ADVANCED CLINICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE 183>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Advanced Clinical Systems, Inc.:
We have audited the accompanying consolidated balance sheets
of ADVANCED CLINICAL SYSTEMS, INC. (a Delaware corporation)
and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free
of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Advanced Clinical Systems, Inc.
and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the
years then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Nashville, Tennessee
August 12, 1998
<PAGE 184>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS 1998 1997
- ------------------------------- ---------- ----------
CURRENT ASSETS:
Cash $ 567,683 $ 412,986
Trade receivables, net of
allowance for doubtful
accounts of $499,745 and
$509,708, respectively 2,316,724 2,128,141
Other receivables, net 19,889 74,387
Income taxes receivable 250,000 -
Prepaid expenses and other
current assets 43,574 31,273
Deferred tax asset 303,286 345,889
---------- ----------
Total current assets 3,501,156 2,992,676
---------- ----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation 317,639 487,573
OTHER ASSETS:
Excess of cost over fair value
of net assets acquired, net
of accumulated amortization 386,105 443,515
Start-up costs, net of
accumulated amortization 39,455 166,159
Loan costs, net of accumulated
Amortization 125,095 -
Deferred tax asset 334,905 193,638
Other assets 29,836 29,102
---------- ----------
Total assets $4,734,191 $4,312,663
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit $ 500,000 $ -
Current portion of notes
Payable 246,105 -
Current portion of capital
lease obligations 24,266 53,048
Accounts payable 351,859 369,785
Accrued salaries and benefits 439,768 512,233
Other accrued expenses 39,668 105,744
Income taxes payable - 245,484
---------- ----------
Total current liabilities 1,601,666 1,286,294
---------- ----------
NON-CURRENT LIABILITIES:
Notes payable, net of current
portion 5,218,735 -
Notes payable to shareholders - 610,000
Interest payable to shareholders - 389,805
Capital lease obligations, net of
current portion 18,707 42,505
Other long-term obligations 80,000 -
---------- ----------
Total noncurrent
Liabilities 5,317,442 1,042,310
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock - $.01 par
value; 10,000,000 shares
authorized; 4,202,370
and 2,869,666 shares
issued, respectively 42,024 28,697
Additional paid-in capital,
net of deferred compensation
of $0 and $21,972,
respectively 2,330,189 1,261,223
Retained earnings 1,392,365 694,139
Treasury stock, at cost (5,949,495) -
---------- ----------
Total shareholders'
equity (2,184,917) 1,984,059
---------- ----------
Total liabilities and
shareholders' equity $ 4,734,191 $ 4,312,663
---------- ----------
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
<PAGE 185>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
---------- ----------
NET REVENUES $ 12,925,752 $ 11,928,867
OPERATING EXPENSES:
Salaries and benefits 7,241,373 7,411,124
Other operating expenses 3,588,232 3,245,681
Depreciation and amortization 410,819 534,695
Litigation settlement 283,325 -
---------- ----------
Total operating expenses 11,523,749 11,191,500
---------- ----------
OTHER REVENUES (EXPENSES):
Interest expense (209,911) (145,819)
Investment income 18,297 57,329
Other 9,662 1,278
---------- ----------
Total other expense (181,952) (87,212)
---------- ----------
INCOME BEFORE TAXES 1,220,051 650,155
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 620,489 441,317
Deferred (98,664) (428,355)
---------- ----------
521,825 12,962
---------- ----------
NET INCOME $ 698,226 $ 637,193
---------- ----------
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
<PAGE 186>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Additional
Common Stock Treasury Stock Paid-in Retained
Shares Amount Shares AmountCapitalEarningsTotal
---------- --------- --------- --------- --------- ---------- --------
BALANCE
AT JUNE 30,
1996 2,868,666 $28,687 - - $1,237,640 $56,946 1,323,273
Exercise of
options 1,000 10 - - 1,490 - 1,500
Amortization
of deferred
compensation - - - - 22,093 - 22,093
Net income - - - - - 637,193 637,193
BALANCE
AT JUNE 30,
1997 2,869,666 28,697 - - 1,261,223 694,139 1,984,059
Conversion of
convertible notes
payable 1,332,030 13,320 - - 1,045,990 - 1,059,310
Purchase of
treasury
