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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1997
Commission file number 0-15893
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Nevada 91-1256470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38 Pond Street, Suite 305
Franklin, Massachusetts 02038
(Address of principal executive offices) (Zip Code)
(508) 520-2422
Registrant's telephone number, including area code
Not applicable
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of June 30, 1997.
Common Stock, $.012 Par Value -- 15,759,583
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INDEX
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
PAGE # PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
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3 Condensed Consolidated Balance Sheets -- June 30, 1997 and
December 31, 1996
4 Condensed Consolidated Statements of Operations -- Three months
and Six months ended June 30, 1997 and 1996
5 Condensed Consolidated Statements of Cash Flows -- Six months
ended June 30, 1997 and 1996
6 Notes to Condensed Consolidated Financial Statements -- June 30,
1997
7-11 Item 2. Management's Discussion and Analysis of Financial
------ Condition and Results of Operations
PART II. OTHER INFORMATION
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12 - 13 Item 1. Legal Proceedings
Item 2. Changes In Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
14 SIGNATURES
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2
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
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Condensed Consolidated Balance Sheets
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(unaudited)
ASSETS: 06/30/97 12/31/96
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Current assets:
Cash $79,837 $37,141
Accounts receivable (net of allowance for doubtful accounts of $721,000 in
1997 and $977,000 in 1996) 1,450,613 1,817,036
Other account receivables 765,400 535,225
Other current assets 97,968 176,403
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Total current assets 2,393,818 2,565,805
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Property and equipment, at cost:
Equipment 1,191,167 1,316,166
Less accumulated depreciation and amortization (832,213) (862,305)
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Property and equipment, net 358,954 453,861
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Other assets:
Goodwill (net of accumulated amortization of $423,000 in 1997 and $385,000
in 1996) 2,390,657 2,428,463
Other 373,513 132,437
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Total other assets 2,764,170 2,560,900
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TOTAL $5,516,942 $5,580,566
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LIABILITIES AND STOCKHOLDERS' EQUITY:
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Current liabilities:
Short-term debt, current portion of long-term debt and lease obligations $277,350 $353,023
Accounts payable 874,112 778,358
Accrued payroll, taxes, & benefits 352,581 377,085
Accrued expenses and other liabilities 86,276 173,038
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Total current liabilities 1,590,319 1,681,504
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Long-term debt 1,193,096 1,804,550
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Total liabilities 2,783,415 3,486,054
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Stockholders' equity:
Preferred stock, 10,000,000 shares authorized; issued 1,727,305 in 1997 and 1996 1,727,305 1,727,305
Common stock, $.012 par value, 50,000,000 shares authorized; issued
16,459,583 in 1997 and 16,369,583 in 1996 197,514 196,435
Additional paid-in capital 8,263,282 8,230,611
Accumulated deficit (7,367,074) (7,972,339)
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2,821,027 2,182,012
Less-treasury stock, 700,000 shares, at cost (87,500) (87,500)
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Total stockholders' equity 2,733,527 2,094,512
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TOTAL $5,516,942 $5,580,566
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See notes to Condensed Consolidated Financial Statements.
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3
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
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Condensed Consolidated Statements of Operations (Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
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1997 1996 1997 1996
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Revenue, net $2,146,318 $2,256,379 $4,652,061 $4,619,511
------------ ------------ ------------ ------------
Cost and expense:
Operating costs 1,667,056 1,666,047 3,500,330 3,401,998
Administrative and selling costs 550,222 439,109 1,147,692 838,797
Depreciation and amortization 50,932 57,753 103,641 115,556
------------ ------------ ------------ ------------
Total cost and expense 2,268,210 2,162,909 4,751,663 4,356,351
------------ ------------ ------------ ------------
Operating income/(loss) (121,892) 93,470 (99,602) 263,160
------------ ------------ ------------ ------------
Interest expense, net 74,958 69,828 140,377 123,711
Other expense/(income) (15,278) 0 (43,237) 1,611
------------ ------------ ------------ ------------
Total other expense/(income) 59,680 69,828 97,140 125,322
------------ ------------ ------------ ------------
Income/(loss) before income taxes (181,572) 23,642 (196,742) 137,838
Gain/(loss) on sale of clinics 0 0 802,724 0
Income tax provision 0 2,175 717 4,675
------------ ------------ ------------ ------------
Net income $(181,572) $21,467 $605,265 $133,163
============ ============ ============ ============
Net income per share: $(0.01) $0.00 $0.04 $0.01
============ ============ ============ ============
Average shares outstanding 15,759,583 14,403,604 15,759,583 14,202,955
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See notes to Condensed Consolidated Financial Statements.
