.Trenk, a Director and
Chairman of the Company, Steven L. Trenk, a Director and President of the
Company and Martin G. Jacobs, M.D., a Director and Medical Director of the
Company, entered into a Covenant Not to Compete which obligates each of them to
refrain from competing with the buyers and RTC in New Jersey within 35 miles of
Cape May Court House, New Jersey (the "Restricted Area") in certain businesses
for a term of seven years. The restricted businesses include those previously
conducted by the Company in the covered area.
BACKGROUND
The Company's clients who receive dialysis treatments suffer from end
stage renal disease ("ESRD"), which is the permanent failure of the kidneys to
function properly. The function of the kidney is to remove waste products,
maintain healthy levels of bodily fluids and help regulate blood pressure.
Kidneys generally act as the body's filter, separating harmful substances from
useful substances and maintaining a healthy balance of chemicals and water in
the blood. When the kidneys fail, a chemical imbalance and buildup of toxic
chemicals can cause serious illness or death. Individuals with ESRD must either
undergo a kidney transplant or receive dialysis treatments on a continuing
basis.
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Dialysis treatments are in the form of either hemodialysis or
peritoneal dialysis. Hemodialysis uses a machine and an "artificial kidney," or
dialyzer, to remove toxic chemicals from the blood stream and replace cleansed
blood to the patient. An access is created, through the surgical implantation of
a tube or other surgical procedure, through which the blood can be transferred
between the client and the dialyzer. The dialyzer tubing is then attached to
this tube or other access for the treatment. Patients generally undergo
hemodialysis three times a week for 2-1/2 to 4 hours per treatment.
Peritoneal dialysis is a form of dialysis therapy which involves
placing sterile dialysis solutions into the peritoneal cavity of the body for
periodic removal. This process cleanses a client's blood within the body, rather
than through a machine. The peritoneum, a membrane which lines the abdominal
cavity, performs the cleansing process. To create an access for peritoneal
dialysis clients, doctors surgically implant a tube called a catheter into a
client's abdomen. Through the catheter, dialysate, a cleansing solution, slowly
fills the peritoneum. Waste products filter out of the body into the dialysate.
The used dialysate then drains out through the catheter.
Peritoneal dialysis treatments can be divided into three categories:
(i) intermittent peritoneal dialysis ("IPD") involves the connection of a
patient's catheter to a machine which performs the necessary exchanges through
the peritoneum (IPD treatments are not appropriate for residential settings),
(ii) continuous cycling peritoneal dialysis ("CCPD") involves the connection of
the patient's catheter to a machine which performs three or more solution
exchanges while the patient sleeps and (iii) continuous ambulatory peritoneal
dialysis ("CAPD") in which patients fill their peritoneum with dialysate through
their catheter, they raise the dialysate bag to fill the peritoneal cavity, and
lower the bag to drain the used dialysate back into the bag.
OPERATIONS
RESIDENTIAL ALTERNATIVE SITE DIALYSIS
Residential clients are those who receive some or all treatments in a
residential setting, whether at home or in an institution. Generally,
residential clients are referred to the Company by the client's treating
physician or, less frequently, by a hospital or social welfare agency. If the
physician has determined that the client should receive hemodialysis or
peritoneal treatments, the referring physician or organization generally
provides the Company with insurance information and the referring or treating
physician provides the Company with prescription information. Services for
clients who reside in institutions, such as prisons, with which the Company has
agreements, are generally supplied pursuant to the terms of the agreement
between the Company and the institution.
Upon receiving a referral, the Company confirms the existence of
insurance or Medicare eligibility. If the dialysis equipment and the supplies
needed by the client are currently in the Company's inventory, the Company
delivers the equipment and related supplies to the client. If the equipment is
not in inventory, the Company arranges for its supplier to deliver the equipment
directly
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to the client or to deliver it to the Company for delivery by the Company to the
client. Necessary supplies are generally in the Company's inventory.
If a prescription for drugs is prepared by a physician, the Company
will generally contact a pharmacy or other supplier of the drugs, and the
pharmacy or other supplier ships the drugs directly to the client.
Equipment provided to the Company's clients is purchased or leased by
the Company. The Company undertakes to maintain the equipment either through the
manufacturer of the equipment
or using its own employees.
If the physician or the patient requires nursing services to assist in
the administration of dialysis treatments, the Company can provide the nurse at
an additional charge. Nursing services are not reimbursed under the Medicare
program. Dialysis-related nursing services are generally provided for a per
treatment charge of $300-$315. The Company generally places nurses with clients
on an independent contractor or per diem basis and retains some nurses on a full
time basis. Further, the Company may determine to retain full or part time
nursing employees to provide some or all of the services currently provided by
the independent nursing contractors placed by the Company. See "New York
Operations" and "Governmental Regulation" for information regarding changes to
the Company's nursing services business necessitated by state licensure
compliance requirements.
The provision of supplies and equipment, as well as the maintenance of
patient records and other regulatory and operational requirements, are
supervised by physicians ("Medical Directors") retained by the Company, usually
pursuant to Medical Director's agreements with the Company.
During fiscal year 1995, the Company opened a Training Facility in
Linden, New Jersey. The Company retained a Medical Director to help construct,
develop and oversee the provision of the treatments at the center. Although
the Company also obtained preliminary approval from the New Jersey Department
of Health to open an In-Center Facility in Union, New Jersey, the Company has
determined not to develop a Training Center in Union in the foreseeable
future. The Company has not executed a lease for a Union Training Center and
intends to proceed with the development of the Union center only if it
obtains additional referral sources in the Union, New Jersey area, which
event is not currently expected to occur.
NEW YORK OPERATIONS
The Company's current operations in New York include the provision of
dialysis-related services, equipment and supplies to clients in their homes, to
the South Bronx Kidney Center ("SBKC"), and the Upper Manhattan Dialysis Center
("UMDC"), one hospital and three long-term care facilities. During the fourth
quarter of 1996, the Company began providing similar services, supplies and
equipment to Continental Dialysis Center of the Bronx, Inc. ("CDBI"), a new
facility that became fully certified and operational on January 17, 1997. The
Company expects that Alpha Administration Corp. ("Alpha"), a New York
corporation which is wholly-owned by officers and
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directors of the Company, will acquire the assets of SBKC during the first
quarter of 1997. In connection with the provision of such services, equipment
and supplies to its home-based clients, the Company has arrangements with
physicians who provide protocol development services to the Company and review
dialysis patient performance for such clients. To supplement its furnishing of
dialysis-related services, equipment and supplies to New York based long-term
care facilities, the Company provides, through its staff of nurses and medical
technicians, a program of dialysis training to staff members of the long-term
care facilities.
The Company also operates a licensed employment agency specializing in
the placement of nurses (a "nurse registry") in homes, freestanding dialysis
centers, long-term care facilities and hospitals. In addition, the Company
provides administrative and consulting services to the acute hemodialysis unit
of Hempstead General Hospital, located in Hempstead, New York.
The Company does not currently intend to expand its New York operations
through the development of facilities. However, the Company continues to seek
additional home based patients and is seeking to expand its client base for
institutional based services. See "Consulting, Services and Subcontracting."
The Company has established a home care services agency to enable the
Company to directly provide in-home dialysis and in-home nursing services to
individual clients in New York. The operation of the home care services agency
is licensed by the New York Department of Health ("NYDH"). The licensed agency
currently arranges for the provision of the Company's in-home nursing services
in lieu of some of the nurse placement activities of the Company's nurse
registry and the Company expects that the licensed agency will provide nursing
services to more patients currently served by SBKC and the Company's nurse
registry. The provision of nursing services through a home care services agency
permits the Company to receive a larger percentrage of the fee charged to
patients served by the Company then does the provision of such services through
a nursing registry. In addition, the use of the home care services agency
permits the Company to bill directly for services currently performed for the
Company's patients by SBKC.
The Company believes it is currently in material compliance with all
laws and regulations governing its business in New York. The Company has
concluded that its past nursing business in New York may not have been conducted
in compliance with existing licenses and that additional licenses may be
required in New York State. The Company received all additional appropriate
licenses which the Company believes it needs.
The Company previously arranged for the National Nephrology Foundation,
a New York not-for-profit corporation ("NNF") to provide all New York home-based
nursing services previously provided by the Company. Revenue which the Company
received from the provision of nursing services in New York was substantially
limited, as compared with revenue received from the provision of such services
in the past. During 1993, the last full year of home based nursing services in
New York, the Company had sales in the amount of approximately $849,000 for New
York home-based nursing services, from which it recognized income of
approximately $157,000 before taxes and
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overhead allocations. Management believes that the maximum amount which the
Company could be required to pay to private claimants in connection with
violations which may have arisen from its nursing operations in New York is
approximately $209,500. Due to the fact that New York home-based nursing
services were provided by NNF, expenses incurred in connection with providing
such services have been borne by NNF. Management of the Company believes that
the increased revenue recognized by NNF as a result of its provision of nursing
services in New York, together with improved collections of accounts receivable
due to NNF, substantially eliminated the obligation to fund NNF's operating cash
requirements in 1995 and 1996. See "Consulting, Services and Subcontracting."
The provision by NNF of home based nursing services contributed to the cash flow
of SBKC, thereby decreasing the cash shortfalls of SBKC which the Company would
otherwise have been requested to fund. No assurance can be given that the direct
provision of nursing services by the Company to patients previously served by
SBKC will not adversly affect the financial condition of SBKC. In such event,
NNF or Alpha, following the acquisition by Alpha of the SBKC assets, could be
unable to pay to the Company sums due for future equipment and supplies provided
by the Company, if any. There can be no assurance that the Company will not be
obligated to further change its practices or that it will not be materially
adversely affected as a result of a review or challenge to its past or present
practices under these statutory provisions or as a result of being required to
repay placement fees. See "-- Governmental Regulation -- New York Health Care
Licensure Requirements."
The Company has concluded that its engagement of all professional
personnel in connection with the performance of its agreements with NNF may not
have been conducted in compliance with the New York State prohibition of the
corporate practice of a profession. Such agreements may also have constituted an
improper management agreement under the New York State licensing regulations
governing an In-Center Facility. The Company restructured such arrangements and
believes it now complies in all material respects with applicable law and
regulations.
INFUSION THERAPY; THE LDL ACQUISITION
In March 1994, the Company acquired all of the issued and outstanding
capital stock of LDL, a company engaged primarily in the business of providing
home infusion therapy services in New Jersey, pending regulatory approval, which
approval was obtained in July 1994.
The acquisition of LDL was made pursuant to a stock purchase agreement
dated March 11, 1994 among the Company, LDL and the shareholders of LDL (the
"LDL Agreement"). Pursuant to the terms of the LDL Agreement, all of the closing
documents and the purchase price were held in escrow until July 1994, when the
New Jersey Board of Pharmacy approved the change in owners of the stock of LDL.
The purchase price under the LDL Agreement was $165,000 plus a contingent
portion equal to a maximum of $75,000 based upon the actual collection of
certain accounts receivable of LDL. Under the terms of the LDL Agreement, the
former shareholders of LDL were also entitled to receive an additional
contingent amount, not in excess of $60,000 in the aggregate, determined by
reference to the profits of LDL and CCIS on a combined basis. During the second
quarter of 1995, the Company closed its pharmacy and contributed certain assets
relating to its
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infusion therapy business into a newly formed joint venture with Infu-Tech, Inc.
In recognition of the diminished value of its investment in LDL, the Company
wrote off the unamortized goodwill, the unamortized value of the pharmacy
license and certain pharmaceutical inventories in 1995, resulting in an
aggregate charge of $306,000. The LDL Agreement contains non-competition
provisions applicable to the former shareholders of LDL. The former shareholders
of LDL filed suit seeking an accounting related to the LDL Agreement. The
Company asserted counterclaims against the former shareholders of LDL seeking
compensatory damages or recision and punitive damages in connection with the
sale of LDL. See "Legal Proceedings." In January 1997, the parties entered into
a Stipulation of Settlement and all claims and potential claims of the parties
were dismissed with prejudice.
NURSING SERVICES
The Company places dialysis nurses on a part-time basis to provide
hemodialysis treatments pursuant to agreements with three hospitals and pursuant
to a subcontract to provide dialysis services to prisoners in prisons operated
by the State of New Jersey. In addition, the Company has contracts to provide
training services to approximately eighteen nursing homes. Currently, the
Company is providing treatment services pursuant to agreements to three nursing
homes in New York. The nurses generally provide hemodialysis or peritoneal
dialysis training or services to assist physicians and nurses who are not
trained in or are otherwise unable to perform dialysis treatments for their
patients or residents. The Company is not reimbursed separately under Medicare
for nursing services rendered to such institutionalized patients. Nursing
services are included in the services provided to clients at prisons and
In-Center Facilities. The Company also provides dialysis training for nurses
employed by the nursing homes. Patients receiving nursing services for
home-dialysis treatments must pay for the nursing services separately, usually
relying on private insurance for funds. See "New York Operations" and
"Governmental Regulations" for information regarding changes to the Company's
nursing services business necessitated by state licensure compliance
requirements.
TRAINING
The provision of services in the Linden Training Center is generally
reimbursed by Medicare at the same reimbursement rate at which Medicare
reimburses the Company for dialysis treatments generally. In addition, Medicare
reimburses approximately $12.00 to $20.00 (depending upon modality) per
treatment for the training component of the services.
CONSULTING SERVICES AND SUBCONTRACTING
New York law provides that entities which operate certain health care
facilities may be owned only by natural persons or corporations or general
partnerships comprised solely of natural persons. In addition, New York health
care regulations prohibit certain health care facilities, such as In-Centers
from entering into management agreements with third parties. In addition,
general hospitals may not enter into management agreements without the prior
approval of the NYDH and such agreements must contain provisions which may be
unacceptable to the Company. See "Governmental Regulation
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- -- New York Health Care Licensure Requirements." As a result of the foregoing,
the Company does not own or operate licensed health care facilities in New York.
The Company has determined to operate in New York by entering into
consulting, service or subcontracting agreements with certain New York health
care entities ("Consulting Customers") which are licensed New York health care
facilities. In addition, management believes that, under New York law, the
Company is permitted to own or lease health care related real property and
equipment and to lease or sublease the real property and equipment to licensed
New York health care facilities. The Company currently intends to enter into
such leases or subleases in the future with certain current and future
Consulting Customers where such arrangements are advantageous to the Company and
the Company can negotiate such arrangements with the Consulting Customers.
The Company has entered into agreements with four Consulting Customers,
only three of which, NNF, CDBI and UMDC, have commenced operations. The other
consulting customer is Alpha. Alpha and CDBI are wholly-owned by Alvin S. Trenk,
Steven L. Trenk and Martin G. Jacobs, M.D., executive officers and directors of
the Company and beneficial owners of a majority of the Common Stock. Alpha has
the right to acquire the dialysis-related business of NNF, which transaction is
expected to close in March 1997. During 1996, the Messrs. Trenk and Dr. Jacobs
acquired an aggregate of 50% of the outstanding common stock of UMDC. A third
party hospital with which UMDC has an affiliation agreement has asserted that
the transfer of UMDC shares to Messrs. Trenk and Dr. Jacobs may have been in
violation of the affiliation agreement. The Company and the individuals disagree
with the hospital's position and are currently engaged in discussions concerning
the matter. No assurance can be given that the Company and the individuals will
be successful in discussions with the hospital or that the parties will not
become engaged in litigation concerning this matter. UMDC commenced operations
in August 1994.
Alpha has assigned to the Company a consulting and administrative
services agreement (the "NNF In-Center Agreement") between Alpha and NNF. NNF
owns and operates the South Bronx Kidney Center ("SBKC"), an In-Center facility
located in New York City. Pursuant to the terms of the NNF In-Center Agreement,
Alpha was to provide consulting and administrative services to SBKC's In-Center
Facility. As a result of the assignment, those services are presently provided
by the Company. The Company also entered into a consulting and administrative
services agreement (the "NNF PD Agreement") with NNF pursuant to which it
provided consulting and administrative services to NNF and provides equipment,
services and supplies on behalf of NNF to the patients of NNF treated at home or
at other alternative residential sites. The Company ceased providing
substantially all services under the NNF PD Agreement following the commencement
of operations at UMDC, at which time substantially all of the patients
previously treated through NNF under the terms of the NNF PD Agreement were
treated through UMDC.
Under the terms of the NNF In-Center Agreement, the Company provides,
for a maximum annual consulting fee of $240,000, bookkeeping and accounting
services and advice concerning, among other things, collections, manuals, third
party billing, supplies, inventories, non-physician staffing, labor and
collective bargaining agreements, personnel policies, artificial renal systems
design,
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equipment purchasing, leasing and maintenance, statutory and regulatory matters,
reimbursement, licensure and information concerning technical and scientific
advances in the field of dialysis and the treatment of ESRD. Such consulting fee
is expressly subordinated to the payment of all operating expenses of SBKC
arising after April 16, 1993. The operating expenses of SBKC exceeded revenues
for an extended period of time; however, commencing in the first quarter of
1995, the operating revenues of SBKC equalled or exceeded its operating
expenses. No assurance can be given that SBKC, or Alpha, if it acquires the
assets of SBKC and assumes the obligations of NNF, will continue to provide
nursing services previously provided by the Company in New York or that, if
provided, revenues from such services will be sufficient to permit NNF to pay
the above consulting fee obligations to the Company.
