-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U+I0m/yREAcc72nv86RZL67h/zPHAvd2f/+f/zIndKIq1S6ryPtmpLpmjraoef3O a8YVrHGLWy3+gpkilQUa8g== 0000889812-96-001402.txt : 19961002 0000889812-96-001402.hdr.sgml : 19961002 ACCESSION NUMBER: 0000889812-96-001402 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL HEALTH AFFILIATES INC CENTRAL INDEX KEY: 0000354761 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 222362097 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09255 FILM NUMBER: 96638035 BUSINESS ADDRESS: STREET 1: 900 SYLVAN AVE CITY: ENGLEWOOD CLIFFS STATE: NJ ZIP: 07632 BUSINESS PHONE: 2015674600 MAIL ADDRESS: STREET 1: 900 SYLVAN AVENUE CITY: ENGLEWOOD STATE: NJ ZIP: 07632 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996. Commission file number: 0-11895 CONTINENTAL HEALTH AFFILIATES, INC. (Exact name of registrant as specified in its charter) Delaware 22-2362097 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 910 Sylvan Avenue Englewood Cliffs, N.J. 07632 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 567-4600 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.02 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 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-K 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-K or any amendment to this Form 10-K. [ ] As of September 27 , 1996, the aggregate market value of the voting stock held by non-affiliates of the registrant was $8,826,436. As of September 27, 1996, 9,288,716 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of definitive proxy statement to be filed not later than October 30, 1996 PART Item 1. Business. General Continental Health Affiliates, Inc. ("CHA" and, together with its subsidiaries, the "Company") provides a variety of non-hospital based health care services to patients. These alternate-site health care services include long term care and assisted living facilities, home infusion therapy (including enteral and parenteral nutrition and intravenous therapies) and provision of medical products and services, including infusion therapy, to patients in long term care facilities. The Company's home infusion and medical products and services businesses are conducted by Infu-Tech, Inc. ("Infu-Tech"), a 59% owned subsidiary. On October 31, 1995, the Company concluded a $46.0 million financing to purchase four facilities which the Company had previously leased and/or managed. In November 1995, the Company changed its fiscal year to end on June 30 of each year. Nursing Homes At June 30, 1996, the Company was operating or managing seven nursing homes with approximately 1,100 beds. Typically, the Company provides lodging, meals and nursing assistance to residents of its nursing homes for a per diem charge and provides limited additional treatment for additional charges. The following table provides information about the nursing homes the Company was operating (as owner or as lessee) or managing at June 30, 1996:
Average Occupancy Percentage ----------------------------------------------------------- Six months Year Number ended ended Location of Beds 1993 1994 June 30, 1995 June 30, 1996 -------- ------- ------ ------ ------------- ------------- Nursing Homes Being Operated: Atlantic City, NJ 104 90% 97% 95% 97% Cedar Grove, NJ 180 96% 96% 96% 95% Cape May Courthouse, NJ 116 96% 98% 97% 97% Philadelphia, PA 135 91% 93% 92% 95% West Orange, NJ 131 81% 78% 92% 94% West Palm Beach, FL 191 95% 92% 91% 74% Nursing Homes Being Managed: Norwood, NJ (Heritage) Skilled 180 99% 98% 98% 98% Residential Care 70 100% 100% 100% 100%
As of June 30, 1996, the Company owned the nursing homes in Atlantic City, Philadelphia, Cedar Grove, West Orange and West Palm Beach and the real property of the long term and residential care facility located in Norwood, New Jersey (the "Heritage Facility"). The Company leases the nursing home in Cape May Courthouse. 2 The Company leases the Heritage Facility to the owner of the facility, Senior Care Foundation, Inc. ("SCF"), a not for profit corporation, for twenty-five years at a rental of $2.4 million per year. The Company manages the Heritage Facility and receives a management fee of 5% of the gross revenues of the Heritage Facility (after the payment of rent to the Company). The operations of SCF are included in the consolidated financial statements from October 31, 1995 which was when the Company purchased the real property of the Heritage facility. The occupancy percentage for the West Palm Beach, Florida nursing home was impacted by a moratorium on admissions imposed in December 1995 as a result of state survey deficiencies. The state resurveyed the facility and the moratorium was lifted (opening the facility to admissions) in May 1996. Although the facility had been reopened to admissions, because certain deficiencies had remained uncorrected for more than six months, applicable regulations require a recommendation of termination of Medicare and Medicaid participation. Although such a recommendation was made by the state agency, notice of such termination has not yet been received. Regulatory practice permits the facility to demonstrate that it has achieved substantial compliance prior to any proposed termination taking effect. In May 1996, the Company closed its nursing home in Pine Brook, New Jersey and sold the assets of that nursing home, other than the land and buildings and certain current assets, to another health care provider for $2.4 million. The Company plans to develop an assisted living facility on the Pine Brook site. The Company has obtained site plan approval to eventually subdivide acreage at the Norwood facility. The Company plans to utilize this acreage to build a 120-unit assisted living facility, if financing becomes available. The Company is a 15% limited partner in a partnership which, in 1987, purchased a property in Teaneck, New Jersey from the Company and constructed a 224-bed congregate care facility (i.e., a facility on which medical and nursing services are available if needed, but are not provided on a regular basis) on the property. The Company receives a fee from the partnership equal to 1% of its revenues, although it is not required to