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4
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
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Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1997 and 1996
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1997 1996
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Cash Flows From Operating Activities:
Net income $605,265 $133,163
Adjustments to reconcile net income to net cash from (used by) operating
activities:
Depreciation and amortization 103,641 115,556
(Gain)/loss on sale of clinics (802,724) 0
Non-cash expenses 418 7,890
Decrease (increase) in accounts receivable (328,761) (139,322)
Decrease (increase) in other current assets (34,656) 87,709
Decrease (increase) in other assets and deferred costs (18,363) (34,390)
Increase (decrease) in accounts payable and accrued expenses 254,111 (177,414)
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Net cash from (used by) operating activities (221,069) (6,808)
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Cash Flows From Investing Activities:
Proceeds from sale of clinics 884,361 0
Purchases of equipment (10,180) (10,764)
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Net cash used in investing activities 874,181 (10,764)
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Cash Flows From Financing Activities:
Proceeds from issuance of debt 150,000 100,000
Proceeds from exercise of stock options 0 10,000
Principal payments on debt and lease obligations (760,416) (154,185)
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(610,416) (44,185)
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Net cash provided by (used in) financing activities
Net decrease in cash 42,696 (61,757)
Cash, beginning of year 37,141 85,557
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Cash, end of period $79,837 $23,800
========= =========
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See notes to Condensed Consolidate Financial Statements.
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Footnote: The Company issued 90,000 shares of common stock in
conjunction with proceeds from the issuance of debt.
The Company satisfied approximately $462,000 of note
payables incurred in connection with business acquisitions
through the assignment of accounts receivables related to
those businesses.
5
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Rule
10-01 of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. The results should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1996.
6
PART I. FINANCIAL INFORMATION
Item 2. Management's discussion and analysis of financial condition and
results of operations
General
Consolidated Health Care Associates, Inc. "the Company", provides ancillary
health care and outpatient rehabilitation services through a network of
outpatient clinics principally in the Northeast and Mid-Atlantic regions. The
Company owns and operates nine clinics under the name PTS Rehab, Inc. ("PTS") of
which five are in Massachusetts, one is in Pennsylvania, and three are in
Delaware. The Company also provides managed ancillary health care rehabilitation
services through contract staffing under the name Consolidated Rehabilitation
Services, Inc ("CRS"), principally in Massachusetts, Pennsylvania, Delaware and
New York.
In 1996, the Company began development of a program of Managed
Rehabilitation Services ( "MRS"), pursuant to which the Company would furnish
contract development, staffing, administrative, payroll, billing, collection and
management services to local, independently owned community based clinics,
nursing homes and home health agencies. The MRS system provides for the ability
to deliver contractual ancillary health care and rehabilitation services through
the community based locations that in turn, would coordinate the actual
services.
Results of operations
Net revenues increased to $4,652,061 for the six months ending June 30,
1997 from $4,619,511 for the same six month period ended June 30, 1996, an
increase of $32,550 or 0.7%. Net revenues for the quarter ending June 30, 1997
declined to $2,146,318 from $2,256,379 for the same period of time during 1996.
Net revenues year to date increased despite a decline in PTS outpatient net
revenues resulting primarily from fewer Company owned clinics in operation
during the six month period ended June 30, 1997 as compared to the same six
month period during 1996. In February 1997, the Company's PTS division sold
three of its clinics ("the Disposition") in Pennsylvania and in March 1997,
returned one clinic in Florida to its former owner. The Company also had two
fewer clinics in operations as compared to the same period during 1996 resulting
from the closing of one non-performing clinic in Florida and the merging of two
clinics in Massachusetts into one location. Additionally, lower PTS net revenues
during the first six months of 1997 are also attributable to higher accruals for
contractual allowances as compared to reserves for contractual allowances
recorded during the same period in 1996. In the third quarter of 1996, the
Company performed a review of its reserves for contractual allowances and
determined that higher accruals were required. Higher accruals of approximately
$64,000 are reflected in the first six months of 1997 and as a result cost are
not comparable to those accruals recorded during the same period in 1996.