Alpha obtained an option (the "NNF Option") to acquire the assets and
business of SBKC from NNF, subject to regulatory approval. As consideration for
the NNF Option, Alpha agreed to pay an aggregate sum of $500,000, less certain
offsets, payable in five annual installments of $100,000 each, commencing April
1994. Alpha also agreed to pay, until the earliest of (i) the termination of the
NNF Option, (ii) the exercise of the NNF Option or (iii) the date upon which
Alpha determines that it will not exercise the NNF Option, an amount (each a
"Shortfall") equal to the amount by which Alpha and NNF agree that the monthly
current cash requirements for the operation of SBKC exceeds the cash available
from the operation of SBKC. The purchase price for the acquisition of the assets
is $500,000, less all amounts other than Shortfalls paid by Alpha in connection
with the NNF Option. The Company has agreed to pay the option purchase price and
all other costs incurred by Alpha in connection with the NNF Option, including
any Shortfall payments, other than Shortfall payments aggregating $565,000 which
are in the form of promissory notes made by Alpha payable to the Company bearing
interest at 8% per annum and payable on April 24, 1999 ($300,000) and December
31, 1999 ($265,000). The $565,000 represents Shortfalls incurred by SBKC during
the period from May 1, 1993 through December 31, 1994. The obligations of Alpha
under the terms of the promissory note have been guaranteed, jointly and
severally, by each of the shareholders of Alpha. Alpha also incurred an
obligation, pursuant to the terms of an employment agreement with a former
officer of NNF, to make payments of $200,000 per annum for a period of five
years to the estate of the former officer of NNF, the payment of which was also
guaranteed by CDI.
During 1996, the parties entered into revised Settlement Agreements
pursuant to which NNF agreed to transfer substantially all of the assets of SBKC
to Alpha in exchange for sums, including cash shortfalls, paid to or on behalf
of NNF to the date of the settlement plus an amount not in excess of $95,000
representing certain expenses incurred or to be incurred by NNF pending the
approval of the transaction by NYDH and the courts of the State of New York. In
addition, the estate of the former medical director agreed to settle all claims
for $225,000, of which $200,000 is payable upon the closing of the sale. In
February 1997, all governmental and judicial approvals were obtained and the
Company expects the closing will occur in March 1997.
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The Company and Alpha have also entered into a consulting and
administrative services agreement substantially similar to the NNF In-Center
Agreement, except that consulting fees will not be subordinated to the payment
of Alpha's operating expenses. The agreement will become effective immediately
following Alpha's acquisition of the assets of SBKC, if any.
The Company has guaranteed the payments to the estate of the former
officer and, although Alpha has indemnified the Company for any payments made by
the Company under such guaranty, and Alvin S. Trenk, Steven L. Trenk and Martin
G. Jacobs, M.D. have personally assumed the Company's guaranty and agreed to
indemnify the Company for any payments made by the Company under such guaranty,
there can be no assurance that the Company will not be required to make payments
pursuant to this guaranty for which it will not be reimbursed.
The Company has also entered into a consulting and services agreement
(the "CDBI Agreement") with CDBI. Under the terms of the CDBI Agreement, the
Company has agreed to provide consulting and administrative services in
connection with CDBI's proposed operations which are substantially similar to
those services provided pursuant to the terms of the NNF In-Center Agreement.
CDBI will be required to pay to the Company an annual fee of $240,000 for the
provision of services under the CDBI Agreement. The obligations of payment under
the CDBI Agreement are not subordinated to the payment of operating expenses of
CDBI. However, CDBI, which has received a certificate of need to develop and
operate a 12 station In-Center Facility, commenced operations on January 17,
1997. Development and operating expenses to be incurred by CDBI are expected to
exceed revenues for an extended period of time. As of December 31, 1996 and
1995, the Company had advanced approximately $1,177,000 and $479,000,
respectively, to CDBI, which amounts are reflected by promissory notes bearing
interest at the rate of 8% per annum due March 19, 2001 and February 24, 2002.
Payment under the promissory notes is guaranteed by Alvin S. Trenk, Steven L.
Trenk and Martin G. Jacobs, M.D. There can be no assurance that CDBI will
generate sufficient revenues to pay the Company any or all of the fee due the
Company pursuant to the CDBI Agreement in the near future, or that any advances
made by the Company will be reimbursed.
The two original principals of UMDC, Drs. Lorch and Cortell entered
into an affiliation agreement with a New York hospital near the site of the
facility, which hospital terminated its in- center treatment program for chronic
dialysis patients in August 1994. The home-based patients previously serviced by
the hospital were serviced by NNF and the Company provided equipment and
services to these patients on behalf of NNF pursuant to the NNF PD Agreement
from May 1993 through August 1994. In addition, in June 1995, the Messrs. Trenk,
Dr. Jacobs and UMDC entered into a Stock Purchase Agreement (the "UMDC" Purchase
Agreement") with the holder of the remaining outstanding shares of UMDC common
stock to acquire the shares held by him for a maximum purchase price of $50,000.
Under the terms of the UMDC Shareholders Agreement and the UMDC Purchase
Agreement, Drs. Lorch and Cortell will each hold 25% and the Messrs. Trenk and
Dr. Jacobs will hold, in the aggregate, 50% of the outstanding stock of UMDC.
The transfer of the shares was closed during 1996. A third party hospital with
which UMDC has an affiliation agreement has asserted that the transfer of UMDC
shares to Messrs. Trenk and Dr. Jacobs may have
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been in violation of the affiliation agreement. The Company and the individuals
disagree with the hospital's position and are currently engaged in discussions
concerning the matter. No assurance can be given that the Company and the
individuals will be successful in discussions with the hospital or that the
parties will not become engaged in litigation concerning this matter. The UMDC
Shareholders' Agreement provides, in part, that the board of directors of UMDC
is to consist of Drs. Lorch and Cortell and any two of the Messrs. Trenk or Dr.
Jacobs (or their designees), that the shares of UMDC are to be owned 50% by Drs.
Lorch and Cortell and 50% by the Messrs. Trenk and Dr. Jacobs and that a
Consulting and Services Agreement between the Company and UMDC (the "UMDC
Agreement") may be terminated only upon the affirmative vote of the majority of
the full board of directors of UMDC. Under the terms of the UMDC Agreement, the
Company provides consulting and administrative services to UMDC in consideration
for a fee of $400,000 per annum plus the amount of all direct costs incurred by
the Company in connection with the rendering of services and the provisions of
equipment and supplies.
The Company guaranteed payment by UMDC under the terms of a lease for
the premises occupied by UMDC. Drs. Lorch and Cortell agreed that, subject to
regulatory approval, they would undertake to cause UMDC to transfer UMDC's
premises and equipment leases to the Company, with the understanding that such
premises and equipment will be subleased by the Company to UMDC. To date, the
doctors have not undertaken these obligations and the Company has not applied
for regulatory approval of such transaction.
In September 1994, a bank lender (the "Bank") loaned the sum of
$1,900,000 to UMDC (the "UMDC Term Loan"). $1,400,000 was advanced under the
UMDC Term Loan to finance the purchase of furniture, fixtures, leasehold
improvements and equipment at UMDC's In-Center Facility and to repay principal
and accrued interest on a bridge loan advanced by the Bank to finance
construction costs associated with the center. In addition, $500,000 was
advanced under the UMDC Term Loan to provide working capital for use in
connection with UMDC's In-Center Facility.
In April 1995, the Bank agreed to advance up to an additional $500,000
to UMDC for working capital purposes under a revolving line of credit (the
"Revolver").
The UMDC Term Loan and the Revolver bear interest at the Bank's prime
rate plus 1%. Under the terms of the UMDC Term Loan, through December 31, 1994,
UMDC made monthly interest payments. Thereafter, UMDC was required to make 60
equal payments of principal plus accrued interest. In connection with the
closing of the Revolver, the Bank agreed to extend to April 30, 1995 the
commencement of the obligation of UMDC to make payments of principal under the
terms of the UMDC Term Loan. Further, the principal amount of $1,400,000 of the
UMDC Term Loan was to be paid in 57 monthly installments and the principal
amount of $500,000 was to be paid in 33 monthly installments of principal and
interest. Interest payable in respect of the UMDC Loan is to be paid, with
respect to the $1,400,000 and the $500,000 principal amounts, at the time of the
last respective principal payment.
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Under the terms of the Revolver, UMDC was required to make payments of
interest through December 31, 1995, with all principal amounts drawn down under
the Revolver to be paid in full on December 31, 1995. The principal payment date
under the terms of the Revolver was extended by the Bank to the end of February
1996. Although UMDC began making monthly principal payments of $20,000, the full
principal amount was not paid on that date, and the Bank further extended the
repayment date to August 31, 1996. Funds were not available to repay the
Revolver in full on August 31, 1996, and UMDC and the Bank entered into an
agreement extending the repayment date of the Revolver to December 31, 1997. The
Revolver is to be paid off in monthly principal amounts of $20,000 plus current
interest; any balance of principal and interest remaining is to be paid at
December 31, 1997.
As a condition of extending the Revolver, the bank accelerated the 1998
and 1999 principal payments on the UMDC Term Loan originally totalling
$1,900,000 to December 31, 1997. The bank also required that $200,000 be placed
in a trust account to further collateralize the loans; the Company provided such
funds. Provided that UMDC has complied with all payments and conditions through
December 31, 1997, the bank would consider reinstituting the original payment
schedule for the $1,900,000 UMDC Term Loan. No assurance can be given that the
term of the credit facilities will be extended or that the bank will not call
upon the guarantees of the Company or Certain Executive Officers. The UMDC Term
Loan and the Revolver are guaranteed by the Company and the Messrs. Trenk and
Drs. Jacobs, Lorch and Cortell. Guarantees of Drs. Lorch and Cortell are limited
to a maximum of $550,000 each, declining to $300,000 each if and when the
Revolver is paid in full. The obligations of the Company, the Messrs. Trenk and
Dr. Jacobs are not so limited. The loan documents executed in connection with
the UMDC Term Loan and the Revolver contain cross defaults which will cause the
Loans to be in default in the event that any of the guarantors defaults under
the term of any other loan agreement with the Bank. At December 31, 1996, the
remaining principal owing to the Bank on all three UMDC loans aggregated
$1,340,000.
In addition, in 1994, Drs. Lorch and Cortell were required to make an
additional $350,000 capital contribution to UMDC. The Company advanced the sum
of $350,000 to Drs. Lorch and Cortell as a loan. As of the date of the UMDC
loan, Drs. Lorch and Cortell had contributed an aggregate of $100,000 to the
capital of UMDC. Such amount was also advanced by the Company to Drs. Lorch and
Cortell pursuant to the terms of promissory notes which bear interest at the
Bank's prime rate less 1% and were due on May 16, 1995. The maturity dates were
extended by the Company to November 30, 1995. As of the date of this report, the
promissory notes remain outstanding. The Company intends to extend the maturity
dates of the promissory notes. Further, the Company loaned an aggregate of
$301,500 to UMDC, which amount UMDC repaid to the Company, with accrued interest
at the Bank's prime rate less 1%. As security for repayment of the loans and to
secure the individual guarantees, Drs. Lorch and Cortell have pledged the
outstanding common stock of UMDC held by them to the Company, the Messrs. Trenk
and Dr. Jacobs. In addition, UMDC agreed to grant to the Company a security
interest in UMDC's furniture, fixtures and equipment, which lien is subordinated
to that of the Bank. The Bank has not determined whether it will permit the
Company to place a lien on the assets of UMDC.
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As of December 31, 1996, the Company had amounts due from UMDC for
working capital advances and for equipment and supplies delivered by the Company
to UMDC of $1,072,448 and $875,248, respectively. The repayment of amounts due
to the Company by UMDC for equipment and supplies and the payment by UMDC of
fees due to the Company under the UMDC Agreement are subordinated in full to the
obligations of UMDC to the Bank under the terms of the UMDC Loans. Further,
amounts due to the Company from UMDC may be further delayed by UMDC if UMDC is
in default under the terms of the UMDC Loans.
As a result of terms of the UMDC Term Loan, and the Revolver, the
Company, the Messrs. Trenk and Dr. Jacobs were contingently liable for the
payment of a maximum of $2,400,000. The aggregate outstanding balance at
December 31, 1996 totalled $1,340,000. In addition, the potential ownership of
UMDC by the Messrs. Trenk and Dr. Jacobs and the contingent liability
represented by the personal guarantees could give rise to potential conflicts of
interest. The Messrs. Trenk and Dr. Jacobs have incentive to cause the Company
to have patients treated at UMDC, which patients might otherwise be treated at
other facilities operated by the Company. Further, the Messrs. Trenk and Dr.
Jacobs could cause UMDC to obtain, or cause the Company to permit UMDC to obtain
business opportunities which would otherwise be available to the Company.
Further, the Company has guaranteed the lease for the premises used by UMDC. The
Messrs. Trenk and Dr. Jacobs could cause UMDC to pay creditors other than the
lessor, thereby causing the Company to incur obligations under its guaranty.
PHYSICIAN RELATIONSHIPS
The primary source of clients for the Company is local physicians and,
to a lesser extent, hospitals and social agencies and organizations. In
addition, the ability of the Company to obtain Medicare and certain other third
party reimbursement is conditioned upon the provision of services being under
the general supervision of a Medical Director who is a physician. Generally, the
Medical Director must be board certified or board eligible in internal medicine
and/or nephrology and have at least 12 months of training or experience in the
care of patients at ESRD centers. Except for Dr. Jacobs, the Corporate Medical
Director, the Company's Medical Directors are generally either consultants
retained by, or employees hired by, the Company on a part time basis pursuant to
agreements providing for payments ranging, during 1996, from approximately
$6,000 to a maximum of approximately $48,000 per annum. In substantially all
cases, the Company's Medical Directors refer patients to the Company and the
Medical Directors of the consulting Customers refer or may in the future refer
patients to the respective Consulting Customer. In most cases, other than in the
case of institutional clients, the Medical Director is the sole or a substantial
source of referrals to the program served. There can be no assurance that the
Company will be successful in negotiating employment agreements on terms
acceptable to the Company.
Physician referrals are subject to, and limited by, current
governmental laws and regulations. Existing federal and state laws, and the
Stark II Amendment (which became effective in January 1995), substantially limit
referrals by physicians to entities, like the Company, in which they have an
interest. See "Governmental Regulation." The Company has restructured some of
its programs and
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is currently seeking alternative sources of client referrals. However, no
assurance can be given that such alternative referral sources can be found or,
if found, will generate sufficient referrals to enable the Company to maintain
its current revenues. Certain of the Medical Directors, alone or through
practice groups, were offered the opportunity to purchase up to 50% of the
common stock of Training Centers for which they are expected to perform
services, in each case subject to prohibitions and limitations imposed by the
applicable laws, rules and regulations. No such offers have been accepted and
the Company does not currently expect any such offers to be accepted. In
addition, in 1996, the Company entered into a Stock Purchase and Shareholders'
Agreement with the Medical Director of the Company's Cape May Court House
Facility, pursuant to which the Medical Director would have been entitled to
purchase up to 15% of the outstanding common stock of Courthouse Dialysis, Inc.
("Courthouse") in consideration of the payment of up to $15,000. As of the date
of the sale of substantially all of the assets of Courthouse, the Medical
Director had not exercised his right of purchase. Subsequently, the former
medical director brought an action against the Company seeking damages of up to
approximately $130,000 resulting from the sale of the Courthouse assets. The
Company is vigorously defending the action.
THIRD PARTY REIMBURSEMENT
Substantially all of the Company's revenues are dependent upon
reimbursement from third party payors, including the Medicare and Medicaid
programs and commercial insurance companies. Generally, patients are referred to
the Company upon being diagnosed as having ESRD.
Under the Medicare ESRD program, Medicare reimburses dialysis providers
for the treatment of individuals who are diagnosed to have ESRD and are
otherwise eligible for Medicare, regardless of age or financial circumstances.
For each treatment, Medicare pays 80% and a secondary payor, usually Medicare
supplemental insurance or, to a lesser extent, private insurance or Medicaid,
pays approximately 20% of the amount set by the Medicare prospective
reimbursement systems. One condition to participating in the Medicare program is
that the Company must accept the Medicare rates, less any supplemental
insurance, as payment in full from Medicare. The States of New Jersey and New
York provide Medicaid benefits to qualified recipients to supplement their
Medicare entitlement.
During the period following a patient's diagnosis of ESRD, payments to
the Company for its dialysis services are made by commercial insurance company
payors or private payors if the patient is not eligible for primary Medicare
coverage. Thereafter, patients enter the Medicare ESRD program in which
reimbursement rates are established by the Health Care Financing Administration
("HCFA"). Individuals receiving or entitled to Medicare reimbursement at the
time they develop ESRD are entitled to immediate reimbursement under Medicare
upon being diagnosed as having the disease.