render significant services to the partnership. During 1996, the fees from the partnership totalled $87,212. Infusion Therapy and Other Medical Services The Company, through Infu-Tech, provides infusion therapy (i.e., administration of nutrients, antibiotics and other medications either intravenously or through feeding tubes) and other medical products to patients in their homes, in Infu-Tech's ambulatory suites and in nursing homes. The Company was one of the early marketers of equipment and nutrients for infusion therapy and was one of the first to market equipment and formulations for intravenous infusion of nutrients and medication outside hospitals. Infu-Tech is organized into two service units. The Intravenous Infusion unit provides a broad range of home ambulatory and subacute infusion therapy services, including intravenous total parenteral nutrition therapy, intravenous antibiotic therapy, enteral nutrition therapy, intravenous chemotherapy, intravenous chronic pain management therapy, intravenous hydration therapy and a variety of other therapies. The Contract Services unit provides medical products and services, including enteral nutrition therapy, intravenous infusion therapy, orthotic products, urological products and wound care products, to patients in long term care facilities. 3 Since 1993, the Company has focused on selling products and services through managed health care providers. During 1996, the Company entered into new agreements to provide infusion therapy to members of 19 health maintenance organizations, increasing the total number with which the Company has agreements to 52 managed care companies with approximately 15 million members. The Company's marketing efforts directed at managed care companies resulted in a 38% increase in the number of home infusion patients serviced and a 42% increase in home infusion revenues as of June 1996 compared to June 1995. The agreements with managed care companies are generally on a per diem basis and typically provide that the Company is one, but not the only, provider of infusion therapy, and in some cases other products, to members of the plans. In 1994, Infu-Tech entered into a one-year renewable non-exclusive distribution agreement with Genzyme Corporation for Ceredase(R) enzyme and Cerezyme(TM), which are the only products approved by the FDA as therapy for patients with Gaucher's disease. Genzyme estimates that there are between 2,000 and 2,500 Gaucher patients in the United States who require treatment with these drugs. Cost of the therapy normally ranges from approximately $150,000 to $250,000 per year per patient. Because of this high cost, the Company's percentage mark-up is relatively small. The following table sets forth the percentages of Infu-Tech's revenues, by service unit, from the various therapies, products and services.
Year ended Six months ended Year ended December 31, 1994 June 30, 1995 June 30, 1996 ---------------------------------- ---------------------------------- -------------------------------- Intravenous Contract Total Intravenous Contract Total Intravenous Contract Total Infusion Services Revenues Infusion Services Revenues Infusion Services Revenues ----------- -------- -------- ----------- -------- -------- ----------- -------- -------- Enteral Nutrition 5% 65% 33% 4% 68% 24% 3% 72% 20% Antibiotic 38% - 20% 32% - 22% 30% - 23% TPN 11% - 6% 7% - 5% 7% - 5% Orthotics - 6% 3% - 3% 1% - 1% - Immune Globulin 11% - 6% 9% - 6% 8% - 6% Ceredase/Cerezyme 10% - 5% 26% - 18% 27% - 20% Wound Care - 8% 4% - 8% 2% - 2% 1% Other 25% 21% 23% 22% 21% 22% 25% 25% 25% ----------- -------- -------- ----------- -------- -------- ----------- -------- -------- 100% 100% 100% 100% 100% 100% 100% 100% 100% =========== ======== ========= =========== ======== ======== =========== ======== ========
Intravenous Infusion Therapy Intravenous infusion therapy principally involves the intravenous administration of nutrients, antibiotics or other medications to patients in their homes, in Infu-Tech ambulatory suites, or in Infu-Tech credentialed subacute facilities, often as a continuation of treatment initiated in the hospital. The national non-hospital infusion therapy market has grown to over $4 billion since its inception approximately 16 years ago. The Company believes the primary factors contributing to the rapid growth of the non-hospital infusion therapy market have been health care cost containment pressures, incentives by third party payors to use home care, rapid growth of the elderly population and increased acceptance of home infusion therapy by the medical community and patients. Additionally, the number of therapies that can be administered safely outside the hospital has increased significantly in recent years because of technological innovations such as more sophisticated portable infusion control devices, implantable injection ports, new vascular access devices and advances in drug therapy. Consequently, more infections and diseases that would otherwise have required patients to be hospitalized are now considered treatable without hospitalization. 4 Before accepting a patient for infusion therapy, Infu-Tech consults with the physician or clinician and hospital personnel in assessing the patient's specific medical needs and suitability for infusion therapy. This assessment process includes an analysis of the patient's physical condition as well as social factors such as the stability of the patient's home life and the availability of family members or others who can assist in the administration of the patient's infusion therapy. Once the patient is accepted for therapy, Infu-Tech provides training and education to the patient and his family or others relating to proper infusion techniques, care and use of equipment, care of infusion sites, and other aspects of the patient's infusion therapy. Infusion therapy equipment, consisting primarily of poles and pumps, is owned or leased by Infu-Tech and provided to patients along with other services. Throughout the course of treatment, all prescribed drugs and solutions are delivered directly to the patient's home or to an Infu-Tech credentialed subacute care facility. In approximately 