7
Net revenues of the Company's Consolidated Rehabilitation Services division
("CRS") increased to $2,166,096 for the six months ended June 30, 1997 as
compared to $949,140 for the same period of time during 1996, an increase of
$1,216,956 or 128%. Increased CRS net revenues resulted from the Company's
continued diversification of services, to now include Nursing Home Rehabilation
Services, as well as the continued integration of contract services within the
Company's nine remaining out-patient clinics.
Operating costs represented 77.6% and 75.2% of revenue during the quarter
and six months ended June 30, 1997 compared to 73.8% and 73.6%, respectively.
The $98,332 increase in operating costs during 1997 as compared to the same
period in 1996 is specifically related to higher salaries and benefit cost
associated with the Company's new nursing home rehabilation contracts, and to a
lesser extent, additional labor and fringe cost associated with the start-up of
the Company's new Managed Rehabilitation Service Division. The continued
integration of the Company's contract service division in the Company's
out-patient clinics continues to lower fixed overhead costs and as a result the
Company continues to achieve lower recruiting, travel and housing costs through
the replacement of subcontracted physical therapy labor cost with internal staff
physical therapists.
Administrative and selling costs constituted 25.60% and 24.6% of net
revenue during the quarter and six months ended June 30, 1997 as compared to
19.5% and 18.1% for the same periods of 1996. The increase reflects $308,895 in
higher administrative and selling costs for six months ended June 30,1997 as
compared to the six months ended June 30, 1996. A significant portion of the
increase relates to higher accruals for accounting, legal, consulting and
financing costs, and to a lesser extent, start-up cost associated with the
Company's MRS division. There were no comparable accruals during the first six
months of 1996, however the Company did record a significant accounting and
legal charge in the third quarter of 1996.
Depreciation and amortization decreased by $11,915 during the six months
ended June 30, 1997 as compared to the same period during 1996. The decrease is
attributable to lower depreciation expenses resulting from the sale of certain
fixed assets in February and March 1997.
Interest expense increased by $16,666 for the six months ended June 30,
1997 as compared to the same period in 1996. The increase is primarily the
result of the Company's increased use of its factoring arrangement to support
its operations, interest expense accrued on term debt, and to a lesser extent
lower interest expense resulting from the use of proceeds from the Disposition
to retire certain current and long-term debt.
Other income increased by $44,848 for the six months ended June 30, 1997 as
compared to the same six months in 1996, primarily as a result of the on-going
successful negotiations to lower liabilities of certain outstanding accounts
payable debt.
On February 28, 1997, the Company completed the sale of three of its four
Pennsylvania clinics for a purchase price of $1,050,000 in cash and a note,
subject to adjustment. The clinics include those located in Millersburg, PA,
Mechanicsburg, PA and
8
Shermansdale, PA. The Company had purchased these clinics from "the Buyer" in
1993. The cash portion of the transaction was $900,000 which at the closing was
reduced by the payment of certain operating expenses due the Buyer of $15,636.
The Buyer also assumed up to $230,000 in associated liabilities. Additionally,
in January 1997 the Company agreed to satisfy a note held by the Buyer issued in
connection with the 1993 business acquisition in the approximate amount of
$413,000, by assigning and without guarantee as to the amount of the collect
ability to the note holder $484,000 in face amount of accounts receivable, but
only to the extent of collections in the amount due under the note. The clinics
sold accounted for approximately 22% of the Company's total revenues for the
year ended December 31, 1996. The Company is utilizing the proceeds from the
Disposition to pay down debt and for other general corporate purposes.