Individuals not covered by group insurance and not already entitled to
Medicare benefits, but who are Medicare eligible, generally must wait until the
first day of the third month after the month in which a regular course of
dialysis begins, to be entitled to Medicare benefits. An exception to this
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general rule exists where the patient participates in self-dialysis training
during the waiting period and self-dialysis is expected to be continued after
the training, in which case the patient becomes entitled on the first day of the
month in which a regular course of dialysis begins. Many patients do not have
private insurance to pay for treatment, and in these cases the Company generally
is not compensated for treatments performed during this 90-day period. Further,
if a secondary payor such as Medicaid or a private insurer is not available and
the patient is financially unable to meet his obligations, the Company may not
be reimbursed for the 20% co-payment of the ESRD rate that is not paid by
Medicare.
Individuals covered by group insurance at the time they start treatment
for ESRD are entitled to Medicare reimbursement within 21 months if they choose
to or are required to receive dialysis treatments at an In-Center Facility, and
within 18 months if they choose to receive dialysis treatments at alternative
sites. The Company does submit claims to insurance company payors providing
secondary coverage where such coverage exists for patients. Where patients are
initially eligible for primary Medicare coverage, the Company makes claims first
to Medicare and then to commercial insurance company payors providing secondary
coverage, if any. Generally, per patient reimbursement from commercial insurance
companies and private payors is at higher reimbursement rates than the rates of
reimbursement from Medicare. Rates paid for services provided to patients in
acute care facility and corrections facility programs are negotiated and are
also generally at higher reimbursement rates than the rates of reimbursement
from Medicare. The reimbursement rate from Medicare for ESRD services and Epogen
("EPO"), a drug used in connection with certain dialysis treatments, is fixed by
HCFA regulation and is subject to change from time to time. Reimbursement in
respect of EPO does not constitute a material portion of the Company's
revenues. Commercial insurance company payors each establish usual and
customary rates of reimbursement which vary from payor to payor and may be
changed from time to time.
Medicare pays for home dialysis provided to beneficiaries with ESRD
under either of two methods. Under Method I (also called the composite rate),
the same rate is paid to a Medicare approved dialysis facility regardless of
whether the dialysis is performed at the patient's home or at the facility.
Under Method II (also called direct dealing), payment to suppliers for home
dialysis supplies and equipment is made by the Medicare carrier on a fee for
service basis, which is the reasonable charge method used for Medicare services.
Under either of these methods, the reimbursement rates are fixed in advance and
have been adjusted from time to time by Congress. Although this form of
reimbursement limits the allowable charge per treatment, it provides the Company
with predictable and recurring per treatment revenue and allows the Company to
retain any profit earned. The Company also receives Medicare reimbursement for
certain ancillary services provided to its dialysis patients.
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Claims for Medicare reimbursement must generally be presented by
December 31 of the next calendar year if the claim relates to services or
supplies received from January 1 to September 30, and by December 31 of the
second calendar year if the claim relates to services or supplies received from
October 1 to December 31. Claims for secondary reimbursement must generally be
presented 60 to 90 days after payment of the Medicare claim. The Company
generally submits claims monthly. New federal and New York State laws may limit
the Company's ability to receive reimbursement for certain ancillary services
provided to patients referred by physicians who have a direct or indirect
financial relationship with the Company. See "Governmental Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company receives reimbursement for dialysis services at rates that
are currently between approximately $1,000 and $3,000 per patient per month.
Since the Medicare ESRD program commenced, the reimbursement rate for dialysis
treatments has periodically been reduced, and if the rates now in effect are
lowered or remain in effect without adjustment for inflation, the Company's
profit margin could be materially reduced. Prior to August 1, 1983,
reimbursement for provided services under Method I was based upon a fixed fee of
$138.00 per treatment. On August 1, 1983, the composite rate was reduced by HCFA
to an average rate of $127.00 per treatment. In October 1986, the composite rate
for provided services under Method I was further reduced to an average of
$125.00 per treatment. The current maximum composite rate for services provided
under Method I is $139.00 per treatment. Reimbursement under Method II is
limited by Medicare based on monthly per patient limitations which are
determined in part by the maximum composite rate for treatment under Method I.
Currently the monthly limitation per patient under Method II for supplies and
equipment is $1,490.85 and for CCPD treatment the payments are $1,974.45 per
patient per month. In addition, as a result of the Gramm-Rudman-Hollings
deficit-reduction measures, temporary reductions from the established ESRD
reimbursement rate were effected in 1989 and 1990, ranging from 1.4% to 2.1%.
The Omnibus Budget Reconciliation Act of 1990 ("OBRA") increased the
ESRD reimbursement rate by $1.00 per treatment, effective January 1, 1991, and
restored the temporary reductions then in effect, resulting in the current
average reimbursement rate of $126.00 per treatment. The maximum composite rate
is $139.00 per treatment. In 1987 and 1990, Congress required that the
Department of Health and Human Services and the Prospective Payment Assessment
Commission ("PROPAC") study dialysis costs and reimbursement and make findings
as to the appropriateness of ESRD reimbursement rates. PROPAC recently
recommended a 2.5% per treatment increase in the reimbursement rate. However,
Congress is not required to implement this recommendation. The Company is unable
to predict what, if any, future changes may occur in the rate of reimbursement,
or, if made, whether any reductions will have a material adverse effect on the
Company's revenues and net earnings.
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GOVERNMENTAL REGULATION
GENERAL
The Company's operations are subject to extensive governmental
regulations at the federal, state and local levels and its arrangements with
health care facilities and medical personnel have been designed to comply with
such existing laws and regulations. Except as otherwise disclosed below, the
Company believes its operations are in material compliance with such laws and
regulations. The laws, rules and regulations which govern the Company and other
persons with whom the Company has relationships are very broad and are subject
to continuing change and interpretation. There is also an absence of regulations
or decisions specifically addressing the dialysis business. Thus, it is possible
that certain of the Company's past or present contractual arrangements or
business practices might be challenged, and if so successfully challenged, there
can be no assurance that the Company would not be adversely affected thereby. No
assurance can be given that the Company will be able to obtain or maintain the
licenses and approvals necessary to conduct its current or proposed businesses.
Further, no assurance can be given that federal, state and local laws, rules and
regulations will not be amended or interpreted so as to require the Company to
change its contracts or practices or to obtain additional approvals or licenses
to conduct its business as now conducted or proposed to be conducted or that the
Company will be able to obtain any such approvals or licenses. The failure to
obtain requisite licenses or approvals or to otherwise comply with such existing
or future laws, rules and regulations or interpretations thereof could have a
material adverse effect on the Company's operations. State regulations typically
require the Company to meet various standards with respect to its licenced
facility relating to, among other things, the management of facilities,
personnel, maintenance of proper records, equipment and quality assurance
programs. Further, dialysis facilities are subject to periodic inspection by
state agencies and other governmental authorities to determine if the premises,
equipment, personnel and patient care meet applicable standards. To receive
Medicare reimbursement, certain of the Company's subsidiaries must be certified
by HCFA and must obtain provider numbers to file claims. The Company's Training
Facility, and two of the Company's subsidiaries, Continental Dialysis, Inc., a
Delaware corporation ("CDI") and Choice Care Infusion Services, Inc., a Delaware
corporation which currently conducts substantially no activities ("CCIS"), are
so certified and have provider numbers.
In certain circumstances, federal and state law mandate that conviction of
certain abusive or fraudulent behavior with respect to one health care facility
may subject other facilities under common control or ownership to
disqualification for participation in Medicare and Medicaid programs. In
addition, some regulations provide that all facilities under common control
or ownership are subject to revocation of their licenses if any one or more
of such facilities' licenses are revoked. The Company is not subject to any
proceedings at this time to revoke its licenses. The Company provides
consulting services to certain facilities that are administered by
corporations and/or physicians who are not under the direct control of the
Company. The Company also provides financial assistance, including loan
guarantees, to certain of these facilities. Because the Company does not have
control over the actions of such corporations and physicians who render
services, the Company is subject to the risk that such physicians may violate
federal or state laws and regulations including Medicare and Medicaid laws
without the knowledge or consent of the Company. Limited violations may have
occurred at such facilities in the past. However, the Company is not aware
of any ongoing violations as of the date of this filing. Because of the
Company's financial commitments, loan guarantees and dependence on the
continuing business of such facilities, the inability of the facilities to
participate in reimbursement programs or the imposition of other sanctions
could materially adversely affect the Company's financial condition,
liquidity and business prospects.
FEDERAL AND STATE ANTI-KICKBACK LAWS
The Company and the health care providers with whom the Company has
relationships are subject to state and federal laws prohibiting direct or
indirect remuneration for patient referrals and
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regulating reimbursement procedures and practices under Medicare, Medicaid and
other third party payors. State and federal law may also prohibit physicians
from referred patients to providers with which the physician or his/her
immediate family member has a financial relationship. The federal Medicare and
Medicaid legislation contains the anti-kickback provisions which prohibit any
remuneration in return for the referral of Medicare or Medicaid patients. In
July 1991, the United States Department of Health and Human Services adopted
regulations that provide exceptions, or "safe harbors," from federal criminal
and civil penalties by identifying certain types of joint ventures and other
arrangements that will be deemed not to violate the illegal remuneration
provisions. Arrangements which do not fall within the safe harbors are not
illegal per se; however, such arrangements are subject to greater governmental
scrutiny. The Medical Directors, who are also in private practice, are the most
important referral sources of the Company's business, and utilization of the
Company's facilities, equipment, supplies and services by the patients of these
physicians is crucial to the success of the Company. The compensation of the
Medical Directors is fixed by agreement and reflects competitive factors in
their local markets and the Medical Directors' professional qualifications,
commitments and responsibilities. The Company believes that the illegal
remuneration provisions described above are primarily directed at abusive
practices that increase the utilization and cost of services covered by
governmentally funded programs. It believes that the dialysis services provided
by the Company generally cannot, by their very nature, be over-utilized since
dialysis treatments are not elective and cannot be prescribed unless there is
temporary or permanent kidney failure. Moreover, reimbursement rates for these
services are fixed by law so, in the opinion of the Company, the amount of
reimbursement by the government cannot be increased by actions of the Company.
The Company has never been challenged under these statutes and endeavors in good
faith to comply with them. While the arrangements between the Company and its
former joint venture partners and certain other Medical Directors did not and do
not fall within the protection afforded by these safe harbors, the Company
believes its operations are in material compliance with applicable laws.
Nevertheless, because of the breadth of the statutory provisions and the absence
of regulations or court decisions specifically addressing the arrangements by
which the Company conducts its business, it is possible that certain of the
Company's past or present contractual arrangements might be challenged. There
can be no assurance that the Company will not be obligated to change its
practice or that it will not be materially adversely affected as a result of a
review or challenge to its past or present practices under these statutory
provisions. Violations of these provisions are punishable by criminal and civil
penalties, including individual monetary fines for each separate service billed
to Medicare in violation of the anti-kickback provisions, exclusion of the
provider from future participation in the Medicare and Medicaid programs, and
imprisonment for up to five years. In New York and New Jersey, licensed health
care practitioners, including physicians, are prohibited from, directly or
indirectly, offering, giving, soliciting or receiving or agreeing to receive,
any fee or consideration to or from a third party for the referral of a patient.
STATE PHYSICIAN SELF-REFERRAL LAWS
Several states have statutes prohibiting financial arrangements with
health care providers which, while similar in many respects to the federal
legislation, vary from state to state and are often vague and have infrequently
been interpreted by courts or regulatory agencies. Under New Jersey
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law, a physician with a significant beneficial interest in certain health care
services (and a physician whose immediate family has a significant beneficial
interest in certain health care services) other than health care services
relating to the treatment of renal dialysis, may not refer patients to those
health care services, except in certain cases including where the significant
beneficial interest was held prior to July 31, 1991. In all cases where referral
is permitted, New Jersey law requires disclosure to the patient of the interest
of the physician. In addition, under the New York physician self-referral law,
physicians are prohibited from referring patients to a provider of clinical
laboratory, pharmacy or x-ray and imaging services with which the referring
physician or any of his/her immediate family members has an ownership or
investment interest or maintains a compensation arrangement. See "New York
Health Care Licensure Requirements." New York law requires that patients be
informed of a physician's interest in the provider in cases where the referral
is permitted. The Company's existing referral relationships with its referral
sources for its renal dialysis, nursing and consulting services are not limited
by the New York physician self-referral law as currently drafted. However,
proposals have been made to extend the scope of the physician self-referral law
to include other health care services. The operations of the Company's
Consulting customers may be subject to the physician self-referral laws in New
Jersey or New York.
NEW JERSEY AMBULATORY CARE FACILITIES REGULATIONS
The New Jersey Department of Health has promulgated comprehensive
regulations governing ambulatory care facilities and dialysis facilities. These
regulations are applicable to the operations of the Company's Training Facility,
were applicable to the operations of the Company's In-Center Facility, and
establish standards for operating all licensed ambulatory care facilities. The
regulations encompass a broad range of business operations such as requirements
for maintaining employee health, reporting certain events such as the death of a
patient, protocols for patient treatment and disclosure requirements to the
State Board of Medical Examiners. In addition, they require that the facility
have a governing authority, an administrator and a medical director. Although
these regulations also require that a facility providing chronic dialysis
services must have at least nine stations, the Company's former In-Center
Facility was granted a waiver by the New Jersey Department of Health to operate
with six stations. Further, a facility providing chronic dialysis services is
required to have a written transfer agreement with at least one hospital-based
chronic dialysis unit with acute dialysis capacity and with at least one
facility having a renal transplantation program. Since the Company does provide
chronic dialysis services, it is subject to these regulations and has a written
agreement with St. Barnabas Medical Center, which has a chronic dialysis unit
and renal transplantation program.
MEDICARE ESRD PROGRAM REGULATIONS
As required by Medicare regulations, the Company's In-Center Facility
was, and the Training Facility is supervised by Medical Directors as are the
Consulting Customers. In addition, the Company and the Consulting Customers are
required to maintain complete medical records, obtain back-up agreements with
other renal dialysis facilities in certain instances, comply with record keeping
and reporting requirements of HCFA and satisfy other detailed regulatory
requirements. The
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failure to comply with these applicable regulations could result in fines and
penalties or in the Company's or the Consulting Customer's loss of its Medicare
and Medicaid certification. The loss of Medicare and Medicaid certification by
the Company or a Consulting Customer could result in the loss of the provider's
right to receive Medicaid and Medicare reimbursement, which comprises the major
source of revenue for the Company and the Consulting Customers.
THE STARK II AMENDMENT
On August 10, 1993, the Physician Ownership and Referral Act ("Stark
II"), which was incorporated into the federal Omnibus Reconciliation Act of
1993, was adopted. Effective as of December 31, 1994, Stark II extended the
aforementioned prohibitions against physician referrals to several other health
care services, including durable medical equipment, parenteral and enteral
nutrients, equipment and supplies, home health services and outpatient
prescription drugs. Stark II also prohibits the Company from billing any
individual, third party payor or other entity for designated health services
which are furnished pursuant to a referral by a physician who has a financial
relationship with the Company. Financial relationship is broadly defined to
include compensation arrangements involving any form of remuneration. However,
there are a number of exceptions for certain types of compensation arrangements,
including exceptions for personal service arrangements, space leases, employment
relationships, certain prepaid health plans, isolated transactions and certain
payment arrangements that are consistent with fair market value, so long as
these arrangements meet certain specified criteria. With respect to physician
ownership interests, an exception exists for ownership of investment securities
which may be purchased on terms generally available to the public and which are
(i) listed on the New York Stock Exchange, the American Stock Exchange or
certain regional exchanges or are traded under an automated inter-dealer
quotation system operated by the National Association of Securities Dealers,
Inc. and (ii) are shares in a corporation that had at the end of the
corporation's most recent fiscal year or on average during its previous three
fiscal years shareholders equity exceeding $75,000,000. The Company's securities
do not, and the Company does not expect its securities to satisfy either of
these requirements. The Company believes that the termination of various
agreements with physicians which the Company terminated when Stark II became
effective have caused a decrease in physician referrals to the Company, which
has adversely affected the Company's revenues. There can be no assurance that
the restrictions of Stark II or additional or similar laws will not further
materially adversely affect the Company's revenues.
AMA GUIDELINES
The American Medical Association ("AMA") has recently revised its
position, which does not have the force of law, regarding referrals by
physicians to businesses in which they hold ownership interests. The AMA's
current view is that, in general, physicians should not refer patients to a
health care facility outside their office practice at which they do not directly
provide care or services when they have an investment interest in the facility.
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STATE CORPORATE PRACTICE OF PROFESSIONS
Many states, including New Jersey and New York, prohibit corporations,
with limited exceptions, from engaging in the practice of a learned
professional, including medicine and nursing. Under New York law, the Company
may not arrange for the provision of or directly engage physicians or nurses to
provide or arrange for the provision of, professional services. Violation of the
New York law prohibiting the unauthorized practice of a profession is a felony
with sanctions, including fines of up to $10,000 and/or up to four years'
imprisonment per offense. "See Operations -- New York Operations" for the
application of these provisions to the Company's operations. Despite this broad
prohibition, not all affiliations between corporations and professionals are
unlawful. The Company may engage professionals to provide medically-related
administrative services on its behalf without violating the prohibition. In
addition, if the Company obtains the home care services agency license for which
it has applied from the State of New York, it will be permitted to directly
engage or employ nurses to perform clinical duties in the homes of its
individual clients. The Company's activities as a licensed nurse registry are
also exempt from the prohibition. New Jersey and New York also prohibit
physicians and nurses from splitting or sharing their professional fees with
anyone other than a partner, subcontractor or employee authorized to practice
their profession. In New York, this prohibition includes any fee the Company may
receive from its nurses which is set in terms of a percentage of a nurse's fee
or otherwise clearly tied to a nurse's professional income, except any placement
fee received from a nurse for placement services provided by the Company's
licenced nurse registry.