shares - - 2,902,253 (5,949,495) - - (5,949,495)
Exercise of
options 674 7 - - 1,004 - 1,011
Amortization
of deferred
compensation - - - - 21,972 - 21,972
Net income - - - - - 698,226 698,226
BALANCE
AT JUNE 30,
--------- ------ --------- ----------- --------- --------- -----------
1998 4,202,370 42,024 2,902,253 (5,949,495) 2,330,189 1,392,365(2,184,917)
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<PAGE 187>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(Increase (Decrease) in Cash)
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 698,226 $ 637,193
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 410,819 534,695
Deferred income taxes (98,664) (428,355)
Amortization of deferred
Compensation 21,972 22,093
Changes in assets and
liabilities, net of effect
of acquisition:
Trade receivables, net (188,583) (91,637)
Other receivables, net 54,498 125,895
Prepaid expenses and other
current assets (262,301) 171,344
Accounts payable (17,926) (130,037)
Accrued expenses (244,520) 392,572
---------- ----------
Net cash provided by
operating activities 373,521 1,233,763
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment,
Net (50,194) (143,469)
Other (734) (85,534)
---------- ----------
Net cash used in investing
Activities (50,928) (229,003)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of
Payments 5,464,840 -
Proceeds from line of credit 500,000 -
Payment of loan costs (131,672) -
Payment on line of credit - (765,000)
Purchase of treasury stock (5,949,495) -
Payments on capital lease
Obligations (52,580) (28,817)
Other 1,011 1,500
---------- ----------
Net cash used in financing
Activities (167,896) (792,317)
---------- ----------
NET INCREASE IN CASH 154,697 212,443
CASH, at beginning of year 412,986 200,543
---------- ----------
CASH, at end of year $ 567,683 $ 412,986
---------- ----------
(Continued)
<PAGE 188>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
(Increase (Decrease) in Cash)
(Continued)
1998 1997
---------- ----------
SUPPLEMENTAL INFORMATION:
Cash payments of interest
expense $ 150,400 $ 76,358
Cash payments of income taxes $1,129,973 $ 68,040
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of notes payable to
shareholders into common stock $1,059,310 $ -
Liabilities assumed in
Acquisition $ - $ 59,605
Capital lease of equipment $ - $ 58,660
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE 189>
ADVANCED CLINICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Advanced Clinical Systems, Inc. (the "Company") provides
management services to hospitals and community mental health
centers under long-term contracts for the operation of inpatient
and outpatient clinics dedicated either to the diagnosis and
treatment of individuals suffering with mental health conditions
or chronic pain. The Company also provides practice management
services to physicians and other clinicians in connection with
the Company's programs at those hospitals. At June 30, 1998,
the Company provides mental health management services to
fourteen hospitals and two community mental health centers
through its wholly-owned subsidiary, New Day, Inc., and provides
chronic pain management services to eight hospitals through its
wholly-owned subsidiary, Pain Care, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. As of June 30,
1998, the Company's investment in an unconsolidated partnership
was accounted for using the equity method and the investment is
included in other assets. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Approximately 90% and 85% of the Company's net operating
revenues for 1998 and 1997, respectively, consist of management
fees earned from contracts with hospitals and community mental
health centers. Remaining net operating revenues consist
primarily of patient service revenues and management fees earned
from contracts with physician practices.
Provision for Doubtful Accounts
Provision for estimated uncollectible accounts receivable is
included in operating expenses.
<PAGE 190>
-2-
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the property and equipment. The general range
of estimated useful lives is 3-10 years. Maintenance and
repairs are charged to operations while significant renewals and
replacements are capitalized. When assets are sold or retired,
the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the
consolidated statement of income. The Company uses accelerated
depreciation methods for tax reporting purposes.