In March 1997, the Company returned one non-performing clinic in Florida to
its "former owner". The Company assigned approximately $64,000 of net trade
receivables, approximately $4,000 of prepaid assets and approximately $6,000 of
net fixed assets related to the returned clinic to the former owner. In
conjunction with the return of the clinic, the former owner agreed to forgive
the balance of a Company note held in the amount of $48,000, forfeit accrued
earned time benefits in the approximate amount of $10,000, and assumed certain
accounts payable in the approximate amount of $13,000. The returned clinic
accounted for approximately 4.7% of the Company's total net revenues for the
year ended December 31, 1996. The sale of the Pennsylvania clinics and the
return of the Florida clinic resulted in a net gain on sale of assets for the
period ending March 31, 1997 of $802,724.
The Company elected to sell the Pennsylvania clinics and return the Florida
clinic after determining that current and projected future cash flows of these
operations did not and would not satisfy operating and debt service
requirements. No future consolidations of clinics are planned at this time,
however, no assurances can be given that consolidations will not occur in the
future if a particular clinic is not operating at a satisfactory level.
The Company's tax provision is substantially the result of state income tax
accruals.
As a result of the above factors, the Company earned net income of $605,265
for the six months of 1997 as compared to a net income of $133,163 for the same
period of 1996.
Liquidity and Capital Resources
The Company's liquidity, as measured by its cash increased by $42,696 in
the first six months of 1997. The increase in cash is primarily the result of
the remaining effects of the sale of the Pennsylvania clinics and additional
proceeds received from the issuance of new term debt, less certain financing
activities of the Company described below.
Net accounts receivable were $1,450,613 at June 30, 1997 compared to
$1,817,036 at December 31, 1996, a decrease of $366,423. In January 1997 the
Company
9
agreed to satisfy a note held by the Buyer issued in connection with the 1993
business acquisition in the approximate amount of $413,000 by assignment to the
note holder of $484,000 in face amount of accounts receivable, but only to the
extent of collections in the amount due under the note. Subsequently, included
in the February 1997 Pennsylvania Disposition were approximately $230,000 of
remaining net accounts receivables related to the clinics included in the
disposition. In the March 1997 return of the Florida clinic to its Former Owner,
net accounts receivable returned were approximately $65,000. Net accounts
receivables further decreased through additional reserves for contractual
allowances of approximately $41,000. The decreases were offset by increased
accounts receivables of approximately $329,000 generated primarily in the CRS
division.
Accounts payable, accrued payroll, taxes and benefits, and accrued other
decreased by $15,512 in the first six months of 1997 as compared to the balances
at December 31, 1996. The decrease includes the combined assumption of
approximately $269,000 of accounts payable and accrued payroll and related
benefit costs by the Buyer of the Pennsylvania clinics and by the former owner
of the Florida clinic, offset by increased accounts payable resulting from
higher operating cost associated with the increase in CRS revenues and to a
lesser extent, increased accounts payable for legal and accounting cost which
includes the filing of the Company's Registration Statement on Form SB-2 in
February 1997.
Cash provided by investing activities for the six months ended June 30,
1997 was $874,181, which consisted of net proceeds provided by the sale of
clinics of $884,361 less cash used for the purchases of equipment of $10,180.
The cash portion of the Pennsylvania disposition was $900,000 which at the
closing was reduced by the payment of certain operating expenses due the Buyer
of $15,639.
Financing activities in the first six months of 1997 used cash of $610,416.
Proceeds from the issuance of debt were $150,000 and payments of $760,416 were
made on term debt. Due to the shortfalls in working capital as discussed above,
the Company discontinued scheduled principal and interest payments on several of
its note payable obligations during 1996. During 1997, in conjunction with the
assignment of accounts receivables and the utilization of proceeds from the
dispositions, the Company cured certain defaults in principal and interest
payments by remitting past-due amounts.
At June 30, 1997 and December 31, 1996, the Company had outstanding
approximately $1,470,000 and $2,158,000 in notes payable and long-term debt,
respectively. At December 31, 1996 of such amount, approximately $462,000
related to clinics included in the February disposition and the March 1997
clinic returned to the former owner. During the three months ended March 31,1997
by assignment of accounts receivable from the Company to the note holders, the
remaining balance of these notes were satisfied. Net term debt remaining
decreased during the six months ended June 30, 1997 primarily as a result of the
continuation of scheduled payments of term debt offset by the issuance of new
term debt of $150,000.