NEW JERSEY NURSE REGISTRIES
New Jersey also regulates the operations of an employment agency, which
is defined to include a nurses' registry, requiring such entity to be licensed
by the Division of Consumer Affairs, Department of Law and Public Safety. As a
licensed employment agency, the Company is required to maintain job placement
records, advertisement records, fee records and other correspondence by and
between the Company and the employer and the Company and the nurses it places.
In addition, among other licensing and operating requirements, the Company is
required to prepare and execute written agreements with employers and nurses
which include information relating to the Company's fee schedule, timing of the
payment of the Company's fee and by whom, and the conditions under which an
adjustment or refund in the fee will be made. The Company has concluded that a
portion of its nursing business in New Jersey may have been conducted other than
in accordance with certain regulations and may have been conducted in a manner
which required additional licensure. The Company has modified this portion of
its business so that it is currently operated in accordance with existing
licenses and has applied for additional licensure. The Company has modified its
operations to be in conformity with applicable regulations. Current regulations
require providers of hemodialysis services in a long term care facility in New
Jersey to be licensed as ambulatory care facilities. These regulations require
ambulatory care requirements to be established and require the provider to
demonstrate the ability to serve nine patients statewide within six months of
licensing approval. Once
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licensed, the dialysis provider must submit each new agreement with a long term
care facility to the New Jersey Department of Health before services are
provided. The Company does not currently provide these services. However, there
can be no assurance the Company will obtain appropriate regulatory approvals in
the event it does determine to provide these services.
Any loss by the Company of its New Jersey Training Facility license or
employment agency license, from which a substantial portion of its revenue is
derived, could have a material adverse effect on its business in the State of
New Jersey.
NEW YORK HEALTH CARE LICENSURE REQUIREMENTS
The rendering of health care services, including the provision and
management of renal dialysis services and nursing services, is highly regulated
in the State of New York with respect to licensure, management and control of
licensed facilities. Failure to comply with the applicable laws and regulations
could result in, among other things, the imposition of fines and in extreme
circumstances, license revocation and/or criminal prosecution.
Health care facilities, including hospitals, nursing homes, and
In-Center Facilities, are required to maintain an operating license under
Article 28. Article 28 facilities are subject to the New York State Health
Commissioner's (the "Health Commissioner") review and approval of the
management, certain operational activities, and the change of ownership thereof.
Health care facilities licensed under Article 28 may be owned or operated only
by natural persons or corporations or general partnerships if they are comprised
solely of natural persons. In addition, the change of control of 10% or more of
the stock or voting interest of an Article 28 facility is subject to regulatory
approval. The Company's operations in New York are subject to Article 28 and its
regulations as a result of the consulting and services agreements they maintain
with clients which are licensed under Article 28.
Under Article 28, the Company is permitted to provide consulting and
other administrative services to hospitals, In-Center Facilities and nursing
homes and management services to hospitals, subject to certain restrictions. The
Company is also permitted to be the lessor of real property and equipment
utilized in the operation of an In-Center Facility. However, the Company cannot
be licensed to operate an In-Center Facility in New York since Article 28
requires that only natural persons or corporations or general partnerships
comprised solely of natural persons may have an ownership interest in an Article
28 facility.
Article 28 limits the manner and extent to which licensed facilities
may delegate authority to perform certain management activities. Article 28
facilities, other than hospitals, are not permitted to enter into management
agreements which give an outside entity which is not an Article 28 facility
primary responsibility for managing the day-to-day operations of an entire
facility or a defined patient unit. General hospital management agreements are
permissible, but require the prior approval of the Health Commissioner and are
subject to other restrictions. Such management agreements may not exceed three
years, may be renewed only with the prior approval of the Health Commission and
must be terminable by the general hospital, with or without cause, on no more
than 90 days' notice. An
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arrangement between a general hospital and an outside entity will not be subject
to the Health Commissioner's review if it pertains to the provision of
administrative services to a defined patient unit of the general hospital where
the general hospital retains authority over the day-to-day operations of the
unit. In addition, the general hospital may not delegate to the outside entity
the authority to: (i) engage or terminate any general hospital employee, (ii)
maintain or control the books and records of the unit, (iii) dispose of assets
or incur liabilities on behalf of the general hospital, or (iv) adopt and
enforce policies regarding the operation of the unit.
The fees charged by the Company under any consulting and administrative
services agreement or management agreement with an Article 28 facility must be
determined in a manner which is not tied to the total gross income or net
revenue of the health care facility, since Article 28 facilities are subject to
regulations which prohibit fee splitting with non-Article 28 entities. The
Company believes that its consulting and administrative services agreements,
including its agreements with its Consulting Customers and Hempstead General
Hospital are in compliance with the applicable provisions of Article 28 and its
regulations. See "Operations -- New York Operations" for a discussion of the
applicability of these provisions to the Company's operations.
After April 1, 1986, no home care services agency engaged in providing
or arranging for home nursing services, whether directly or through contract
arrangement, may be operated in New York without a license issued by the Health
Commissioner. Licensed nurse registries are specifically exempt from this
licensure requirement. The Company has received a home care services agency
license to enable it to provide home infusion care services and in-home nursing
care to its individual clients and has commenced providing services under the
license to certain patients previously serviced through SBKC and through the
Company's nurse registry.
New York also regulates the operations of nurse placement agencies.
Article 11 of the New York General Business Law prohibits any person from
operating a business within the City of New York which procures or attempts to
procure employment or other engagement for registered nurses or licenced
practical nurses, without a license issued by the Commissioner of Consumer
Affairs of the City of New York. The Company operates a duly licensed employment
agency/nurse registry. As a licensed nurse registry, the Company is restricted
in the manner in which it may place nurses and the amount of fees it may charge
for a placement. The fee limitation to which a licensed nurse registry is
subject varies according to the services to be provided by the nurse placed by
the registry. A licensed nurse registry may charge each nurse placed to provide
private duty nursing services and the client separates fees of up to five
percent of the nurse's compensation for the first ten weeks of the engagement
for a total placement fee of ten percent of such nurse's compensation. For all
other nursing services, the licensed nurse registry may charge each nurse placed
and the client separate fees of up to five percent of the nurse's compensation
for the first year of the engagement, for a total placement fee of ten percent
of such nurse's compensation. In each instance, the client may voluntarily
assume the payment of the fee charged to the nurse. See "Operations -- New York
Operations" for the application of these provisions to the Company's operation.
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Any loss by the Company of its nurse registry license, failure to
obtain or maintain its anticipated home care services agency license, or failure
to comply with the restrictions under article 28 in connection with its
consulting and services arrangements with licensed health care facilities, could
have a material adverse effect on the Company's business in New York.
ENVIRONMENTAL LAWS
The Company's operations are subject to various state hazardous waste
disposal laws. The Company disposes its medical waste through hazardous waste
vendors which are primarily responsible for compliance with such laws. Those
laws as currently in effect do not classify most of the waste produced during
the provision of dialysis services to be hazardous, although disposal of
non-hazardous medical waste is also subject to regulation. The Company incurred
disposal expenses of approximately $3,000 in 1996 for hazardous and
non-hazardous medical wastes.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigation and remedying any
hazardous substances that have come to be located on the property, including any
such substances that may have migrated from, or emitted, discharged, leaked,
escaped or been transported from the property. The handling, use, storage,
transportation, disposal and/or discharge of hazardous materials may result in
damage to individuals, property or the environment, may interrupt operations
and/or increase their costs may result in legal liability, damages, injunctions
or fines, may result in investigations, administrative proceedings, penalties or
other governmental agency actions, and may not be covered by insurance. There
can be no assurance that the Company will not encounter such risks in the
future, and such risks may result in material adverse consequences to the
operations or financial condition of the Company.
At the present time, the Company is not aware of any pending or
threatened claim, investigation or enforcement action regarding such
environmental issues that, if determined adversely to the Company, would
have material adverse consequences.
The Company believes that it is in substantial compliance with all
applicable environmental regulatory requirements, and is not aware of any
noncompliance with applicable environmental regulatory requirements which could
have a material adverse effect upon the Company.
The Company is also subject to state and federal laws, including OSHA,
relating to occupational safety and health standards designed to protect the
Company's employees and clients. OSHA regulations require employers of workers
who are occupationally exposed to blood or other potentially infectious
materials to provide those workers with certain prescribed protections against
blood borne pathogens. The regulatory requirements apply to all health care
centers, including dialysis centers. The regulations require employers to make a
determination as to which employees may be exposed to blood or other potentially
infectious materials and maintain a written exposure control plan. In addition,
employers are required to provide hepatitis B vaccinations, personal protective
equipment, infection control training, post-exposure evaluation and follow-up,
waste disposal techniques and procedures, and engineering and work practice
controls.
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The Company is subject to a wide variety of other federal, state and
local environmental laws and regulations. Among the types of general regulatory
requirements faced by health care providers are: air and water quality control
requirements; waste management requirements; specific regulatory requirements
applicable to asbestos, polychlorinated biphenyls, and radioactive substances;
requirements for providing notice to employees and members of the public about
hazardous materials and wastes; and certain other requirements.
HEALTH CARE REFORM
There are several health care reform proposals which have been
discussed by the United States Congress. These proposals are for the most part
designed to contain health care costs and to improve access to medical service
for uninsured individuals. The proposals included cutbacks to certain Medicare
and Medicaid programs, and steps to permit greater flexibility in the
administration of Medicaid. They also include limitations on spending for health
care benefits, price controls and the creation of large purchasing groups.
Legislation incorporating such recommendations, if enacted, could, among other
things, restrict the Company's ability and flexibility to raise prices. It is
uncertain at this time what legislation on health care reform will ultimately be
implemented or whether other changes in the administration or interpretation of
governmental health care programs will occur. The Company anticipates that
federal and state legislatures will continue to review and assess the proposals
and alternative health care systems and payment methodologies. A bill is
currently pending in the United States Senate which, if adopted, would, among
other things, cap the amount of fees which can be received for medical services
by, and extends the federal prohibition against physician referrals to, an
entity which provides home infusion therapy services. The Company is unable to
predict the ultimate impact of any federal or state restructuring of the health
care system, but such changes could have a material adverse impact on the
operations, financial condition and prospects of the Company.
COMPETITION
Competition for patients and referral sources in the dialysis business
is highly competitive. The Company competes with many health care providers
ranging in size from single location In-Center Facilities and small home health
care providers to regional and national companies, and may face additional
competition from others that may decide to enter into business in the geographic
areas served by the Company. Many of the Company's competitors have
substantially greater financial resources than the Company. In addition, the
Company faces competition from other health care providers seeking acquisition
candidates of the type and size which are or may in the future be sought by the
Company. There is no assurance that the Company can continue to compete
effectively with such providers.
CERTAIN TAX MATTERS
A substantial number of nurses who provide services on behalf of the
Company and on behalf of UMDC and NNF are not employed as employees by the
Company and are treated by the Company
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as independent contractors for purposes of federal and state tax laws. The
Company is aware that the Internal Revenue Service (the "IRS") recently
considered the status of nurses providing services through a specific nurse
registry and concluded that the nurses in that case were employees and not
independent contractors of the nurse registry. The Company believes that the
relationship between its nurse registry and the nurses providing services
through the nurse registry and the relationship among the consulting customers
and the nurses providing services through the consulting customers are
distinguishable from the case considered by the IRS. Further, even if the nurses
were considered to be employees of the Company or the consulting customers, the
Company believes it and the consulting customers would be entitled to relief
provisions which would permit the Company to continue treating the nurses as
independent contractors for tax and other purposes. In addition, if the Company
or the consulting customers must pay additional taxes as a result of a tax
assessment arising from this issue, other federal provisions may reduce the
overall liability if the Company or the consulting customers, respectively, can
show that it did not intentionally disregard the requirements to deduct and
withhold income or FICA taxes. However, in the event the IRS or certain other
federal or state governmental agencies were to determine that the nurses are in
fact employees of the Company or the consulting customers, the Company or the
consulting customers could incur liability for unpaid social security,
unemployment, withholding, and state and local taxes. Further, reclassification
of the nurses could result in the disqualification of, or increased expense to
the Company's or the consulting customer's pension plans, health insurance
programs and other benefit arrangements and the entitlement of certain workers
to a range of employee rights under federal and state laws.
EMPLOYEES
As of March 3, 1997, the Company had 34 full-time and 20 part-time
employees, of which 18 persons were employed as the Company's corporate staff.
In addition, the Company uses the services of a substantial number of nursing
independent contractors. No employees are covered by collective bargaining
agreements, and the Company considers its employee relations to be good.
LIABILITY INSURANCE
The Company carries property, general liability and professional
liability insurance in amounts and coverage deemed adequate by management.
However, there can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that
professional liability and other liability insurance will continue to be
available at a reasonable cost or that the nurses or Medical Directors will be
able to maintain adequate levels of malpractice insurance and other liability
insurance in the future. Medical Directors and nurses acting as independent
contractors for the Company maintain their own malpractice insurance.
ITEM 2. PROPERTIES
The Company's corporate headquarters currently consists of 5,000 square
feet of leased office space located in Florham Park, New Jersey. The lease
provides for a base annual rent of
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approximately $82,000, expires March 31, 1999 and is renewable for an additional
five-year term. The Company's New York subsidiaries occupy two offices located
in Bayside, New York, under leases expiring in June 1997.
The Company's Training Center in Linden, New Jersey occupies
approximately 1,500 square feet pursuant to a lease which provides for an annual
rent of approximately $30,000. The lease has a term of 5 years, expiring
November 30, 1999.
The Company has assumed the obligations of LDL under a lease for 3,900
square feet previously used by LDL as office and warehouse space located in East
Hanover, New Jersey at a rate of $37,225 per annum, plus 39% of all utilities
for the entire premises which includes the leased space. The term of the lease,
which expires July 1, 1998, may be extended at the option of the Company for two
additional five year terms. The premises are currently used by the Company for
warehouse space and for RMI.
The Company has guaranteed payment under a lease entered into by CDBI
for its In-Center Facility for approximately 9,500 square feet in the Bronx, New
York. The lease provides for an initial monthly rent of approximately $11,534
and has a term of fifteen years. The Company has also guaranteed the obligations
of UMDC under the terms of its operating lease. See "Consulting Services and
Subcontracting."
ITEM 3. LEGAL PROCEEDINGS
The former shareholders of LDL brought an action against the Company
seeking an accounting of the operations of LDL following the acquisition of LDL
by the Company. Under the terms of the LDL Agreement, the former shareholders of
LDL were entitled to receive additional payments up to a maximum of $135,000,
based upon the actual collection of certain accounts receivable and the profits,
if any, of LDL and CCIS on a combined basis. The Company vigorously disputed the
plaintiffs' claims and asserted counterclaims against the plaintiffs alleging
breach of contract, misrepresentation, fraud and conversion, and seeking
compensatory damages or recision and punitive damages in connection with the
sale of LDL. In January 1997, in connection with a settlement among the parties,
all actions relating to LDL were dismissed with prejudice. The Company is not
currently a party to any other material pending legal proceeding.
Many aspects of the business of the Company and its subsidiaries
involve risks of potential liability. The Company and its subsidiaries and
affiliates are subject to actions by patients and employees in the normal course
of the Company's and the subsidiaries' respective businesses, including actions
grounded in personal injury. Further, the Company and its subsidiaries may, from
time to time, be involved in proceedings with, and investigations by,
governmental agencies relating to licensure and to the federal, state and local
laws, rules and regulations under which the Company and its subsidiaries
operate. Management believes that the outcome of these proceedings will not have
a material adverse effect on the Company's financial position or results of
operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMPANY COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock (CCCI) and the Company's Common Stock
Purchase Warrants (CCCIW) and the Company's units, each comprised of one share
of Common Stock and one Common Stock Purchase Warrant, (CCCIU) are traded in the
NASDAQ national market system. There are approximately 19 holders of record of
the Company's common stock as of February 25, 1997. The following table sets
forth the closing high and low bids for each of the securities for each quarter
since following the quarter ended June 30, 1995. The figures set forth below
were obtained from the National Association of Securities Dealers (NASD)
"Monthly Statistical Report".
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS UNITS
THREE MONTHS ENDED (CCCI) (CCCIW) (CCCIU)
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 3-3/8 1-7/16 11/32 3/16 3-3/8 1-3/8
September 30, 1996 4 2 1/2 1/4 4-1/8 2-1/16
June 30, 1996 4-1/8 3-7/8 1/2 3/8 4-1/2 4-1/8
March 31, 1996 4-1/8 3-1/4 1/2 1/4 4-1/2 3-1/2
December 31, 1995 5 3-1/4 3/4 1/4 5-3/4 3-1/2
September 30, 1995 5-1/2 4-1/2 1 3/8 6 5
</TABLE>
As of February 12, 1997, the date immediately prior to the public
announcement of the execution of the Purchase Agreement, the average of the high
and low bid prices for the Company's common stock, common stock purchase
warrants and units were $1.38, $0.14 and $1.31 respectively. As of March 3,
1997, the average of the high and low bid prices of the Company's common stock,
common stock purchase warrants and units were $1.50, $0.12 and $1.62
respectively. The prices shown reflect interdealer quotations without adjustment
for retail mark-up, mark-down or commission and may not represent actual
transactions. The Company has paid no cash or stock dividends since its
inception. The Company's securities are subject to delisting from trading by
NASDAQ in the event the Transaction is consummated. See "The Transaction -
Certain Post Closing Risks".