Other Assets
The excess of cost over fair value of net assets acquired
("goodwill") is being amortized over 15 years using the
straight-line method. Start-up costs generally include
development fees, salaries and wages, travel and other related
costs incurred with the development of new clinics. These costs
are amortized over 36 months using the straight-line method
beginning when patients are initially served.
Effective April 1, 1997, the Company changed its method of
accounting for start-up costs from capitalizing start-up costs
and amortizing those costs over 36 months to expensing the new
start-up costs as incurred. The change in the method of
accounting for start-up costs resulted in a charge to operations
of $50,625 for the year ended June 30, 1997. Capitalized costs
through March 31, 1997, are being amortized over their remaining
life under the Company's original policy.
In April 1998, the Company incurred $131,672 in loan costs
associated with the financing arrangements described in Note 5.
These costs are being amortized over the life of the related
debt.
The Company evaluates, on a continual basis, the realizability
of intangible assets using measurements of earnings before
amortization, as well as operating cash flows for the respective
operations. The Company considers the effects of external
changes to the Company's business environment, including
competitive pressures, market erosion and technological and
regulatory changes.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Certain elements of income and
expense are recognized in different periods for income tax
reporting than for financial reporting. Such differences are
primarily attributable to the Company's use of accelerated
depreciation methods for equipment and timing differences
related to the deduction of bad debt expense and accrued
expenses. See Note 4 for further information related to income
taxes.
<PAGE 191>
-3-
Concentration of Credit Risks
The Company's credit risks relate primarily to cash and trade
receivables. Cash is primarily held in bank accounts with
financial institutions in the southeastern region of the United
States. Trade receivables consist primarily of amounts due from
hospitals, community mental health centers and physician
practices in the southeastern region of the United States. The
Company continually monitors the financial condition and
operations of its clients to determine adequacy of allowances
for doubtful accounts on these receivables. The Company has
risk of accounting losses should uncollectible amounts exceed
current allowances.
Litigation Settlement
In fiscal 1995, the Company was named as a defendant in a
lawsuit in which the plaintiff alleged breach of contract. In
fiscal 1998, the Company settled the suit with the plaintiff for
$283,325, including legal fees of $43,325.
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 reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates.
Accounting Developments
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 129, "Disclosure of Information about Capital
Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure. The statement
was adopted during fiscal year 1998, and the adoption did not
have a material impact on the Company's results of operations,
financial condition or cash flows.
In April 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities." The SOP is effective for fiscal years
beginning after December 15, 1998, and requires entities to
expense costs of start-up activities as incurred. As discussed
in "Other Assets" above, the Company changed its method of
accounting for start-up costs in April 1997. Accordingly,
management does not expect the adoption to have a material
impact on the Company's results of operations, financial
condition or cash flows.
Reclassifications
Certain reclassifications have been made to the 1997
consolidated financial statements in order to conform with the
1998 presentation.
<PAGE 192> -4-
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at
June 30, 1998 and 1997:
1998 1997
---------- ----------
Clinic leasehold improvements $ 197,512 $ 197,512
Equipment, furniture and
Fixtures 587,901 738,124
Automobiles 171,301 171,301
---------- ----------
956,714 1,106,937
Less accumulated depreciation (639,075) (619,364)
---------- ----------
$ 317,639 $ 487,573
---------- ----------
3. EMPLOYEE BENEFIT PLAN
The Company has a defined-contribution employee benefit plan
that was established under provisions of section 401(k) of the
Internal Revenue Code. Substantially all full-time regular
employees of the Company and its subsidiaries are eligible to
participate in the plan. Under the plan's provisions, an
employee may contribute, on a tax-deferred basis, up to 15% of
total cash compensation, not to exceed, within a calendar year,
the amount allowable by the Commissioner of Internal Revenue.
Matching contributions and discretionary contributions can be
made by the Company in an amount determined by the Board of
Directors each year. The Company did not make matching or
discretionary contributions for the years ended June 30, 1998 or
1997.