90% of the cases, Infu-Tech's own pharmacies provide the prescribed drugs, solutions and supplies. Due to geography, patients who cannot be adequately serviced through an Infu-Tech-owned pharmacy are covered by one of six satellite pharmacies. Infu-Tech maintains contact with the patient and the patient's physician in order to monitor and, when directed by the physician, refine the patient's plan of care. Infu-Tech's nursing and pharmacy services are available on-call 24 hours a day for consultation, home visits and special prescription needs. A registered nurse clinical-coordinator follows each case and monitors the therapy with the patient, the nurses assigned to the case and the patient's physician. Billing information is coordinated at a central billing department which bills the appropriate payor, in most cases, private insurance companies, and tracks payments. During 1994, Infu-Tech began also to provide infusion therapy services in ambulatory infusion suites attached to its pharmacies, where patients receive infusion therapy on an out-patient basis. In addition, Infu-Tech began arranging with nursing homes and other subacute care facilities to have patients admitted on a short term basis to receive infusion and other subacute therapies. Contract Services Since late 1990, the Contract Services unit has expanded the number of products it offers to nursing homes and other health care institutions, and it expects to offer additional products, embodying advances in health care technology, in the future. On the other hand, changes in reimbursement regulations or interpretations has led the Contract Services unit to reduce sales of products in the past and may do so in the future. Infu-Tech's contract services involve the distribution of products and services to residents in long term care facilities. Products and services are provided through arrangements with the long term care facilities for specific residents' use. Generally, Infu-Tech bills a third party payor, principally Medicare, on behalf of the individual resident. Until late 1990, a large majority of the products and services Infu-Tech provided to residents of long term care facilities involved enteral nutrition therapy. Beginning in late 1990, Infu-Tech began marketing other products to residents of long term care facilities in circumstances in which these products are eligible for reimbursement under Medicare and other programs. Because of this shift, and a recent willingness of some long term care facilities to permit residents to receive intravenous therapies in the facilities (which increases the facilities' revenues), rather than transferring the residents to hospitals for these treatments, the products and services Infu-Tech provides through its contract services unit now include, in addition to enteral feeding, parenteral feeding, medical/surgical products, orthotic products, wound care products, urological products and other supplies. 5 As part of providing its products and services to patients in long term care facilities, Infu-Tech handles the procedures for obtaining reimbursement from Medicare and other third party payors for these products and services. Infu-Tech believes that in a number of instances its ability to manage billing of third party payors is a significant factor in long term care facilities' decisions to retain Infu-Tech to provide products and services to their residents. Infu-Tech's sales representatives call upon long term care facilities within their respective geographical territories to review the medical status of the facilities' residents in order to determine the needs of the individuals for the products and services provided by Infu-Tech. Since most of the residents participate in the Medicare program, the representatives review insurance coverage and the appropriateness of the products and services under Medicare reimbursement regulations. The sales representatives are responsible for processing the paperwork for billing by the central billing department. Orders for products and services are processed through the customer service department at Infu-Tech's corporate offices in Englewood Cliffs and shipped from Infu-Tech's Moonachie, New Jersey warehouse. Infu-Tech primarily uses its own trucks for local (New York-New Jersey) deliveries and common carriers for deliveries outside the local area. Other Activities A wholly owned subsidiary of the Company has a non-exclusive distribution agreement with Eli Lilly Export S.A. to market, sell and distribute Lilly's pharmaceuticals in Russia. The agreement expires December 31, 1996 and the Company is negotiating a new agreement. By June 30, 1996 the Company had total sales of $1,118 under its arrangement with Lilly. Reimbursement For Services The Company estimates that approximately 70% of the revenues of the seven nursing homes the Company operates were third-party reimbursements from Medicare and Medicaid. Governmental reimbursement for nursing home care is at cost-based per diem rates. Infu-Tech is reimbursed for its products and services by Medicare, Medicaid, private payors (private insurance companies, self-insured employers, health maintenance organizations, other managed care systems and patients) and other third party sources. Prior to accepting a patient, Infu-Tech's reimbursement specialists determine the availability and amount of third party coverage and, thereafter, Infu-Tech processes all payment claims on behalf of the patient. Most of Infu-Tech's contract services revenues result from Medicare reimbursement. Infu-Tech has more than thirteen years' experience in billing Medicare. It believes this experience provides it with an advantage over some of its competitors. Medicare provides reimbursement for 80% of the amounts shown on fee schedules it has developed. The remaining 20% co-insurance portion is not paid by Medicare, although in most cases, Medicaid reimburses the remaining 20% for "medically indigent" patients. In other cases, Infu-Tech bills other third party payors or patients responsible for co-insurance reimbursement. Infu-Tech often has difficulty collecting the 20% co-insurance portion of charges for Medicare-eligible items, particularly