As of October 3, 1996, the Company issued warrants (the "Josephthal
Warrant") to purchase up to 100,000 shares of Common Stock to Josephthal and to
certain of its employees. The Josephthal Warrants are exercisable during the
period ending September 30, 2001 at a price of $3.00 per share
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of Common Stock. Holders of the Josephthal Warrants are entitled to certain
"piggy back" registration rights with respect to the Common Stock underlying the
Josephthal Warrant.
In 1997, the Company also issued warrants to a public relations firm
(the "PR Warrant") and to an outside legal firm (the "Firm Warrant") pursuant to
commitments made in 1996. The PR Warrant entitles the holder to purchase up to
50,000 shares of Common Stock at a price of $4.25 per share and the Firm Warrant
entitles the holder to purchase up to 60,000 shares of Common Stock at a price
of $3.00 per share. Each of the PR Warrants and the Firm Warrants are
exercisable during the period ended December 31, 2001 and holders of each are
entitled to certain "piggy back" regulation rights with respect to the Common
Stock underlying the Warrants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
This Annual Report on Form 10-KSB, including this Item, contains
"forward-looking statements" within the meaning of the Private Securities
Ligitation Reform Act of 1995. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements
as a result of known and unknown risks, uncertainties and other factors.
Certain factors which could cause actual results to differ and which are
known to the Company are set forth in this Item, as well as under
"Item 1. Business."
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared With Year Ended December 31,
1995.
NET PATIENT REVENUES
Net patient revenues of the Company are derived from providing
equipment and supplies to patients (52% for 1996 and 60% for 1995) and services
(48% for 1996 and 40% for 1995), which services consist of contract nursing
services, and dialysis treatments provided by the Company's Training Facility in
Linden, New Jersey and, in 1995, by the Company's former New Jersey in-center
facility. In 1996 and 1995, 30% and 33%, respectively, of the Company's cash
receipts were received under the Medicare program, while approximately 70% and
67%, respectively, of cash receipts were received from commercial insurance
companies or contracted entities and Medicaid programs.
The Company anticipates that Medicare payments will continue to be a
major source of revenue. The reimbursement rates for dialysis treatments and for
Epogen, a dialysis medication, are separately determined by Medicare and are
subject to change from time to time. The Medicare reimbursement rate for
dialysis treatments per month per patient was $1,193 in both 1996 and 1995. The
success of the Company is also dependent upon such factors as substantial
government regulation and the ability to grow and be profitable in a highly
competitive industry.
The market for patients and referral sources in the dialysis business
is highly competitive. The Company competes with many health care providers
ranging in size from single location in-center facilities and small home health
care providers to regional and national companies, and may face additional
competition from others that may decide to enter into business in the geographic
areas served by the Company. Many of the Company's competitors have
substantially greater financial resources than the Company. In addition, the
Company faces competition from other health care providers seeking acquisition
candidates of the type and size which are or may in the future be sought by the
Company. During 1995 and 1996, the number of patients served by the Company
decreased. The Company believes that the loss of patients has resulted primarily
from the wind down and
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termination of relationships between the Company and certain physicians, which
relationships the Company believes may not have complied with Stark II. Further,
current regulations limit the range of arrangements which can be entered into
between dialysis companies, such as the Company and referring physicians.
Consequently, the Company believes that more physicians are retaining more
services, rather than referring those services to third party providers, and are
entering into arrangements with larger consolidators in the industry who are
exempt from Stark II, have greater financial stability and perceived longevity
or who are otherwise able to offer more benefits. If these trends continue, the
Company's future business may be materially adversely affected.
Net patient revenues were $5,751,896 in 1996 as compared with
$8,232,389 in 1995. The decrease of $2,480,493 is attributable to a number of
factors. In addition to the overall decrease in patient census discussed above,
sales to consulting customers were lower by $682,424 for 1996 as compared to
1995. As a result of the sale of the Company's New Jersey in-center facility in
March 1996, sales decreased by $1,198,290 in 1996 as compared to 1995. In
addition, there were no net patient revenues related to the Company's infusion
services business for 1996 as compared to $292,269 for 1995 as a result of the
termination of that business in June 1995. Reductions in the Company's former
southern New Jersey equipment and supplies revenues of $423,614 and New York
sales of equipment and supplies of $658,689 were partially offset by $411,011 in
revenues due to the full year operation of the Company's Linden Training
Facility which opened in late 1995, revenues of $336,604 relating to the
Company's new Renal Management, Inc. subsidiary and $240,000 in consulting fees
pertaining to the Bronx Facility.
The Company provides certain services in New York through consulting,
administrative, or subcontracting service arrangements with Consulting Customers
in New York. The Consulting Customers are partially or 100% owned by the Certain
Executive Officers. In addition, during 1996, the Company was the assignee of
the Bronx Facility Agreement between Alpha and the Bronx Facility. The Bronx
Facility Agreement provides that for an annual consulting fee of $240,000, the
Company, as assignee, provides various administrative and consulting services to
the Bronx Facility. The Company has also provided equipment and supplies to the
Bronx Facility under the agreement at the Company's listed cost for the
equipment and supplies. The $240,000 consulting fee is expressly subordinated to
the payment of operating expenses of the Bronx Facility arising after April 16,
1993. The obligations of NNF under the Bronx Facility Agreement are expected to
be assumed by Alpha upon Alpha's purchase of the Bronx Facility's assets.
Effective August 1994, the Company entered into an agreement to provide
administrative and consulting services to UMDC for a monthly fee of $33,333. The
agreement with UMDC similarly provides for reimbursement to the Company for
services rendered and for its direct costs of equipment and supplies. The UMDC
agreement was automatically renewed in 1995, extends for a period of two years
and is automatically renewable for successive two year periods unless either
party decides to terminate. The Company also has a consulting and services
agreement with CDBI. The agreement has a term of two years and is automatically
renewable for successive two year periods unless terminated by either party. The
CDBI Agreement provides for payments of $20,000 per month. During 1996, the
Company recorded $240,000 in consulting fees for services provided to the Bronx
Facility. No other consulting fees have been recorded due to realization
uncertainties, nor are such fees anticipated to be recorded in
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1997 unless the sale of assets discussed below in the Liquidity and Capital
Resources section is consummated. No assurance can be given that UMDC or CDBI
will not require additional cash advances in 1997. A requirement to provide
additional funding could have a material adverse effect on the Company.
The Company established a new subsidiary, Renal Management, Inc.
("RMI"), to expand the scope of the Company's services and enable it to be more
directly involved in renal disease state management and nephrology practice
management. RMI intends to contract with third parties to provide care to renal
patients and to manage the overall care of renal patients for others. During the
second quarter of 1996, RMI prepared and submitted a proposal to the Health Care
Financing Administration ("HCFA") End Stage Renal Disease Managed Care
Demonstration Project ("Demonstration Project") on behalf of four New Jersey
healthcare entities (the "Consortium"). In the event a portion of the project
was awarded by HCFA to the Consortium, RMI expected to manage the project for
the Consortium. Second quarter 1996 revenues include $336,604 billed to the
Consortium by RMI at no margin pursuant to a letter agreement between the
Company and the Consortium. In the third quarter of 1996, the Federal Department
of Health and Human Services advised the Consortium that, in light of the
Department's limited resources, the Department could not fund the Consortium's
application. Accordingly, the Company does not expect to participate in the
Demonstration Project. To date, RMI has entered into no substantive agreements
to provide management services. The Company does not expect to provide
additional substantive financial support for RMI. Accordingly, unless
third-party financing is obtained to fund RMI's operations, as to which no
assurance can be given, it is likely that the Company will terminate the
business of RMI.
COST OF GOODS SOLD/COST OF SERVICES
Cost of goods sold was $1,322,308 or 44% of net patient revenues
attributable to equipment and supplies in 1996 as compared with $2,436,298 or
49% of net patient revenues attributable to equipment and supplies in 1995. This
decrease in cost of goods sold as a percentage of revenues is primarily the
result of a decrease of equipment and supplies purchased by consulting customers
from the Company at no margin.
The cost of services totaled $859,499 or 31% of net patient revenues
attributable to services in 1996, a reduction from $1,076,942 or 33% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $5,183,414 or 90%
of net patient revenues for 1996 as compared with $4,626,788 or 56% of net
patient revenues in 1995. The net increase of $556,626 is primarily comprised
of: (i) an increase in rent and other office expenses aggregating $147,294 due
to the opening of the Company's Linden Training Facility; (ii) $757,015
31
<PAGE>
of expenses relating to the start-up of the Company's new Renal Management, Inc.
subsidiary and (iii) $225,000 of expense incurred by the Company in connection
with Alpha's option to purchase the Bronx Facility, partially offset by a
decrease of $424,697 due to the sale of the Company's New Jersey in-center
facility.
COST OF FAILED ACQUISITION AND DISCONTINUANCE OF INFUSION BUSINESS
In 1995, the Company incurred substantial costs in connection with the
proposed merger transaction with INS. In June 1995, the Company terminated the
merger transaction with INS and incurred $242,000 costs in connection with the
proposed transaction. Also in 1995, as a result of losses incurred from the
operations of LDL and the outlook for the future profitability of LDL, the
Company discontinued its infusion business and wrote off $285,645 of unamortized
intangibles and $20,000 of pharmacy inventory.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $379,672 for 1996 as compared
with $837,770 in 1995 due primarily to a decrease in patient revenues. The
provision for doubtful accounts is recorded to the extent deemed to be adequate
to absorb possible losses resulting from uncollectible receivables. The Company
reviews each individual account in detail to determine the collectibility of
each item in the account. A reserve is established to reflect any amounts
considered doubtful of collection. The calculation of doubtful accounts is based
on the Company's knowledge of specific payors, past experience with the account
under review and historic experience with accounts having characteristics
similar to the one being reviewed. Due to the unusually long third-party
reimbursement process, especially as to secondary and tertiary payors and
self-pay patients, the Company often does not write off receivables for a year
or more.
As of December 31, 1996, the allowance for doubtful accounts was
$517,000 as compared with $728,000 at December 31, 1995. As a percentage of
receivables outstanding, such allowance was 34% at December 31, 1996, and 27% at
December 31, 1995. Due to the reduction in current period revenues discussed
above and aggressive collection activity, the patient accounts receivable have
been significantly reduced. As a consequence, the percentage of older
receivables is larger and requires a higher percentage allowance. Management is
continuing to evaluate the collectibility of all accounts and believes the
stated allowance as of December 31, 1996 is adequate to absorb possible losses
resulting from uncollectible receivables. As of December 31, 1996, 438,290 or
44% of net receivables were greater than 90 days past due.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense totaled $177,353, an increase of
$14,831 or 9% from 1995.
32
<PAGE>
INTEREST INCOME, NET
Net interest income was $68,981 in 1996 and $62,758 in 1995. Interest
expense on the Company's debt obligations in both periods was more than offset
by interest earned on the remaining proceeds from the sale of assets and rights
in the Cape May Court House, New Jersey area. See "Liquidity and Capital
Resources" and "Sale of New Jersey In-Center Facility."
BENEFIT FOR INCOME TAXES
The benefit for Federal income taxes was $58,345 in 1996 and $0 in
1995. The state income tax provision (benefit) was $37,930 in 1996 and
($119,000) in 1995. The effective income tax rate was (6%) and (9%) in 1996 and
1995, respectively. The 1996 effective income tax rate primarily results from
state income taxes assessed related to the sale of assets and rights in the Cape
May Court House, New Jersey area. Substantially all of the Company's deferred
tax asset has been offset by a valuation allowance as a result of the Company's
operating results. A portion of the deferred tax asset is expected to be
realized as a result of the sale of assets (see Note 11 in the notes to
consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a positive net cash flow of $76,099 in 1996
comprised of $1,270,882 provided from investing activities, derived primarily
from the proceeds of the sale of certain southern New Jersey assets of the
Company, partially offset by $1,105,408 used in operating activities and
$89,375 used in financing activities.
On July 27, 1994, the Company completed an initial public offering of
equity securities (the "Offering"). The Offering was comprised of 1,610,000
units, each unit consisting of one share of common stock and one warrant. The
Company received proceeds of $5,493,061, representing cash from the sale of
1,237,500 units priced at $5.75 per unit, net of underwriting discount and
expenses of $903,685 and outstanding and previously paid stock issuance costs of
$719,020. In 1995, an additional expense of the underwriting was settled with
one vendor for $81,000. As of December 31, 1996, the Company had completed the
planned use of proceeds of the Offering.
The Company has made advances to certain affiliates and Consulting
Customers. In the second quarter of 1994, a note receivable of $125,868 was
created for the amount due from TechTron for costs incurred by the Company on
TechTron's behalf. This note bears interest at an Internal Revenue Service
imputed rate for instruments having a maturity of two or more years and
otherwise without a stated interest rate. Principal and accrued interest thereon
were payable on December 31, 1996. Payment was not made. The borrower has
executed a new note which is due and payable on demand. During 1996 and 1995, an
additional $16,000 and $15,000, respectively, was advanced to TechTron by the
Company. The Company has obtained notes from TechTron for these additional
advances. The notes bear interest at the rate of 8% and are payable on demand;
payments on the notes are not anticipated in 1997. The notes have been
guaranteed by Certain Executive Officers. Through December 31, 1996,
33
<PAGE>
the Company had advanced loans to the principals of UMDC aggregating $450,000
and loans to UMDC in the amount of $622,449, and had provided $875,248 of
equipment and supplies to UMDC for which the Company had not yet been
reimbursed. The loans bear interest at prime less 1% and remain outstanding
as of December 31, 1996. There were no repayments made by UMDC during 1996.
Advances and supplies and equipment in 1996 to UMDC totaled $201,000.
The Company, Certain Executive Officers and the shareholders of UMDC
have guaranteed UMDC's credit facilities aggregating $2,400,000, of which
approximately $1,340,000 is outstanding as of December 31, 1996. The UMDC credit
facilities contain various default provisions, including the failure to pay
principal or interest, failure to adhere to certain financial ratios, material
adverse changes in UMDC's business and violations of healthcare laws and
regulations. A default by UMDC under the provisions of the credit facilities
would have a material adverse effect on the Company. Through
December 31, 1994, Alpha had funded $565,000 of the cash requirements of the
Bronx Facility with funds provided from the Company. The Company loaned an
additional $57,405 to Alpha to enable Alpha to meet its obligations under its
agreement with the estate of the former director of the Bronx Facility. The
advances were converted into loan agreements with Alpha in the amounts of
$265,000 and $357,405, bearing interest of 8% and the IRS imputed rate for
two-year investments, respectively. Both notes are payable in full in 1999. All
notes from Alpha have been guaranteed by Certain Executive Officers. As of
December 31, 1996, $205,300 was due from the Bronx facility. Total repayments
made by NNF in 1996 were $957,448. Additional 1996 advances to the Bronx
facility for supplies and equipment totaled $371,995.
The Company has also advanced funds to Continental Dialysis Center of
the Bronx, Inc. ("CDBI") for the construction of a new In-Center Dialysis
Facility in the Bronx, New York. At December 31, 1996 and 1995, $1,176,985 and
$479,437, respectively, is due from CDBI. Such amounts are reflected by
promissory notes bearing interest at the rate of 8% per annum due March 19, 2001
and February 24, 2002, respectively, and are guaranteed by Certain Executive
Officers.
In 1996, cash flow was positive due to proceeds of $2,010,330 from the
sale of the Company's former New Jersey In-Center Facility and certain other
assets. In addition, positive cash flow resulted from (i) depreciation and
amortization of $177,353; (ii) provision for doubtful accounts of $379,672; and
(iii) a decrease in accounts receivable of $568,853, partially offset by (iv) a
net loss of $281,874 and (v) an increase in property and equipment of $420,455.
On February 20, 1996, an indirect subsidiary of the Company, Courthouse
Dialysis, Inc. ("Courthouse"), and a direct subsidiary of the Company,
Continental Dialysis, Inc. ("CDI") signed a definitive agreement to sell
substantially all of the assets of Courthouse and certain assets of CDI to Renal
Treatment Centers - New Jersey, Inc. ("RTCNJ") and RTC Supply, Inc. ("Supply"),
for approximately $1,360,000 and $640,000, respectively. As of March 26, 1996,
the transactions were consummated. In connection with the transaction, certain
directors, officers and indirect shareholders of the Company have entered into a
covenant not to compete, the effect of which is to restrict the ability of the
Company and its subsidiaries to compete in New Jersey within 35 miles of the
Cape May Court House area for a term of seven years.