4. INCOME TAXES
The provision (benefit) for income taxes includes the following
components for the years ended June 30, 1998 and 1997:
1998 1997
---------- ----------
Current income taxes
Federal $ 527,415 $ 375,119
State 93,074 66,198
---------- ----------
Total current tax provision 620,489 441,317
---------- ----------
Deferred income taxes
Federal (83,864) (364,102)
State (14,800) (64,253)
---------- ----------
Total deferred tax benefit (98,664) (428,355)
---------- ----------
Total income tax provision $ 521,825 $ 12,962
---------- ----------
<PAGE 193>
-5-
Deferred income taxes reflect the tax effects of differences
between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. The significant
components of the Company's net deferred tax assets and
liabilities, at the respective tax rates, as of June 30, 1998
and 1997 are as follows:
1998 1997
Non- Non-
Current Current Current Current
--------- --------- --------- -------
Deferred tax assets:
Allowance for
accounts receivable $ 199,898 $ - $ 203,883 $ -
Accrued liabilities 103,388 - 142,006 -
Accelerated
Depreciation - 303,594 - 153,538
Other - 31,311 - 40,100
--------- --------- --------- -------
Total deferred
tax assets $ 303,286 $334,905 $ 345,889 $193,638
--------- --------- --------- --------
In fiscal 1997, the Company eliminated valuation allowances in
the amount of $269,332 applied against deferred tax assets based
upon its tax planning strategies and future income projections.
5. FINANCING ARRANGEMENTS
Effective November 29, 1994, the Company negotiated a revolving
line of credit with a bank which provided for borrowings up to
$1,400,000. Borrowings accrue interest at an adjustable market
rate payable monthly and are secured by a first lien on the
accounts receivable, financial instruments and intangible assets
of the Company. As of June 30, 1997, there were no outstanding
borrowings under this line of credit. The line of credit
expired November 15, 1997. As of that date, there were no
outstanding borrowings under the line of credit.
Effective April 3, 1998, the Company negotiated a new revolving
line of credit with a bank which provides for borrowings up to
$1,200,000. Borrowings accrue interest at an adjustable market
rate (8.78% at June 30, 1998) and are payable monthly. Line of
credit borrowings are secured by liens on certain assets of the
Company. The line of credit expires on March 31, 2004. As of
June 30, 1998, the Company had outstanding borrowings related to
the line of credit of $500,000.
<PAGE 194>
-6-
Effective April 3, 1998, the Company issued notes payable to a
bank to fund the repurchase of a portion of the Company's
outstanding common shares (see Note 7). Notes payable consist
of following:
June 30,
1998 1997
---------- ----------
Note payable to bank, issued
April 3, 1998, interest at
a variable rate (9.53% at
June 30, 1998), maturing
March 31, 2003 $3,714,840 $ -
Note payable to bank, issued
April 3, 1998, interest at
a variable rate (10.03% at
June 30, 1998), maturing
March 31, 2004 1,750,000 -
---------- ----------
5,464,840 -
Less current portion (246,105) -
---------- ----------
$ 5,218,735 $ -
---------- ----------
Principal payments required on long-term debt are as follows:
1999 $ 246,105
2000 609,375
2001 796,875
2002 1,042,500
2003 1,019,985
Thereafter 1,750,000
-----------
$ 5,464,840
-----------
The Company's revolving line of credit and notes payable contain
certain financial covenants which, among other restrictions,
restrict total debt, impose minimum coverage ratios, limit
capital expenditures and require a minimum net worth. As of
June 30, 1998, the Company was in compliance with all financial
covenants.