when there is no third party reimbursement and these sums must be collected directly from patients. Inability to collect the 20% co-insurance portion of bills is the principal reason for Infu-Tech's provision for uncollectible accounts. Infu-Tech also bills private payors (primarily private insurance companies, self-insured employers, health maintenance organizations and managed care systems), which generally pay for services and 6 products based upon contracted rates or "reasonable and customary" charges. Infu-Tech's billing specialists work closely with these payors to maximize reimbursement in the shortest possible time. Private payors have been increasingly concerned about cost containment and often seek to negotiate lower rates directly with providers, including Infu-Tech. While these efforts tend to reduce profit margins, Infu-Tech has for several years been able to operate in this environment. The following table details the sources of payments to Infu-Tech during the twelve months ended June 30, 1996: Home Contract Total Infusion Services Revenues -------- -------- -------- Medicare 5% 82% 23% Private Pay 93% 18% 75% Medicaid 2% - 2% ----- ------ ----- 100% 100% 100% ==== ==== ==== Sales and Marketing The Company's nursing homes have historically been marketed to doctors, hospitals and social services agencies in the areas in which they are located, and directly to patients' families. Recently, they have increasingly been marketed to health maintenance organizations, preferred provider organizations and managed care systems. Each nursing home has an admissions staff which interviews with the family, makes financial arrangements and coordinates the admission of the new resident. Infu-Tech's principal sources of patient referrals are health maintenance organizations, physicians, hospital discharge planners, other hospital officials, nursing homes, insurance companies and other managed care systems. Infu-Tech's products and services are marketed through its sales force and clinicians. Infu-Tech's sales force is responsible for establishing and maintaining referral sources. At June 30, 1996, the sales force included approximately nine full time sales employees and approximately six sales and service representatives, who report to their respective regional managers. Sales employees receive a base salary plus commissions based on revenues. Infu-Tech conducts regular sales training programs, intended to enable its sales force to generate more revenue from current and new sources of patient referrals and to assist them in targeting and developing new revenue sources. The "Infu-Tech" trademark is registered and is established in the areas in which Infu-Tech does business. Suppliers The Company purchases drugs and other materials and leases equipment from many suppliers. The Company has not experienced difficulty in purchasing supplies or leasing equipment. The Company believes there are alternative sources for virtually all the supplies and equipment it requires, other than Ceredase(R) enzyme and Cerezyme(TM), which are only available from one supplier, Genzyme Corporation. Potential Liability and Insurance Participants in the health care market are subject to lawsuits based upon alleged negligence or similar legal theories, many of which involve large claims and significant defense costs. The Company 7 could be subject to such suits. The Company maintains general liability insurance, including insurance against professional and products liability, with coverage limits of $10 million. The Company's insurance policy provides coverage on an "occurrence" basis and is subject to annual renewal. A successful claim against the Company in excess of the applicable insurance coverage could have a material adverse effect upon the Company's business and results of operations. Claims against the Company, regardless of their merit or eventual outcome, also may have a material adverse effect upon the Company's reputation. There can be no assurance that the coverage limits of the Company's insurance policies will be adequate. While the Company has been able to obtain liability insurance in the past, such insurance varies in cost, is difficult to obtain and may not be available in the future on acceptable terms or at all. Competition The Company's nursing homes compete with other nursing homes in the areas in which they are located, as well as, to a limited extent, hospitals and home health care providers. Competition is based primarily on location and quality of the nursing home facilities and price. The segments of the health care market in which Infu-Tech operates are highly competitive. In each of its lines of business there are relatively few barriers to entry, a limited number of national providers, as many of the large national providers have recently merged, and numerous regional and local providers. The principal competitors for sales to patients in long term care facilities are local providers of health care products and the operators of the facilities themselves. The competitive factors most important in Infu-Tech's lines of business are quality of care and service, on-time delivery, reputation with referring health care professionals, ease of doing business with the provider, ability to develop and maintain the confidence of potential sources of patient referrals and price of service. Some competitors in Infu-Tech's lines of business have also attempted to enhance sales by entering into joint ventures or other financial relationships with potential referral sources. Increasingly stringent, and increasingly enforced, laws prohibiting remuneration between health care providers has reduced these arrangements as a competitive factor. Infu-Tech believes that it competes effectively in each of its service areas with respect to all of the above factors. Some of Infu-Tech's current and potential competitors have or may obtain significantly greater financial and marketing resources than Infu-Tech. It is likely that Infu-Tech will encounter increased competition in the future, which could limit Infu-Tech's ability to maintain or increase its market share and could adversely affect Infu-Tech's operating results. Other types