The Company expects that the cash flow from operations and from the
sale of the New Jersey In-Center Facility will be sufficient to fund its
operations through 1997. In the event the Company's revenues do not increase or
its costs are not substantially decreased, the Company is likely to require
34
<PAGE>
additional funds to continue in operation after 1997. The Company has no current
commitments or arrangements for additional financing and there can be no
assurance that additional financings, through bank borrowings, debt or equity
financings or otherwise, will be available on acceptable terms, if at all.
Alpha has the option ("SBKC Option") to purchase the Bronx Facility for
$500,000, to be paid in five $100,000 annual installments, plus the cash
requirements of the Bronx Facility and less certain offsets. In addition, Alpha
was obligated to make medical director payments of $200,000 per year for five
years to the former medical director and founder of the Bronx Facility (the
"Employment Obligation"). Alpha agreed to exercise or not exercise the option at
the sole discretion and expense of the Company. During 1996, the obligations of
the Company under the SBKC Option and the Employment Obligation were settled and
the option was exercised subject to regulatory approval (which was subsequently
received in February, 1997). Under the terms of the Settlement, the Company
placed $200,000 in escrow to be released to the estate of the former medical
director upon the closing of the purchase of the Bronx Facility.
The Company has also guaranteed leases for UMDC and Continental
Dialysis Center of the Bronx, Inc. ("CDBI") for In-Center Facilities in New York
City. Each has a 15-year term at an annual rental of $145,000 and $138,000,
respectively.
SUBSEQUENT EVENT
On February 12, 1997, the Company and substantially all of its
subsidiaries, other than RMI, signed a definitive agreement to sell
substantially all of their operating assets to IHS of New York, Inc., a
privately held company ("IHS"). In addition, Alpha and CDBI, consulting
customers of the Company and wholly-owned by officers and directors of the
Company, signed the definitive agreement, thereby agreeing to sell substantially
all of their operating assets to IHS. UMDC, which is 50% owned by Certain
Executive Officers, is a signatory to the definitive agreements but has not
executed the same. The Certain Executive Officers owning 50% of UMDC have
granted an option to IHS to acquire their interests in UMDC if UMDC does not
approve the transaction, subject to restrictions contained in certain existing
agreements.
The purchase price for the assets to be sold, including the assets of
the consulting customers, is $13,120,000. The purchase price will be allocated
among the Company and the consulting customers and all amounts due from
consulting customers, which total $2,872,468 as of December 31, 1996, are
anticipated to be repaid at the closing of the transaction. In addition, the
Company and IHS will enter into a consulting agreement pursuant to which certain
officers of the Company will provide consulting services to IHS in exchange for
payments to the Company aggregating $1,000,000 over the three-year term of the
agreement. The Company will also enter into a five-year covenant not to compete
with IHS.
The definitive agreements are subject to approval by the shareholders
of the Company. The closing of the transaction is subject to certain conditions,
including without limitation, completion of
35
<PAGE>
due diligence by IHS, governmental approvals, completion of certain transactions
involving consulting customers and the continuing accuracy of certain
representations and warranties contained in the definitive agreement among the
parties. In the event the transaction is not consummated, IHS is not in breach
of the definitive agreement among other things, and the Company enters into a
similar transaction at a higher price with a third party, the Company is
obligated to pay a $500,000 break-up fee to IHS.
The Company continues to operate in a highly competitive market and has
experienced a decrease in patients served. In addition, the Company has incurred
operating losses in the past nine quarters. In light of the above, management
has decided to sell substantially all assets. As described above, a definitive
sale agreement has been signed which would provide for realization of recorded
net asset values and provide cash for the Company's operating needs. Such sale
is expected to close in the second quarter of 1997. In the event such sale is
not consummated, the Company may be forced to seek additional sources of
financing; however, no assurance can be given that such sources will be
available. The Company's 1997 operating plan contains assumptions regarding
revenue and margins consistent with historical levels and planned reductions to
the Company's cost structure. The achievement of the operating plan depends
heavily on maintaining existing patients and the timely reduction of costs. An
inability to maintain existing patients and to reduce costs could have an
adverse impact on the Company's ability to fully execute its operating plan and
maintain adequate cash flow. In the event actual results do not meet the
operating plan, management believes it could execute contingency plans to
mitigate such effects. The contingency plans include consideration of the sale
of assets and additional cost reductions. Considering the cash on hand and based
on the achievement of the operating plan and management's actions taken to date,
management believes it has the ability to continue to generate sufficient cash
to satisfy its operating requirements in the normal course of business. However,
no assurance can be given that sufficient cash will be generated from
operations, that sufficient cost reductions can be achieved or that the Company
will be able to sell assets on terms acceptable to the Company.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is submitted in a separate section of this
report commencing on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No change in accountants or disagreement requiring disclosure pursuant
to applicable regulations took place within the Company's two most recent fiscal
years or in any subsequent interim period.
36
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTIONS 16(C) OF THE EXCHANGE ACT.
The material contained in "Election of Directors" and "The Board of
Directors and Executive Officers" of the Company's definitive proxy statement
(to be filed pursuant to the Securities Exchange Act of 1934, as amended) for
the 1996 annual meeting of Shareholders of the Company is hereby incorporated
by reference.
In 1996, Alvin S. Trenk gifted 2,000 shares of stock, of which 1,000
shares were gifted to Steven L. Trenk's son. Each of Alvin S. Trenk and Steven
L. Trenk, who are directors, officers and beneficial owners of more than 10% of
the Common Stock failed to timely file Form 5's with respect to the transaction.
No other directors, officers or beneficial owners of more than ten (10%) percent
of the Company's registered securities during the fiscal year ended December
31, 1996 failed to file the reports pursuant to Section 16.
ITEM 10. EXECUTIVE COMPENSATION
The material contained in "Executive Compensation" of the Company's
definitive proxy statement (to be filed pursuant to the Securities Exchange Act
of 1934, as amended) for the 1997 annual meeting of the Shareholders of the
Company is hereby incorporated by reference.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The material contained in "Security Ownership of Certain Beneficial
Owners," "Election of Directors," and "The Board of Directors and Executive
Officers" of the Company's definitive proxy statement (to be filed pursuant to
the Securities Exchange Act of 1934, as amended) for the 1997 annual meeting of
the Shareholders of the Company is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The material contained in "Certain Relationships and Related
Transactions" of the Company's definitive proxy statement (to be filed pursuant
to the Securities Exchange Act of 1934, as amended) for the 1996 annual meeting
of the Shareholders of the Company is hereby incorporated by reference.
37
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits that are filed with this report, or that are
incorporated herein by reference, are set forth in the Exhibit Index beginning
on page E-1.
(b) No reports on Form 8-K were filed during the fourth quarter of
the fiscal year ended December 31, 1996.
38
<PAGE>
CONTINENTAL CHOICE CARE, INC.
INDEX TO FINANCIAL STATEMENTS
------------------------------------
PAGE
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................................. F-3
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the Years Ended December 31,
1996 and 1995 ........................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995............................................ F-5
Notes to Consolidated Financial Statements................................. F-6
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Continental Choice Care, Inc.:
We have audited the accompanying consolidated balance sheets of
Continental Choice Care, Inc. (a New Jersey corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations and retained earnings (accumulated deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present
fairly, in all material respects, the financial position of Continental Choice
Care, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 28, 1997
F-2
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- -----------
<S> <C> <C>
Current Assets:
Cash including restricted cash of $200,000 at December 31, 1996 ................ $1,418,054 $1,341,955
Accounts receivable, less allowance for doubtful accounts of $517,000
in 1996 and $728,000 in 1995................................................ 989,363 1,937,888
Supplies inventories............................................................ 52,028 57,134
Deferred tax asset.............................................................. 125,000 112,670
Other current assets ........................................................... 129,163 102,466
------------ -------------
Total current assets ........................................................ 2,713,608 3,552,113
Amounts due from affiliates .................................................... 779,273 763,273
Amounts due from consulting customers .......................................... 2,872,468 2,553,475
Property and equipment, at cost, less accumulated depreciation ................. 691,237 615,698
Other assets ................................................................... 57,907 10,477
------------- -------------
$7,114,493 $7,495,036
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................................. $1,408,939 $1,444,461
Accrued expenses ............................................................. 611,344 593,003
Current portion of notes payable and obligations under
capital leases............................................................. 57,643 43,082
Income taxes payable.......................................................... 48,939 20,000
------------- ---------------
Total current liabilities ................................................. 2,126,865 2,100,546
----------- -------------
Notes payable and obligations under capital leases,
less current portion ...................................................... 64,319 83,148
Deferred income taxes and other liabilities................................... -0- 106,159
----------------- ------------
64,319 189,307
------------- ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized, none issued or outstanding...... --- ---
Common stock, no par value, 10,000,000 shares authorized,
3,237,500 shares issued and outstanding at December 31, 1996
and 1995................................................................... 5,464,061 5,414,061
Paid-in capital............................................................... 500 500
Accumulated deficit........................................................... (541,252) (209,378)
------------ -------------
Total stockholders' equity.................................................... 4,923,309 5,205,183
----------- -----------
$7,114,493 $7,495,036
=========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
F-3
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Net Patient Revenues:
Equipment and supplies.................................................. $2,993,675 $4,963,824
Services................................................................ 2,758,221 3,268,565
----------- ------------
Total net patient revenues ....................................... 5,751,896 8,232,389
----------- ------------
Costs and Expenses:
Cost of goods sold ..................................................... 1,322,308 2,436,298
Cost of services ....................................................... 859,499 1,076,942
Provision for doubtful accounts ........................................ 379,672 837,770
Selling, general and administrative .................................... 5,183,414 4 ,626,788
Cost of failed acquisition and discontinuance
of infusion business................................................. -0- 547,976
Depreciation and amortization........................................... 177,353 162,522
Interest income, net.................................................... (68,981) (62,758)
------------ --------------
Total costs and expenses.......................................... 7,853,265 9,625,538
----------- ------------
Loss from operations....................................................... (2,101,369) (1,393,149)
Gain on sale of former New Jersey in-center
facility and certain other assets....................................... 1,749,080 - 0-
------------ ------------
Loss before income taxes................................................... (352,289) (1,393,149)
Benefit for income taxes................................................... (20,415) (119,217)
------------- --------------
Net loss ......................................................... $ (331,874) $(1,273,932)
Retained Earnings (Accumulated Deficit), beginning of year................. (209,378) 1,064,554
------------- --------------
Accumulated Deficit, end of year........................................... $ (541,252) $ (209,378)
============ =============
Net loss per share......................................................... $ (.10) $ (.39)
============ =============
Weighted average number of shares
outstanding............................................................ 3,237,500 3,237,500
============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-4
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss .................................................................. $(331,874) $ (1,273,932)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization............................................ 177,353 162,522
Provision for doubtful accounts.......................................... 379,672 837,770
Expense related to warrants ............................................. 50,000 -0-
Gain on sale of former New Jersey in-center
facility and certain other assets..................................... (1,749,080) -0-
Write-off unamortized pharmacy and goodwill intangibles ................. -0- 285,645
Decrease in deferred taxes, net.......................................... (118,489) (66,511)
Decrease (increase) in accounts receivable............................... 568,853 (307,070)
Decrease in supplies inventories......................................... 5,106 46,988
(Increase) decrease in other assets...................................... (82,707) 78,224
Increase in amounts due from affiliates ................................. (16,000) (23,800)
Decrease in accounts payable............................................. (35,522) (442,305)
Increase in accrued expenses............................................. 18,341 264,184
Increase (decrease) in income taxes payable.............................. 28,939 (10,492)
------------- ------------
Net cash used in operating activities.................................. (1,105,408) (448,777)
----------- ------------
Cash Flows From Investing Activities:
Proceeds from sale of former New Jersey in-center
facility and certain other assets...................................... 2,010,330 -0-
Amounts loaned or advanced to consulting customers....................... (1,276,441) (1,877,415)
Amounts repaid by consulting customers ................................. 957,448 1,906,736
Purchases of property and equipment...................................... (420,455) (257,228)
------------ ------------
Net cash provided by (used in) investing activities.................... 1,270,882 (227,907)
------------ ------------
Cash Flows From Financing Activities:
Additional costs of 1994 public stock offering........................... -0- (81,000)
Principal payments on notes payable and obligations under capital leases. (89,375) (69,611)
------------- ------------
Net cash used in financing activities.................................. (89,375) (150,611)
------------- ------------
Net increase (decrease) in cash.......................................... 76,099 (827,295)
Cash, beginning of year.................................................. 1,341,955 2,169,250
------------- -----------
Cash, end of year........................................................ $ 1,418,054 $1,341,955
============= ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes................................. $ 64,850 $ 7,781
Cash paid during the year for interest..................................... 5,385 4,289
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-5
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND REORGANIZATION:
Continental Choice Care, Inc. was formed on December 27, 1993 in
connection with the reorganization of the health care related subsidiaries and
affiliates of TechTron, Inc. ("TechTron"). The health care related subsidiaries
and affiliates of TechTron were reorganized as subsidiaries of Continental
Choice Care, Inc. with the assets and liabilities transferred being accounted
for in a manner similar to that of a pooling of interests. Continental Choice
Care, Inc. and subsidiaries are herein referred to as the Company.
The Company is primarily engaged in the business of providing dialysis
related services, training, equipment and supplies to patients at home, in
prisons and in hospitals. The Company also provides acute dialysis nursing
services and administrative services. The Company operates primarily in New
Jersey and New York. The above activities are performed through the following
wholly-owned subsidiaries --
Continental Dialysis, Inc. (CDI)
Courthouse Dialysis, Inc. (Courthouse) (See Note 10)
Dialysis Staffing, Inc. (DSI)
Choice Care Infusion Services, Inc. (CCIS)
Choice Care, Inc. (CCI)
Continental Dialysis, Inc. of Linden (Linden)
Renal Management, Inc. (RMI) (80% owned)
Substantially all of the Company's revenues are dependent upon
reimbursement from third party payors, including the Medicare and Medicaid
programs and commercial insurance companies. Such third party payors maintain
standards which providers must satisfy to remain eligible for participation and
reimbursement; thus the Company's future operating results are dependent on its
ability to remain eligible for participation in such third party payor programs.
A significant portion of the Company's patients are covered by Medicare under
the End Stage Renal Disease Program ("ESRD"). This program began in 1973 through
legislation which extended benefits to qualifying individuals with permanent
kidney failure at rates set from time to time by the government. In general, the
Company is reimbursed by Medicare at 80% of an allowed rate established by the
government for the services rendered in connection with ESRD. The patient or
third party insurance company is responsible for the remaining 20% of the fee in
these cases. Any change in these regulations or reimbursement could have a
significant impact on the Company's operations. In addition, the continuing
efforts of third party payors to contain or reduce health care costs by lowering
reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing could have a material adverse impact on the
Company's operations. The Company's operations and cash flows are dependent upon
the rate and timeliness of payment for patient services from third party payors.
In 1996 and 1995, approximately 30% and 33% of the
F-6
<PAGE>
Company's cash receipts were received under the Medicare program, while
approximately 70% and 67%, respectively, of cash receipts were received from
commercial insurance companies or contracted entities and Medicaid programs.
The health care industry is subject to extensive government
regulations. Such regulations are broad and subject to change and
interpretation. Such regulations do not specifically address certain of the
Company's business arrangements and it is possible the Company's past or present
arrangements or business practices could be challenged. Regulations could be
amended or interpreted to require the Company to change its practices or
business arrangements, the impact of which could have a material adverse effect
on the Company's business and prospects.
Certain of the current and proposed nursing operations of the Company
are also subject to state employment agency and/or home health agency licensure.
In 1994, the Company concluded that its engagement of all professional personnel
in connection with the performance of its agreements with the Bronx Facility may
not have been conducted in compliance with the New York State prohibition of the
corporate practice of a profession. The Company in 1994 also concluded that its
nursing business in New Jersey and New York may not have been conducted in
compliance with its existing licenses and that additional licenses may be
required in each state. The Company has obtained all additional appropriate
licenses. As a result of the Company's efforts to ensure current and future
compliance with applicable licensing requirements, the Company modified certain
aspects of its nursing services in New Jersey. Further, in New York, pending
receipt of additional appropriate licenses with respect to in-home nursing
services which were obtained in 1996, the Company amended its long term and
acute care nursing agreements to comply with New York law. Prior to receipt of
appropriate licensure in New York, the Company arranged for the Bronx Facility
to provide all New York home-based nursing services previously provided by the
Company. Accordingly, in 1996 and 1995, the Company generated no revenue from
providing in-home nursing services in New York. Further, among other things, the
Company could be subject to fines if found to have been in violation of the
prohibition on the corporate practice of professions and the revocation of its
nurse registry licenses with respect to its violations relating to its nursing
services. Since receiving its home care services license from the State of New
York, the Company, in 1997, commenced providing nursing services under the
licenses to certain patients previously serviced by the Company's nurse
registry. In addition, upon demand by a claimant, the Company would be required
to rebate that portion of the nurse registry placement fees which have
heretofore been collected from the claimant which are in excess of the amounts
permitted to be paid under New York law. Management believes that the maximum
amount which the Company could be required to pay to private claimants in
connection with violations which may have arisen from its nursing operations in
New York is approximately $209,500. There can be no assurance that the Company
will not be obligated to further change its practices or that it will not be
materially adversely affected as a result of a review or challenge to its past
or present practices under these statutory provisions. In the event the Company
is required to repay all excess placement fees collected by it, the financial
condition of the Company could be materially adversely affected. Management
believes, except for the potential impact on nursing revenues noted above, the
foregoing will not have a material adverse effect on the Company.