<PAGE 195> -7-
6. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders at June 30, 1997, consists of
subordinated convertible debt agreements. The total outstanding
principal and compounded accrued interest payable is payable
upon maturity or may be converted into shares of the Company's
common stock at the option of the shareholders as follows:
June 30, 1997
Accrued
Principal Interest
---------- ----------
Notes payable to shareholders,
issued September 1, 1991,
interest at 9%, maturing
September 1, 1998,
convertible at $0.75 per
share $ 460,000 $ 311,058
Notes payable to shareholders,
issued February 25, 1992,
interest at 8%, maturing
February 25, 1999,
convertible at $1.00 per
share 150,000 78,747
---------- ----------
$ 610,000 $ 389,805
---------- ----------
During fiscal 1998, the notes payable were converted into common
stock according to the terms of the convertible debt agreements.
See Note 7 for additional discussion of equity transactions.
7. SHAREHOLDERS' EQUITY
Convertible Notes Payable
As discussed in Note 6, during fiscal 1998, convertible notes
payable to shareholders were converted into 1,332,030 shares of
common stock pursuant to the subordinated convertible debt
agreements.
Treasury Stock
In fiscal 1998, the Board of Directors authorized the repurchase
of a portion of the Company's outstanding common stock.
Accordingly, the Company acquired 2,902,253 shares of the
Company's common stock for $5,949,495. The treasury shares are
stated at cost in the accompanying consolidated balance sheets.
<PAGE 196>
-8-
Stock Options
Pursuant to the Company's 1991 Incentive Stock Option Plan (the
"Plan"), the Company provides for the grant of stock options to
certain employees to purchase in the aggregate up to 1,350,000
shares of common stock. Awarded options typically vest and
become exercisable in incremental installments within two to
five years from the date of grant and expire no later than ten
years from the date of grant. All options are deemed to have
been granted for prices at or above fair market value of the
stock at the date of the grant as determined by the Board of
Directors and management. The following table summarizes stock
option transactions for the years ending June 30, 1998 and 1997:
Weighted-
Average
Exercise
Shares Under Price Per
Option Share
---------- ----------
Outstanding at
June 30, 1996 452,000 $1.28
Granted 83,000 $2.00
Canceled (63,500) $1.94
Exercised (1,000) $1.50
---------- ----------
Outstanding at
June 30, 1997 470,500 $1.32
Granted 3,000 $2.50
Canceled (40,000) $1.56
Exercised (674) $1.50
---------- ----------
Outstanding at
June 30, 1998 432,826 $1.30
---------- ----------
There were 347,659 and 353,333 options exercisable at June 30,
1998 and 1997, respectively, with a weighted average exercise
price of $1.17. At June 30, 1998, there are 160,000 options
outstanding with exercise prices between $.50 and $1.49, with a
weighted average exercise price of $.75 and a weighted average
remaining contractual life of 6 months. All of these options
are exercisable at June 30, 1998. 272,826 options outstanding
at June 30, 1998, have exercise prices between $1.50 and $2.50,
with a weighted average exercise price of $1.63 and a weighted
average remaining contractual life of 1.5 years. Of these,
187,659 are exercisable at June 30, 1998 and have a weighted
average exercise price of $1.52.
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to account for options
issued to employees under Accounting Principles Board Opinion
No. 25. All options have been granted with exercise prices
equal to or greater than market value of the Company's common
stock on the date of grant. As a result, no compensation cost
has been recognized in the accompanying consolidated financial
statements.
<PAGE 197>
-9-
SFAS No. 123 established new financial and reporting standards
for stock-based compensation plans. As the Company has adopted
the disclosure-only provision of SFAS No. 123, no compensation
cost has been recognized related to the Plan. If the Company
had recognized compensation cost for the Plan based on the fair
value method prescribed by SFAS No. 123, the Company's net
income would have been reduced by $5,727 and $8,910 for the
years ended June 30, 1998 and 1997, respectively.