of health care providers, including hospitals, physician groups and home health agencies, have entered, and may continue to enter, Infu-Tech's lines of business. Government Regulation Most states require that a certificate of need be obtained prior to establishing a new nursing home or adding beds to an existing nursing home. This can restrict the number of nursing home beds within a specified area. Some states also require governmental approval prior to the acquisition of a nursing home by a new owner. While the need for certificates of need and approval to acquire nursing homes could affect the Company in specific instances, the Company does not believe they would significantly impede any efforts the Company might make to expand its overall nursing home activities. A few states, most notably New York, make it very difficult for nursing homes to be owned by corporations. This could prevent the Company from acquiring or building nursing homes in those states. A New Jersey statute requires that any nursing home in that state which participates in the Medicaid program may not discriminate in admission policy against Medicaid patients until the number 8 of Medicaid patients is a specified percentage (currently 45%) of the beds in the nursing home. Generally, non-Medicaid patient reimbursement is at higher rates than Medicaid patient reimbursement. Health care is an industry subject to extensive regulation and frequent regulatory change. Changes in the law or new interpretations of existing law can have a dramatic effect on permissible activities, the relative cost associated with doing business and the amount of reimbursement by government and third party payors, such as Medicare and Medicaid. Charges under government programs are also subject to audit. A reduction in coverage or payment rates by third party payors, or significant audit adjustments, can have a material adverse effect on the Company's business and results of operations. The Federal government and each of the states in which Infu-Tech currently operates regulate some aspects of Infu-Tech's business. In particular, the operations of Infu-Tech's branch locations are subject to Federal and state laws. Infu-Tech's operations also are subject to state laws governing pharmacies, nursing services and certain types of home health agency activities. Certain of Infu-Tech's employees are subject to state laws and regulations governing the ethics and professional practice of people providing various therapies, pharmacy and nursing. Certificates of need, permits or licenses may be required for certain business activities and may be restricted or otherwise difficult to obtain. Infu-Tech believes it and its employees have all certificates of need, permits and licenses which are required for the business currently being conducted by Infu-Tech. The failure to obtain, renew or maintain any of the required regulatory approvals or licenses could adversely affect Infu-Tech's business and could prevent the location involved from offering products and services to patients. There are Federal laws which generally prohibit any remuneration in return for the referral of Medicare or Medicaid patients, and prohibit the referral of any Medicare or Medicaid patient by a health care practitioner to a provider with which the practitioner has an ownership or financial interest. In addition, the Federal government and several states in which Infu-Tech operates have laws that prohibit financial arrangements, certain direct or indirect payments or fee-splitting arrangements between health care providers. Infu-Tech maintains an internal regulatory compliance review program and uses in house counsel to monitor compliance with all such laws and regulations. Increased attention has been paid recently to enforcement of these laws and regulations. Possible sanctions for failure to comply with these laws and regulations include exclusion from the government programs, loss of license and civil and criminal penalties. Executive Officers of the Company The following is a list of the executive officers of the Company as of September 27, 1996, together with a brief description of the business experience of the last five years of the officers who are not directors. A brief description of the business experience of officers who are directors is included in Item 10, "Directors." Name Office Age - ---- ------ --- Jack Rosen Chairman, President and Director 50 Joseph Rosen Vice President, Assistant Secretary and 45 Director Israel Ingberman Secretary, Treasurer and Director 50 Benjamin Geizhals Vice President, Assistant Secretary and 47 General Counsel S. Colin Neill Vice President, Chief Financial Officer 50 Richard S. Gordon Executive Vice President 39 9 Benjamin Geizhals joined the Company in September 1987 as Vice President and General Counsel. Since the former Chief Financial Officer left the Company in October 1995, Mr. Geizhals has performed on an interim basis some of the functions of the Chief Financial Officer. S. Colin Neill has been Vice President and Chief Financial Officer of the Company and Infu-Tech since July 1996. Prior to that Mr. Neill was Acting Vice President/Finance, Secretary, Treasurer and Chief Financial Officer of Pharmos Corporation, a publicly traded biopharmaceutical company from March 1995 to July 1996. Prior to joining Pharmos, Mr. Neill worked as a financial consultant. From October 1992 until December 1993, Mr. Neill was Vice President - Finance of BTR, Inc., a British diversified manufacturing company. From January 1991 to October 1992, he worked as a financial consultant. From 1986 through January 1991, Mr. Neill served as Vice President - Financial Services of BOC Group, Inc., a British industrial gases and health care company. He is a certified public accountant and worked at Arthur Andersen & Co. for four years followed by eight years with Price Waterhouse. Richard S. Gordon has been employed by Infu-Tech since March 1994 as an Executive Vice President and became an Executive Vice President of the Company in August 1994. From 1989 until 1994, he served as Director of Policy and Planning for Governor Evan Bayh of Indiana, focusing on healthcare, telecommunications, education