F-7
<PAGE>
The Company is dependent upon the referrals of patients for treatment
by physicians practicing in communities served by the Company. A limited number
of physicians account for a significant portion of the Company's patient
referral base. The loss of key referring physicians could have a material
adverse impact on the Company's operations.
Certain Federal legislation, including legislation known as the Stark
II Amendment, which became effective January 1, 1995, restricts or prohibits
certain referrals to entities in which physicians have financial relationships,
as well as certain other referral practices. This is applicable to certain of
the Company's arrangements with referring physicians including some of the
Company's medical directors. The Company's medical directors are a significant
source of the Company's patient referrals and revenues. The Company is currently
seeking other arrangements with parties other than physicians to obtain
alternate sources of referrals. As a result of the enactment of Stark II, the
Company terminated several of its physician relationships, resulting in a
decrease in patient census. The Company's inability to continue to receive
sufficient patient referrals from its current medical directors could have a
material adverse impact on the Company's operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION -- The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the recorded amounts of 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.
PATIENT REVENUE AND ALLOWANCES -- Patient revenue is recorded as
supplies are delivered or services are rendered. Provisions for discounts,
including third party contractual adjustments, are recorded as a charge against
patient revenue. Payments to the Company under the Medicare, Medicaid and other
programs are based upon a predetermined specific fee per treatment.
The Company does not believe there are any significant credit risks
with receivables from Medicare and Medicaid. The allowance for doubtful accounts
consists of management's estimate of amounts that may prove uncollectible from
commercial insurers or patients. Actual results could differ from these
estimates. The Company records a provision for doubtful accounts as the
difference between the normal selling price less discounts and the estimated
amount of cash to be collected.
SUPPLIES INVENTORIES -- Supplies inventories are stated at the lower of
cost (using the first-in, first-out method) or market and consist primarily of
dialysis supplies.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and
depreciation is provided using the straight line method over the shorter of the
useful lives or lease term for leasehold
F-8
<PAGE>
improvements (five to ten years). Costs of maintenance and repairs are charged
to expense as incurred.
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
INTANGIBLE ASSETS -- Intangible assets are recorded at cost and are
amortized on a straight line basis over five to ten years. Amortization expense
was $8,468 and $44,884 in 1996 and 1995, respectively. As of December 31, 1996,
the Company had intangible assets of $4,737 representing organizational costs
incurred in establishing RMI.
As a result of a change in strategic business direction and a review to
assess recoverability from estimated future results of operations and cash
flows, the unamortized goodwill, pharmacy license and organization costs arising
from the acquisition of LDL Med Corp. (See Note 9), were written off in 1995.
INCOME TAXES -- The Company and its subsidiaries file a consolidated
Federal income tax return. The Company and each subsidiary file separate state
income tax returns. Deferred income taxes are recognized for tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial reporting and tax basis of assets and liabilities.
LOSS PER SHARE -- Loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding during the year. The
impact of common stock equivalents is antidilutive and thus is not included in
the calculation of earnings per share for 1996 and 1995.
STOCK-BASED COMPENSATION -- Stock-based compensation is recognized
using the intrinsic value method. For disclosure purposes, pro forma net loss
and loss per share are provided as if the fair value method had been applied.
RECLASSIFICATION -- Certain reclassifications have been made to the
1995 financial statements in order to conform to the 1996 presentation.
F-9
<PAGE>
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Furniture and fixtures.................................... $ 83,486 $ 98,708
Dialysis equipment........................................ 642,030 458,687
Office and other equipment................................ 266,388 193,829
Leasehold improvements.................................... 123,909 226,112
----------- ---------
1,115,813 977,336
Less -- Accumulated depreciation
and amortization....................................... (424,576) (361,638)
----------- ----------
$ 691,237 $ 615,698
=========== ==========
</TABLE>
Included in the above amounts is $151,680 of assets held under capital
leases as of December 31, 1996. Depreciation expense was $168,885 and $117,638
in 1996 and 1995, respectively.
(4) NOTE PAYABLE:
During 1996, the Company financed a Directors and Officers Insurance
policy aggregating $49,255. The note required an initial payment of $9,500 and
the remaining balance of $39,755 to be payable over nine months with an interest
rate of 10.95%. Monthly principal and interest payments aggregate $4,417.
Principal maturities, including the initial payment, aggregated $30,227 in 1996.
Interest expense totalled $1,359 in 1996.
(5) INCOME TAXES:
The provision (benefit) for income taxes for the years ended December
31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
State and local....................................................... $41,000 $ 20,000
Deferred:
Federal............................................................... (58,345) ---
State and local....................................................... (3,070) (139,217)
------- ---------
$(20,415) $(119,217)
</TABLE>
Included in the deferred state and local tax benefit for 1995 is the
reversal of a $127,000 liability, no longer deemed necessary by the Company.
F-10
<PAGE>
At December 1996 and 1995, the Company had a current deferred tax asset
of $847,000 and $1,109,000, and a noncurrent deferred tax liability of $0 and
$72,000, respectively. The deferred tax asset is netted by a valuation allowance
of $722,000 and $996,000, respectively as of December 1996 and 1995. The
deferred tax asset is primarily related to the allowance for doubtful accounts
of $188,000 and $297,000 as of December 31, 1996 and 1995 and net operating loss
carryforwards of $682,000 and $812,000 as of December 31, 1996 and 1995, while
the deferred tax liability is primarily related to depreciation and
amortization.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards and the
timing of the reversal of other temporary differences. Although realization is
not assured, management believes it is more likely than not, that a portion of
the net deferred tax asset will be realized. The amount of the net deferred tax
asset considered realizable, however, could be reduced in the near term if the
asset sale discussed in Note 11 is not consummated or estimates of future
taxable income during the carryforward period are reduced.
The following is a reconciliation of the statutory Federal income tax
rate to the effective rate as a percentage of income before provision for income
taxes as reported in the consolidated financial statements for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
U.S. Federal income tax rate .......................................... (35%) (35%)
State income taxes, net of Federal
tax benefit.......................................................... 7 1
Reversal of state tax reserve.......................................... --- (9)
Non-deductible expenses ............................................... 8 3
Net operating loss for which no tax benefit
is currently available.............................................. 14 31
---------- ----
Effective income tax rate ............................................. (6%) (9%)
======== ======
</TABLE>
(6) RELATED PARTY TRANSACTIONS:
The Company has obtained a $125,868 note from TechTron for expenses of
TechTron paid for by the Company. The note bears interest at the rate imputed by
the Internal Revenue Service for instruments having a maturity of two or more
years and without a stated interest rate. The principal and accrued interest
thereon were due on December 31, 1996; however, a new note was executed which is
payable on demand. During 1996 and 1995, an additional $16,000 and $15,000,
respectively, was advanced to TechTron by the Company. The Company has obtained
notes from TechTron for these additional advances. The notes bear interest at
the rate of 8% and are payable on demand. All notes have been guaranteed by the
Company's Chairman, President and Corporate Medical Director ("Certain Executive
Officers").
F-11
<PAGE>
In 1996, Alpha Administration Corp. ("Alpha"), an entity owned by
Certain Executive Officers, entered into an Agreement for Purchase of Assets
("Purchase Agreement") with National Nephrology Foundation ("NNF"), an Amended
Employment Agreement with the Estate of Norman Deane, M.D., the former medical
director of a New York free-standing dialysis in-center known as the "Bronx
Facility" (the "Estate"), and certain related agreements. The new agreements
superseded the agreements previously in effect between and among Alpha, NNF and
the Estate. Under the terms of the Purchase Agreement, NNF agreed to sell to
Alpha substantially all of the assets of the Bronx Facility, including accounts
receivable and cash. The purchase price is equal to $650,000 previously paid to
NNF in respect of the Bronx Facility plus an amount not in excess of $95,000 to
pay certain expenses of NNF plus the waiver of certain fees due Alpha and to the
Company to the extent such fees exceed the cash available to NNF for the
operations of the Bronx Facility. Alpha also agreed to assume certain operating
liabilities of the Bronx Facility. Alpha obtained the right to be paid its
accrued and current fees under the Consulting and Service Agreement with NNF on
an unsubordinated basis to the extent of available cash of the Bronx Facility.
The closing of the asset purchase transaction was subject to certain conditions,
including the approval of the Attorney General of the State of New York and
final approval of the New York Department of Health. Such approvals were
received in February 1997. Upon execution of the agreement, NNF paid $310,000 to
reduce its outstanding liabilities to the Company. Under the terms of the
Amended Employment Agreement, the parties agreed to settle all amounts
outstanding under the original employment agreement with Dr. Deane for the sum
of $225,000, $25,000 of which was paid to the Estate upon the execution of the
Amended Employment Agreement and the remainder of which is held in escrow. Such
amount was funded by the Company and expensed in the fourth quarter of 1996 in
anticipation of release of the escrowed funds upon the closing of the
transaction contemplated by the Purchase Agreement. Alpha expects the closing of
the transaction to occur in March 1997.
Through December 31, 1994, the Company had advanced Alpha $565,000
required to fund the cash requirements, as defined, of the Bronx Facility, plus
an additional $57,405, and has included these amounts in due from affiliates as
of December 31, 1995 and 1996. Notes due from Alpha as of December 31, 1996, in
the amounts of $265,000 and $357,405, bear interest at 8% and the IRS imputed
rate for two-year investments, respectively. Both are payable in 1999 and are
guaranteed by Alpha's shareholders (the Company's Chairman, President and
Corporate Medical Director).
The Company and Alpha have entered into a consulting and services
agreement. This agreement is essentially identical to the Company's agreement
with the Bronx Facility. The Bronx Facility agreement entitles the Company to
$240,000 per year for services rendered. As of December 31, 1996 and 1995,
$205,300 and $550,754 respectively, was due from the Bronx Facility and is
included in amounts due from consulting customers in the accompanying
consolidated balance sheets. The 1995 amount is net of certain transactions not
recorded due to realization uncertainties. During 1996, the Company recorded
$240,000 in consulting fees for services provided to the Bronx Facility.
The Company, as well as Certain Executive Officers have guaranteed an
aggregate of $2,400,000 of bank credit facilities of the Upper Manhattan
Dialysis Center ("UMDC") to construct the UMDC facility and provide working
capital. The facilities are comprised of a $500,000 credit
F-12
<PAGE>
facility (the "Revolver") and separate loans originally totalling $1,900,000
(the "UMDC Term Loan"). As of December 31, 1996, an aggregate of $1,340,000 was
outstanding under the credit facilities. Under the terms of the Revolver, which
was renewed and matured in August, 1996, certain amounts due the Company are
subordinated to UMDC's obligations to the bank. UMDC negotiated with the bank to
extend the term of the Revolver to December 31, 1997. As a condition of
extending the Revolver, the bank accelerated the final payments on the UMDC Term
Loan originally totalling $1,900,000 to December 31, 1997. The bank also
required that $200,000 be placed in a trust account to further collateralize the
loans; the Company provided such funds. Provided that UMDC has complied with all
payments and conditions through that date, the bank would consider reinstituting
the original payment schedule for the $1,900,000 UMDC Term Loan. No assurance
can be given that the term of the credit facilities will be extended or that the
bank will not call upon the guarantees of the Company or Certain Executive
Officers. In addition, amounts due the Company from UMDC may not be paid if UMDC
is in default under the terms of the credit facilities. In December 1995,
Certain Executive Officers acquired an aggregate of 50% of the Common Stock of
UMDC. A third party hospital with which UMDC has an affiliation agreement has
asserted that the transfer of UMDC shares to Certain Executive Officers may have
been in violation of the affiliation agreement. The Company and the individuals
disagree with the hospital's position and are currently engaged in discussions
concerning the matter. No assurance can be given that the Company and the
individuals will be successful in discussions with the hospital or that the
parties will not become engaged in litigation concerning this matter. In 1994,
the Company loaned the principals of UMDC $450,000 and UMDC an aggregate of
$304,524 at a designated prime rate less 1%. Certain of these loans are due on
demand and certain of these loans which were due on various stated maturity
dates had been extended by the Company to become due on November 30, 1995. These
notes remain outstanding as of December 31, 1996. The Company currently intends
to extend the due dates pending completion of the IHS transaction. In addition,
the Company provided equipment and supplies to UMDC aggregating $875,248 through
December 31, 1996 and $674,154 through December 31, 1995 at no margin. These
amounts and the previously mentioned loans to UMDC and its principals are
included in amounts due from consulting customers in the accompanying
consolidated balance sheets. The total amounts due from UMDC and its principals
of $1,490,183 and $1,523,284 as of December 31, 1996 and 1995, respectively, are
net of certain transactions not recorded due to realization uncertainties. The
Company is the guarantor of a lease for the Upper Manhattan Dialysis Facility.
The lease term is for 15 years at an annual rental of approximately $145,000.
Management intends to pursue all reasonable strategies to recover amounts due to
the Company from consulting customers. (See Note 11).
The Company also is the guarantor of a lease for CDBI, a company owned
by the Company's Chairman, President and Corporate Medical Director; the lease
term is 15 years at an annual rental of approximately $138,000. CDBI is a new
consulting customer to whom the Company has advanced funds for construction of a
new in-center dialysis facility in the Bronx, New York. At December 31, 1996 and
1995, $1,176,985 and $479,437, respectively, guaranteed by the Company's
Chairman, President and Corporate Medical Director, is due from CDBI. Such
amounts are reflected by promissory notes bearing interest at the rate of 8% per
annum due March 19, 2001, and February 24, 2002, and have been included in
amounts due from consulting customers.
F-13
<PAGE>
(7) COMMITMENTS:
EMPLOYMENT AGREEMENTS -- In 1994, the Company entered into compensation
agreements with its Chairman, President and Corporate Medical Director. The
agreements with the Chairman and President have initial terms of five years and
are extended automatically after the first year and thereafter unless such
extensions are terminated by the Board of Directors. The Corporate Medical
Director's agreement has a term of one year. These agreements and two other
employment agreements provide for minimum aggregate compensation of $790,000 in
1997, $660,000 in 1998, $582,000 in 1999, $548,000 in 2000 and $113,000 in 2001.
Each of the individuals may receive bonuses as determined by the Board of
Directors, except the President whose bonus is equal to 10% of the Company's
pretax income in excess of the prior year's pretax income, limited to $100,000.
There were no such bonuses for 1996 or 1995. Compensation paid to the Chairman,
President and Corporate Medical Director aggregated $422,000 and $437,000 in
1996 and 1995, respectively. All executive officers of the Company took
voluntary pay cuts in mid-1995, some of which were restored in mid-1996; two
executive officers continue to receive reduced pay.
LEGAL -- The Company is engaged in certain legal proceedings incidental
to its normal course of business activities. Management believes the outcome of
these proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
BENEFIT PLAN -- The Company maintains a 401(k) profit sharing plan. The
Company matches 10% of the employees' contributions up to 6% of base pay.
Company contributions were $3,465 and $3,524 in 1996 and 1995, respectively.
LEASE AGREEMENTS -- Future minimum rental commitments under office
space and equipment noncancellable operating and capital leases at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Operating Capital
<S> <C> <C>
1997 ............................................................. 183,000 $50,049
1998 ............................................................. 142,000 50,049
1999 ............................................................. 51,000 27,215
--------
127,313
Less amount representing interest.................................. ( 23,020)
----------
104,293
Less current portion............................................... (39,974)
---------
$64,319
</TABLE>
In 1996 and 1995 CDI leased dialysis equipment under cancelable leases
with a third party. Rent expense was $336,000 and $486,000, respectively, for
the years 1996 and 1995.
F-14
<PAGE>
(8) CAPITAL STOCK:
On July 27, 1994, the Company completed an initial public offering of
equity securities (the "Offering"). The Offering was comprised of 1,610,000
units, each unit consisting of one share of common stock and one warrant. Each
warrant entitles the holder to purchase one share of common stock at an exercise
price of $7.25 (subject to adjustment) at any time through July 15, 1999,
subject to earlier redemption by the Company under certain circumstances. The
exercise price and number of shares issuable upon exercise of the warrants are
subject to adjustment under certain circumstances. The Company has reserved
1,610,000 shares of its common stock for these warrants.
The Company sold to the Underwriters or their designees, for nominal
consideration, options (the "Unit Purchase Options") to purchase up to 140,000
Units. The Unit Purchase Options are exercisable during the four-year period
commencing in July 1995 at an exercise price equal to $8.05, subject to
adjustment in certain events to protect against dilution, and are not
transferable for a period of two years from July 20, 1994 except to officers of
the Underwriters or to members of the selling group. The Company has reserved
280,000 shares of its common stock for the Unit Purchase Options.
During 1996, the Company became obligated to issue five-year warrants
to purchase 210,000 shares of its common stock to service providers at exercise
prices ranging from $3.00 to $4.25 per share. The Company recorded $50,000 in
expenses related to these warrants in "Selling, General and Administrative"
expenses in the Consolidated Statements of Operations for 1996 and in "Common
Stock" in the Consolidated Balance Sheets.