The fair value of each option on its grant date has been
estimated for pro forma purposes using the Black Scholes option-
pricing model using the following weighted average assumptions:
1998 1997
---------- ----------
Risk free interest rate 5.70% 5.74%
Expected life of options 5 years 2.68 years
Expected dividends $ - $ -
Weighted average fair value $ .62 $ .20
Deferred Compensation
During fiscal 1995, the Company issued non-qualified stock
options to employees at exercise prices below fair market value,
as estimated by the Company's management. Deferred compensation
of $120,000 has been provided for these stock options as
determined by the differences between the option prices and fair
market value as of the grant date. Of this amount, $21,972 and
$22,093 were charged to operations during fiscal 1998 and fiscal
1997, respectively. The deferred compensation is being
amortized using the straight-line method over the five-year
vesting period of the options.
Warrants
The Company issued stock warrants in fiscal year 1995 for 30,000
shares of common stock at $1.50 per share to an employee. The
Company issued stock warrants in fiscal year 1997 for 20,000
shares of common stock at $2.00 per share in relation to
consulting services received by the Company. The Company issued
stock warrants in fiscal year 1998 for 28,000 shares of common
stock at $2.05 per share in relation to the execution of a
financing arrangement (see Note 5).
In November 1996, the Company issued a stock warrant for 5,000
shares of common stock at $.01 per share related to an
acquisition. This warrant was canceled during fiscal 1998.
Stock Appreciation Rights
In fiscal 1998, the Company adopted a Stock Appreciation Right
plan ("SAR Plan"). The SAR Plan provides for payments to key
employees in the event certain contingent events occur. The
payments to the key employees would be based on appreciation in
the Company's common stock value from a per share base value, as
determined by the employees' respective SAR Plan agreement. The
SAR Plan expires June 30, 1999.
<PAGE 198>
-10-
8. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is a defendant in various legal proceedings arising
in the ordinary course of business. Although the results of
litigation cannot be predicted with certainty, management
believes that the outcome of pending litigation will not have a
material adverse effect on the Company's results of operations,
financial position or cash flows.
Malpractice Liability Insurance
The Company carries malpractice liability insurance of
$1,000,000 per incident and $3,000,000 in the aggregate on a
claims-made basis for possible liability claims and losses.
Lease Agreements
The Company leases certain facilities under noncancellable
operating lease agreements expiring through 2005. Certain
leases contain renewal options for an additional two to four
years. Additionally, the Company has entered into various
capital lease agreements for certain equipment.
Future minimum lease commitments as of June 30, 1998 are as
follows for these lease agreements:
Operating Capital
Leases Leases
---------- ----------
1999 $ 258,393 $ 24,266
2000 209,463 18,707
2001 173,964 -
2002 115,905 -
2003 99,517 -
Thereafter 123,147 -
---------- ----------
$ 980,389 $ 42,973
---------- ----------
Rental expense for the years ended June 30, 1998 and 1997 was
$249,264 and $237,883, respectively.
<PAGE 199>
-11-
Regulatory Compliance
The Company is required to comply with certain federal and state
regulations related to physician self-referral and anti-kickback
rules, the corporate practice of medicine and fee splitting.
The Company continually monitors its contracts and business
practices to make changes as necessary in order to be in
compliance with these regulations. The Company could be subject
to certain fines and penalties if it was determined that its
contracts or business practices violated these regulations;
however, management believes that there would be no material
adverse affect to the Company's results of operations, financial
position or cash flows if such determination was made.
9. LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The health care industry is subject to numerous laws and
regulations of Federal, state, and local governments. These
laws and regulations include, but are not necessarily limited
to, matters such as licensure, accreditation, government health
care program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. In
addition, the Federal government is reviewing certain payment
mechanisms, including Medicare Prospective Payment System rates
for services as those provided by the Company, which could have
an effect on the Company's operations. Recently, government
activity has increased with respect to investigations and
allegations concerning possible violations of fraud and abuse
statutes and regulations by health care providers. Violations of
these laws and regulations could result in expulsion from
government health care programs together with the imposition of
significant fines and penalties, as well as significant
repayments for patient services previously billed. Management
believes that the Company is in compliance with fraud and abuse
statutes as well as other applicable governmental laws and
regulations. Compliance with such laws and regulations can be
subject to future government review and interpretation as well
as regulatory actions unknown or unasserted at this time.
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