and economic development planning. Employees At June 30, 1996, the Company had approximately 128 full-time management, marketing, technical-professional and clerical personnel, including Infu-Tech's approximately 113 employees. The Company's seven nursing homes were staffed by approximately 178 full-time management, marketing, technical-professional and clerical personnel, approximately 220 registered or practical nurses and 600 other people, for a total of approximately 1,000 people, all of whom were obtained through an employee leasing organization. Five of the Company's nursing homes have collective bargaining agreements and two are negotiating new agreements (one an initial collective bargaining agreement and one for a renewal). The Company believes its relations with its employees are generally satisfactory. As of June 30, 1996, Infu-Tech had approximately 113 employees. Of these employees, four were in executive capacities (in addition to executives of CHA who rendered services to Infu-Tech), approximately 15 were in sales or service capacities, approximately 70 were in clinical or pharmaceutical capacities and the remainder were administrative or distribution personnel. Infu-Tech's employees are not currently represented by a labor union or other labor organization. Infu-Tech believes that its employee relations are good. Item 2. Description of Properties. As of June 30, 1996, the Company owned the nursing homes in Atlantic City, Philadelphia, Cedar Grove, West Orange and West Palm Beach and the real property of the long term and residential care facility located in Norwood, New Jersey (The "Heritage Facility"). (See Item 1, "Business--Nursing Homes.") The Company leases the nursing home in Cape May Courthouse. The Company maintains corporate offices in Englewood Cliffs, New Jersey and it leases six branch offices for Infu-Tech's branch operations. Offices provide a home base for salespeople, clinicians and administrative and technical personnel, as well as storage for excess equipment and supplies. In addition, Infu-Tech maintains a central pharmacy and a warehouse in Moonachie, New Jersey and 10 pharmacies and ambulatory infusion suites in Memphis, Tennessee, Boston, Massachusetts and Philadelphia, Pennsylvania. The lease payments for the six branch offices, the central pharmacy, the Memphis, Boston and Philadelphia pharmacies, the infusion suites and the warehouse total $20,912 per month, payable to unrelated parties. The Company pays rent of $27,185 per month for corporate office space to an entity owned by the principal stockholders of CHA, one of whom is the Company's Chairman of the Board and President. The Company believes that this rent is at or below the market rate for comparable space in the area. In communities which cannot be serviced from an Infu-Tech office, staffing and administration is handled by a representative residing in the area. The Company believes its facilities are adequate for its current needs. Item 3. Legal Proceedings. In October 1995, the Company was sued in an action in the United States District Court for the District of New Jersey entitled Rubin v. Continental Health Affiliates in which the plaintiff seeks $140,000 he claims is due him under a consulting contract and $1,250,000 for alleged failure of the Company to issue 250,000 shares of common stock to him in May 1992. The Company is also subject to certain legal proceedings and claims which arise in the ordinary course of its business. The Company does not believe any litigation to which it is a party is likely to have a material adverse effect upon its financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during 1996. 11 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters. The Common Stock is traded in the over-the-counter market and is included on NASDAQ's OTC Bulletin Board Service, but is not listed on an exchange or included in a system which reports actual purchase and sale transactions. According to National Quotation Bureau, Inc., the high bid and low bid prices of the Common Stock in the over-the-counter market during each calendar quarter during 1994 and 1995, and through June 30, 1996 were as follows: High Low Bid Bid 1994: First Quarter 1 15/16 3/8 Second Quarter 1 1/2 1/2 Third Quarter 1 1/32 1/2 Fourth Quarter 1 1/2 1/2 1995: First Quarter 1 3/8 1/2 Second Quarter 1 1/4 1/2 Third Quarter 1 7/16 1/2 Fourth Quarter 1 1/2 1 1/16 1996: First Quarter 1 9/16 1 1/16 Second Quarter 3 1/16 1 The Company has not declared any cash dividends on its Common Stock since the Common Stock was initially sold to the public in 1983, and the Company has no current plans to declare any dividends on its Common Stock. Dividends on the Company's 5% Exchangeable Preferred Stock are cumulative and are payable semi-annually on January 27 and July 27 at the rate of $5 per share per year, when and as declared by the Company's Board of Directors. Although covenants relating to the 141/8% Subordinated Debentures limited the Company's ability to pay dividends, that limitation was waived as to the dividend paid on January 27, 1994 and the covenant was amended to permit the Company to pay dividends, not exceeding $70,000 in any year, with regard to the 5% Exchangeable Preferred Stock. The dividends on the 13,884 outstanding shares of 5% Exchangeable Preferred Stock total less than $70,000 per year. Under Delaware law, the Company is only permitted to pay dividends out of accumulated surplus or the current or prior year's net profits. At June 30, 1996, the Company had a surplus of $2,196 and during the twelve months ended June 30, 1996, it had a net income of $786. In August 1996, the Company made an offer to exchange shares of a new 11% Convertible Preferred Stock for its outstanding 141/8% Subordinated Debentures due September 1, 1996. For each $1,000 face amount of debentures exchanged, the holder would receive one share of 11% Convertible Preferred Stock: with a liquidation preferance of $1,000; convertible until September 1, 1999 to common stock which has a market value of $1,100, and after September 1, 1999, a market value of $1,000; entitled to annual dividends of $110. The Company has deposited in escrow with the Debenture Trustee, 12 funds sufficient to pay redemption of all outstanding debentures (assuming that no debentures were exchanged) plus interest. Because of this escrow deposit, the debentures are not in default although due on September 1, 1996. The Exchange Offer expires on October 4, 1996. At June 27, 1996 there were 385 holders of record of the Company's Common Stock. 13 Item 6. Selected Financial Data. The following table sets forth selected financial data of the Company and should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 1996, the six months ended June 30, 1995 and for each of the three years in the periods ended December 31, 1994 and 1993 and the related notes included elsewhere in this Report:
Six months Year ended ended Year Ended December 31, INCOME STATEMENT DATA June 30, 1996 June 30, 1995 1994 1993 1992 ------------- ------------- --------------------------------- (in thousands, except per share amounts) Revenues $ 69,880 $ 28,724 $ 54,378 $ 61,270 $ 60,364 ---------- --------- ---------- --------- ---------- Income (loss) from operations 4,116 (924) (917) 1,647 1,818 Gain on sale of common stock of subsidiary -- -- -- -- 4,871 Interest and dividend income 221 183 98 184 134 Interest and other financing costs (4,044) (632) (1,481) (3,082) (4,460) Other income, net 550 458 877 1,268 1,071 Minority interest (494) 353 375 (194) -- ---------- --------- ---------- --------- ---------- Income (loss) from continuing operations before income taxes 349 (562) (1,048) (177) 3,434 Provision (benefit) for income taxes 270 -- (341) (385) 1,750 ---------- --------- ---------- --------- ---------- Income (loss) from continuing operations 79 (562) (707) 208 1,684 Discontinued operations(a): Income (loss) from operations -- -- -- -- -- Gain on disposal -- -- -- -- 150 ---------- --------- ---------- --------- ---------- Income (loss) before extraordinary items 79 (562) (707) 208 1,834 Extraordinary items (b) 777 -- 1,058 548 1,708 Cumulative effect of accounting change -- -- -- 973 -- ---------- --------- ---------- --------- ---------- Net income (loss) 856 (562) 351 1,729 3,542 Preferred dividends (70) (35) (69) -- -- ---------- --------- ---------- --------- ---------- Net income (loss) available to common shareholders $ 786 $ (597) $ 282 $ 1,729 $ 3,542 ========== ========= ========== ======== ========== Earnings (loss) per share: Continuing operations $ .00 $ (.08) $ (.09) $ .04 $ .34 Discontinued operations -- -- -- -- .03 Extraordinary items .09 -- .13 .10 .34 Cumulative effect of accounting change -- -- -- .19 -- ---------- --------- ---------- --------- ---------- Net income (loss) available to common shareholders $ .09 $ (.08) $ .04 $ .33 $ .71 ========== ========= ========== ======== ========== As of As of As of December 31, BALANCE SHEET DATA June 30, 1996 June 30, 1995 1994 1993 1992 ------------- ------------- --------------------------------- (in thousands) Working capital (deficit) $ 45 $ (6,060) $ (4,392) $ (13,586) $ (30,814) Total assets 75,572 29,675 30,485 46,194 46,700 Total liabilities and deferred income 67,847 28,119 27,980 43,755 52,773 Minority interest 2,029 1,524 1,877 2,326 1,687 Manditorily redeemable preferred stock 3,500 -- -- -- -- Stockholders' equity (deficit) 2,196 32 628 113 (7,760)
- -------------- (a) Represents operations of the Home Health Care Division which was sold in June 1990 (net of income taxes). (b) Represents net gains on extinguishment of Company debt (net of income taxes) in 1991, 1993, 1994 and 1996 and utilization of tax loss carryforward in 1992. Also includes gain on disposal of assets of a longterm care facility in Pine Brook, NJ. 14 Item . Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Twelve Months Ended June 30, 1996 Compared with (Unaudited) Twelve Months Ended June 30, 1995 Total revenues were $13,836,000, or 25% higher for fiscal year 1996 compared to fiscal year 1995 in part because of revenues of $7,444,000 pertaining to the Heritage Facility (which was acquired on October 31, 1995) for the eight month period from November 1, 1995 to June 30, 1996. Revenues were reduced by $1,103,000, offset by a reduction of expenses of approximately $517,000, in the third and fourth quarters attributable to suspension of admissions at one of the Company's nursing homes from December 1995 to May 1996. Nursing home services revenues increased by $8,075,000, or 22%. Excluding revenues pertaining to the Heritage Facility, nursing home services revenues increased by $631,000 or 2%. Infusion therapy and other medical services revenues increased by $5,761,000, or 29%, from $19,679,000 in 1995 to $25,440,000 in 1996, primarily due to a $5,482,000, or 42%, increase in home infusion division revenues which was caused by a 38% increase in the number of patients serviced with improved pricing. Personnel costs increased by $6,761,000, or 24%. Excluding the Heritage Facility, personnel costs increased by $3,293,000, or 11%, primarily attributed to normal cost of living increases, use of Company personnel to perform some services previously performed by outside consultants and higher state mandated respiratory therapy costs. Costs of medical and nutritional products sold to patients and other customers increased by $2,857,000, or 31%, from $9,144,000 in 1995 to $12,001,000 in 1996. As a percentage of infusion therapy and other medical services revenues, medical and nutritional product costs was 46% in 1995 and 47% in 1996. Health care and lodging expenses, which are incurred in connection with nursing home services, decreased by $2,400,000 or 22% due to a $1,975,000 decrease of rent expense as a result of the acquisition of nursing homes which were previously leased, offset by expenses of the Heritage facility. Excluding the Heritage Facility, health care and lodging expenses decreased by $3,730,000, or 34%. Selling, general and administrative costs increased by $647,000, or 10%. Excluding the Heritage Facility, selling, general and administrative costs increased by $317,000, or 5%, primarily attributed to increases in distribution costs incurred to support the 38% increase in home infusion patients serviced and increased legal expenses. The provision for uncollectible accounts was 2% of revenues in 1996 and 3% of revenues in 1995. As a result of the acquisition of four facilities in the October 31, 1995 refinancing, depreciation and amortization expenses increased by $844,000 and interest and other financing costs increased by $2,851,000. 