The Company has adopted the 1994 Long-Term Incentive Award Plan under
which shares of the Company's common stock as well as incentive and nonqualified
stock options to purchase the Company's common stock and stock appreciation
rights may be awarded or granted to senior executives. The Company has reserved
300,000 shares of its common stock for this plan. The plan terminates in 2004.
The Company has also adopted a Directors' Stock Option Plan under which each
nonemployee director will annually receive nonqualified stock options to
purchase 10,000 shares of the Company's common stock which commenced July 1,
1994. The exercise price of the options will be the fair market value of the
Company's common stock at the date of grant. The Company has reserved 200,000
shares of its common stock for this plan.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), which was effective as of
January 1, 1996, the fair value of option grants is estimated on the date of
grant using the Black-Scholes option-pricing model for pro forma footnote
purposes with the following weighted average assumptions used for grants in all
years; dividend yield of 0%, risk-free interest rate of approximately 6% and
expected option life of 5 years. Expected volatility was assumed to be 46%.
F-15
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
Of Exercise Fair
Shares Price Value
<S> <C> <C> <C>
Options outstanding, December 31, 1994.......................... 20,000 $5.75
Granted.................................................... 60,000 5.50 $2.63
-------
Options outstanding, December 31, 1995..........................
(60,000 exercisable)....................................... 80,000 5.44
Granted.................................................... 130,000 4.00 1.91
-------
Options outstanding December 31, 1996
(190,000 exercisable)...................................... 210,000 4.55
=======
</TABLE>
As permitted by FAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no compensation expense
has been recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Company's stock option plans, the
tax-effected impact would be as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss as reported........................................... $(331,874) (1,273,932)
Estimated fair value of the year's option
grants, net of tax........................................ 256,140 130,970
----------- ------------
Net loss adjusted.............................................. $ (588,014) $(1,404,902)
============ ============
Adjusted net loss per share.................................... $ (.18) $ (.43)
============ ============
</TABLE>
This pro forma impact only takes into account options granted since
January 1, 1995 and is likely to increase in future years as additional options
are granted and amortized ratably over the vesting period.
In the first quarter of 1997, the Board of Directors of the Company
also adopted the Continental Choice Care, Inc. 1997 Equity Incentive Plan (the
"1997 Plan"), a broad-based employee equity incentive plan. The Board of
Directors reserved 1,250,000 shares of the Company's common stock and granted
options to acquire 296,225 shares of the Company's common stock to officers and
employees of the Company. The 1997 Plan and the options granted thereunder are
subject to the approval of the shareholders of the Company. All options under
the 1994 Long-Term Incentive Award Plan were repriced by the Board of Directors
in February 1997 to $1.875 per share or 100% of fair market value of the
Company's common stock at the repricing date.
F-16
<PAGE>
(9) COST OF FAILED ACQUISITION AND DISCONTINUANCE OF INFUSION BUSINESS
On February 2, 1995, the Company and International Nursing Services,
Inc. ("INS") signed a letter of intent to enter into a merger transaction. On
April 26, 1995, the Company and INS signed a definitive agreement to merge INS
into a subsidiary of Continental in a stock-for-stock transaction. However, on
June 22, 1995, the Company announced that it had terminated the definitive
agreement with INS pursuant to the terms of the agreement. During 1995, the
Company provided $242,000 to cover the costs incurred as a result of terminating
this merger transaction.
During 1995, the Company closed its pharmacy and contributed certain
assets relating to its infusion therapy business into a newly formed joint
venture with Infu-Tech, Inc. In recognition of the diminished value of its
investment in the infusion business, the Company wrote off the unamortized
goodwill, the unamortized value of the pharmacy license and certain
pharmaceutical inventories in 1995, resulting in an aggregate charge of
$306,000.
(10) SALE OF NEW JERSEY IN-CENTER FACILITY
In March 1996, Courthouse Dialysis, Inc., a subsidiary of the Company,
sold substantially all of its assets, including the New Jersey in-center
facility to Renal Treatment Centers - New Jersey, Inc. ("RTC - NJ") and
Continental Dialysis, Inc. sold its rights to provide certain services to
designated patients in the Cape May Court House, New Jersey area to RTC Supply,
Inc. The respective buyers of the assets are subsidiaries of Renal Treatment
Centers, Inc. ("RTC"). The price paid in the all-cash transaction approximated
$2,010,000 and resulted in an aggregate net gain of $1,749,080. A significant
portion of the proceeds received by Courthouse Dialysis, Inc. were used to repay
intercompany balances due to other subsidiaries of the Company.
(11) SUBSEQUENT EVENT
On February 12, 1997, the Company and substantially all of its
subsidiaries, other than RMI, signed a definitive agreement to sell
substantially all of their operating assets to IHS of New York, Inc., a
privately held company ("IHS"). In addition, Alpha and CDBI, consulting
customers of the Company and wholly-owned by officers and directors of the
Company, signed the definitive agreement, thereby agreeing to sell substantially
all of their operating assets to IHS. UMDC, which is 50% owned by Certain
Executive Officers, is a signatory to the definitive agreements but has not
executed the same. The Certain Executive Officers owning 50% of UMDC have
granted an option to IHS to acquire their interests in UMDC if UMDC does not
approve the transaction, subject to restrictions contained in certain existing
agreements.
The purchase price for the assets to be sold, including the assets of
the consulting customers, is $13,120,000. The purchase price will be allocated
among the Company and the consulting customers and all amounts due from
consulting customers, which total $2,872,468 as of December 31, 1996, are
anticipated to be repaid at the closing of the transaction. In addition, the
Company and IHS will enter into a consulting agreement pursuant to which certain
officers of the Company will
F-17
<PAGE>
provide consulting services to IHS in exchange for payments to the Company
aggregating $1,000,000 over the three-year term of the agreement. The Company
will also enter into a five-year covenant not to compete with IHS.
The definitive agreements are subject to approval by the shareholders
of the Company. The closing of the transaction is subject to certain conditions,
including without limitation, completion of due diligence by IHS, governmental
approvals, completion of certain transactions involving consulting customers and
the continuing accuracy of certain representations and warranties contained in
the definitive agreement among the parties. In the event the transaction is not
consummated, IHS is not in breach of the definitive agreement among other
things, and the Company enters into a similar transaction at a higher price with
a third party, the Company is obligated to pay a $500,000 break-up fee to IHS.
The Company continues to operate in a highly competitive market and has
experienced a decrease in patients served. In addition, the Company has incurred
operating losses in the past nine quarters. In light of the above, management
has decided to sell substantially all assets. As described above, a definitive
sale agreement has been signed which would provide for realization of recorded
net asset values and provide cash for the Company's operating needs. Such sale
is expected to close in the second quarter of 1997. In the event such sale is
not consummated, the Company may be forced to seek additional sources of
financing; however, no assurance can be given that such sources will be
available. The Company's 1997 operating plan contains assumptions regarding
revenue and margins consistent with historical levels and planned reductions to
the Company's cost structure. The achievement of the operating plan depends
heavily on maintaining existing patients and the timely reduction of costs. An
inability to maintain existing patients and to reduce costs could have an
adverse impact on the Company's ability to fully execute its operating plan and
maintain adequate cash flow. In the event actual results do not meet the
operating plan, management believes it could execute contingency plans to
mitigate such effects. The contingency plans include consideration of the sale
of assets and additional cost reductions. Considering the cash on hand and based
on the achievement of the operating plan and management's actions taken to date,
management believes it has the ability to continue to generate sufficient cash
to satisfy its operating requirements in the normal course of business. However,
no assurance can be given that sufficient cash will be generated from
operations, that sufficient cost reductions can be achieved or that the Company
will be able to sell assets on terms acceptable to the Company.
F-18
<PAGE>
Signatures
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CONTINENTAL CHOICE CARE, INC.
Date: March 10, 1997 By: _______________________________
Alvin S. Trenk, Chairman
In accordance with the Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
<S> <C> <C>
/s/ Alvin S. Trenk
___________________________________ Chairman & Director March 10, 1997
Alvin S. Trenk (Principal Executive
Officer)
/s/ Steven L. Trenk
___________________________________ President March 10, 1997
Steven L. Trenk Chief Operating Officer
Director
/s/ Martin G. Jacobs, M.D.
___________________________________ Corporate Medical Director March 10, 1997
Martin G. Jacobs, M.D. & Director
/s/ Jeffrey Claman
___________________________________ Director March 10, 1997
Jeffrey Claman
/s/ Jeffrey Mendell
___________________________________ Director March 10, 1997
Jeffrey Mendell
/s/ Ronald A. Lefkon
___________________________________ Chief Financial Officer March 10, 1997
Ronald A. Lefkon (Principal Financial Officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
* 3.1 Certificate of Incorporation, together with Certificate of Amendment of Registrant.
* 3.2 By-Laws of Registrant.
* 4.1 Specimen Form of Common Stock Certificate.
* 4.2 Specimen Form of Warrant.
* 4.3 Form of Warrant Agreement.
*10.2 Medical Director Agreement between Continental Choice Care, Inc. and Martin G.
Jacobs, M.D. dated March 1, 1994.
*10.3 Agreement dated December 31, 1993, by and among Alvin S. Trenk, Steven L.
Trenk, Martin G. Jacobs, M.D., Alpha Administration Corp. and Continental Dialysis, Inc.
*10.4 Guaranty made as of December 31, 1993 by and among Alvin S. Trenk, Steven L.
Trenk and Martin G. Jacobs, M.D. in favor of Continental Dialysis, Inc.
*10.5 Assumption of Guaranty Agreement dated as of December 31, 1993 by and among
Alvin S. Trenk, Steven L. Trenk, Martin G. Jacobs, M.D. and Continental Dialysis, Inc.
*10.6 Promissory Note of Alpha Administration Corp. dated April 24, 1994 in the principal
amount of $300,000 payable to Continental Dialysis, Inc.
*10.7 Letter proposal dated May 8, 1992 from Continental Dialysis, Inc. signed by Steven
L. Trenk to Thomas D. Farrell, Supervisor of the Health Services Unit of the New Jersey
State Department of Corrections.
*10.8 Letter proposal dated October 4, 1993 from Steven L. Trenk to Thomas D. Farrell,
Supervisor of the New Jersey State Department of Corrections Health Services Unit.
*10.9 Form of Transfer and Affiliation Agreement.
*10.10 Form of Alternate Care Facility Dialysis Agreement.
*10.11 Form of Provider Agreement.
*10.12 Provider Agreement between LDL Med Corp. and Elois Rogers-Phillips, M.D., P.A.
dated May 1, 1993.
*10.13 Form of Continental Dialysis Acute Care Agreement.
<PAGE>
o *10.14 Consulting Agreement between Continental Choice Care, Inc. and Trenk Enterprises, Inc.
dated April 1, 1994.
o *10.15 Employment Agreement between Continental Choice Care, Inc. and Steven L. Trenk dated
April 1, 1994.
o *10.16 Employment Agreement between LDL Med Corp. and Darlene Domenick dated March 1,
1994.
* 10.17 Office Lease Agreement between Riveredge Plaza Associates and Continental Dialysis, Inc.
for the lease of premises located at 25-B Vreeland Road, Florham Park, Morris County, New Jersey.
* 10.18 First Amendment to Lease Agreement between Metropolitan Life Insurance Company and
Continental Dialysis, Inc. for the lease of premises located at 25-B Vreeland Road,
Florham Park, New Jersey.
* 10.19 Agreement of Sub-Lease among Courthouse Convalescence Center, Inc., Courthouse
Dialysis Center, Inc. and Continental Dialysis, Inc. as guarantor for Tenant dated February 1,
1992.
* 10.20 Equipment Purchase Agreement between Baxter Health Care Corp. and Continental Dialysis,
Inc.
* 10.21 Equipment Lease Agreement and Purchase Option with Macrolease International
Corporation.
* 10.22 Maintenance Agreement between Baxter Health Care Corp. and Continental Dialysis, Inc.
dated August 1, 1993.
* 10.23 Nationwide Life Insurance Company Salary Deferral (401(k)) and Savings Prototype Profit
Sharing Plan and Trust, Plan No. 001, Standardized -- Integrated and Non-Integrated.
* 10.24 Continental Choice Care, Inc. 1994 Long-Term Incentive Award Plan.
* 10.25 Continental Choice Care, Inc. Directors' Stock Option Plan.
* 10.26 Midlantic National Bank Continuing Unlimited Guaranty by Continental Choice Care, Inc.
and Choice Care, Inc. on behalf of Choice Care Infusion Services, Inc. and LDL Med Corp.
* 10.27 Neuman Wholesale Drug Company line of credit dated December 19, 1990 extended to LDL
Med Corp.
* 10.28 Administrative and Service Agreement for Home Based Peritoneal Dialysis dated as of May
1, 1993 between Continental Choice Care, Inc. and National Nephrology Foundation, Inc.
* 10.29 Consulting and Service Agreement dated December 29, 1993 between Continental Choice
Care, Inc. and Alpha Administration Corp.
* 10.30 Consulting and Service Agreement dated December 3, 1993 between Alpha Administration
Corp. and National Nephrology Foundation, Inc.
<PAGE>
* 10.31 Consulting and Service Agreement made as of December 29, 1993 by and between
Continental Choice Care, Inc. and Continental Dialysis of the Bronx, Inc.
* 10.32 Amended and Restated Option Agreement and Exhibit A dated December 13, 1993 between
Alpha Administration Corp. and National Nephrology Foundation, Inc.
* 10.33 Agreement dated December 29, 1993 between Continental Choice Care, Inc. and Alpha
Administration Corp.
* 10.34 Consent to Employment of Employees of National Nephrology Foundation, Inc. by Alpha
Administration Corp. dated December 13, 1993.
* 10.35 Related Agreement dated December 13, 1993 between Alpha Administration Corp. and
National Nephrology Foundation, Inc.
* 10.36 Acquisition Agreement by and among the Registrant, Alvin S. Trenk, Steven L. Trenk and
Martin G. Jacobs, M.D. dated December 29, 1994.
* 10.37 Agreement dated May 16, 1994 among the Registrant, Jonathan Lorch, M.D. and Stanley
Cortell, M.D.
o ++10.38 Agreement dated September 4, 1994 by and between the Registrant and Jeff Ellentuck, Esq.
* 10.39 Store Lease Agreement between 233rd St. Partnership, L.P. and Continental Dialysis of the
Bronx, Inc. and accompanying Guaranty of the Registrant for the lease of premises
located at 170 West 33rd Street, Bronx, New York.
* 10.40 Form of Guaranty made as of December 31, 1994 by and among Alvin S. Trenk, Steven L.
Trenk, and Martin G. Jacobs, M.D. in favor of Continental Dialysis, Inc.
* 10.41 Promissory Note of Alpha Administration Corp. dated December 31, 1994 in the principal
amount of $265,000 payable to Continental Dialysis, Inc.
o 10.42 Form of Agreement and Plan of Merger dated April 26, 1995 by and between the Registrant
and International Nursing Services, Inc.
oo 10.43 Asset Purchase Agreement dated February 21, 1996 among Renal Treatment Centers - New
Jersey, Inc., RTC Supply, Inc., Courthouse Dialysis, Inc. and Continental Dialysis, Inc.
+10.44 Asset Purchase Agreement dated February 12, 1997, by and among
Registrant, Continental Dialysis, Inc., Choice Care, Inc.,CDBI,
Choice Staffing, Inc., Dialysis Staffing, Inc., Choice Care
Infusion Services, Inc. (Delaware), Choice Care Infusion Services,
Inc. (New York), Alpha, UMDC and IHS, with attached
Acknowledgements. Exhibits omitted.
</TABLE>
- -------------------------------
* Filed with the Registrant's Registration Statement on Form SB-2 (Registration
No. 33-78288)
++ Filed with the Registrant's Report on Form 8-K filed October 3, 1994
o Management contract or compensatory plan or arrangement.
* Filed with the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
o Filed with the Registrant's Report on Form 8-K filed May 4, 1995.
oo Filed with the Registrant's Report on Form 8-K filed February 27, 1996.
+ Filed with the Registrant's Report on Form 8-K filed February 28, 1997.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
[identify specific financial statements here]
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 1,418,054
<SECURITIES> 0
<RECEIVABLES> 1,506,363
<ALLOWANCES> (517,000)
<INVENTORY> 52,028
<CURRENT-ASSETS> 2,713,608
<PP&E> 1,115,813
<DEPRECIATION> (424,576)
<TOTAL-ASSETS> 7,114,493
<CURRENT-LIABILITIES> 2,126,865
<BONDS> 0
0
0
<COMMON> 5,464,061
<OTHER-SE> (540,752)
<TOTAL-LIABILITY-AND-EQUITY> 7,114,493
<SALES> 5,751,896
<TOTAL-REVENUES> 5,751,896
<CGS> 2,181,807
<TOTAL-COSTS> 2,181,807
<OTHER-EXPENSES> 5,183,414
<LOSS-PROVISION> 379,672
<INTEREST-EXPENSE> (68,981)
<INCOME-PRETAX> (352,289)
<INCOME-TAX> (20,415)
<INCOME-CONTINUING> (331,874)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (331,874)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