10
Stockholders' equity increased $639,015 during the first six months of 1997
due to the issuance of common stock ($33,750) and net income ($605,265).
In January 1997, the Company negotiated a $150,000 promissory note with
Davstar II Managed Investments Corporation N.V. Pursuant to the promissory note,
the Company is obligated to pay interest on the unpaid monthly balance of the
promissory note at a rate of 10% per annum, computed in arrears, with the entire
principal balance plus any unpaid interest due in full in May 1997. In
consideration of the promissory note, the note holder was issued 90,000 shares
of the Company's common stock at $.375 per share. In early April 1997, the
Company subsequently satisfied in full, the outstanding principal and interest
balance under this promissory note.
In July 1997, the Company negotiated a $300,000 promissory note with
Renaissace Capital Group, Inc.. Pursuant to the promissory note, the Company is
obligated to pay interest on the unpaid monthly balance of the promissory note
at a rate of 8% per annum, computed in arrears, with the entire principal plus
any unpaid interest due in full November 20, 1997.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes In Securities
A telephonic Board of Directors meeting was held on July 8, 1997 whereby the
Board approved the change in the conversion price at which shares of Series A
Preferred Stock can be converted into shares of Common Stock from a conversion
price of $.57 per share to $.38 per share. The Board further resolved to allow
the Company to pay the accumulated preferred dividends in arrears on the Series
A and Series B Preferred Stock in the form of Common Stock to be issued at the
applicable conversion price for the Series A and Series B Preferred Stock
respectively.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on June 20, 1997, the following
matters were proposed and a majority of stockholders were in favor of:
a) Authorization of the Board of Directors to effect a reverse split of the
common stock of the Company without further shareholder action, of not less
than 1 for 2 nor greater than 1 for 10.
b) Electing six Directors to hold office until the next Annual Meeting of
Stockholders.
The number of votes cast for and against the authorization of the reverse
split and the election of each Director, and the number of abstentions with
respect thereto, were as follows:
FOR AGAINST ABSTAIN
Reverse Stock Split 8,670,259 18,000 8,748
Election of:
Sidney Dworkin 8,697,004
Paul Frankel 8.697.004
Joel Friedman 8,697,004
James Kenney 8,697,004
Robert M.Whitty 8,697,004
Goodhue W. Smith III 8,697,004
12
Item 5 Other Information
The Company announced August 13, 1997 that it had signed a non-binding letter of
intent to sell all of the Company's assets and business to a wholly-owned
subsidiary ("Acquisition Sub") of the Olympus Healthcare Group, Inc.("Olympus").
In addition, Olympus shall assume all of the disclosed liabilities and
obligations of the Company.
Olympus is a privately owned, integrated post-acute healthcare services company
with extended business activities in inpatient services, ancillary services, and
ambulatory services. The Company's activities are centered in the New England
states, principally in Massachusetts, Connecticut and Maine.
The letter of intent contemplates a purchase price of $5,000,000, consisting of
175,620 shares of Olympus common stock, par value $.01 per share, and $750,000
in cash, subject to a working capital adjustment. Additional purchase price of
between $750,000 and $1,200,000, payable in shares of Olympus stock, will be
payable to the Company if Acquisition Sub meets certain targets for adjusted net
operating income in 1998.
The consummation of the transaction is subject to a number of conditions,
including the completion of due diligence, the signing of a definitive
agreement, the approval of Consolidated's shareholders and certain other
customary conditions.
The foregoing description is qualified by reference to the press release
announcing the proposed transaction, a copy of which is attached to this report
as Exhibit 99.1 and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 Press Release issued by the Registrant on
August 13,1997.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOLIDATED HEALTH CARE
ASSOCIATES, INC.
Dated: August 14, 1997 By: /s/ Robert M. Whitty
---------------------- --------------------
Robert M. Whitty
President
Dated: August 14, 1997 By: /s/ Raymond L. LeBlanc
---------------------- ----------------------
Raymond L. LeBlanc
Chief Financial Officer
14