15 Other income of $550,000 in 1996 consisted of amortization of deferred income of $543,000, an unrealized foreign currency translation gain of $130,000, which were offset by miscellaneous expenses. Other income of $995,000 in 1995 consisted of amortization of deferred income of $866,000, $188,000 of income resulting from an adjustment to accruals related to the deconsolidation of the Heritage facility, offset by a foreign currency translation loss of $402,000. Minority interest in profit of subsidiary of $494,000 in 1996 and minority interest in loss of subsidiary of $538,000 in 1995 represents the portion of the net income or loss of Infu-Tech allocable to minority stockholders. The provision for income taxes in 1996 reflects use of a portion of the Company's net operating loss carryforwards. In May 1996, the Company closed one of its nursing homes and sold its assets (excluding land, building and certain current assets). The extraordinary gain recorded was $693,000. The preferred stock dividend related to 5% exchangeable preferred stock. Dividends on subsidiaries preferred stock issued as part of the October 31, 1995 refinancing are accounted for under interest and financing costs. The net income available to common shareholders in 1996 was $786,000 or 9 cents per share compared to a net loss applicable to common shareholders in 1995 of $1,027,000 or 13 cents per share. The net income available to common shareholders in 1996 was due to extraordinary gains, principally a gain on closing a nursing home and sale of certain of its assets. Six Months Ended June 30, 1995 Compared with Unaudited Six Months Ended June 30, 1994 Total revenues during the first six months of 1995 increased by $1,666,000, or 6%, compared with the same period of the prior year, even though revenues of the Heritage Facility were included through March 16, 1994, but 1995 revenues include only fees for managing the Heritage Facility. Excluding revenues pertaining to the Heritage Facility in both years, total revenues increased by $3,392,000, or 14%. Nursing home services revenues decreased by $1,817,000, or 9%. Excluding revenues pertaining to the Heritage Facility in both years, nursing home services revenues decreased by $91,000, or 1%. Excluding the Heritage Facility in both years, total patient days decreased 1%, primarily due to a 40 bed reduction in the number of available beds at one of the Company's nursing homes, partially offset by a 3% increase in patient days at the other facilities. The occupancy percentage increased from 91.4% in 1994 to 94.1% in 1995. Infusion therapy and other medical services revenues increased by $3,483,000, or 50%, primarily due to a $3,800,000, or 110%, increase in home infusion division revenues. This increase is partially attributed to a 75% increase in the number of patients serviced. Most of the additional home infusion patients were obtained through marketing efforts directed at managed care companies. These patients are normally serviced under agreements with significant price discounts or under other arrangements which substantially reduce prices. The increase in home infusion revenues was also affected by the Company's beginning to provide in early 1994 Ceredase(R) enzyme and Cerezyme(TM) infusion therapy ("Ceredase(R)") to patients with Gaucher's disease. Sales of Ceredase(R) in the 1995 period were $1,945,000, compared to $175,000 in the same period of 1994. Ceredase(R) is a very high priced drug therapy (approximately 16 $20,000 per month per patient), but due to its high product cost per revenue dollar, it has a very low gross profit margin percentage. Personnel costs increased by $9,000. Excluding the Heritage Facility, personnel costs increased by $1,053,000, or 8%, primarily attributed to normal cost of living increases, higher Infu-Tech nursing costs incurred to support the 75% increase in home infusion patients serviced and increased Infu-Tech pharmacy payroll costs due to new pharmacy operations and the higher number of home infusion patients serviced. Costs of medical and nutritional products sold to patients and other customers increased by $2,430,000, or 85%. As a percentage of infusion therapy and other medical services revenues, medical and nutritional product costs increased from 41% in 1994 to 51% in 1995. The increase is primarily attributed to the lower home infusion pricing and the Ceredase(R) sales discussed above. Health care and lodging expenses, which are incurred in connection with nursing home services, decreased by $412,000, or 7%. Excluding the Heritage Facility, health care and lodging expenses increased by $59,000, or 1%. Selling, general and administrative costs increased by $280,000, or 10%. Excluding the Heritage Facility, selling, general and administrative costs increased by $330,000, or 12%, primarily attributed to higher Infu-Tech distribution costs incurred to support the 75% increase in home infusion patients serviced, start-up costs associated with new businesses and higher rent, travel and entertainment costs. The provision for uncollectible accounts was 3% of revenues in both the 1995 and the 1994 periods. Depreciation and amortization expenses decreased by $135,000. Excluding the Heritage Facility, depreciation and amortization expenses decreased by $17,000, because certain leasehold improvements became fully amortized during the second quarter of 1994. Interest and dividend income increased by $131,000, primarily due to $148,000 of interest income earned on a $7.4 million mortgage note receivable in 1995. Interest on this note receivable was not recorded as income in 1994 because agreements of the obligor prevented it from paying that interest. Interest and other financing costs decreased by $288,000, primarily due to lower debt balances. Other income of $458,000 in 1995 and $340,000 in 1994 primarily consisted of amortization of deferred income of $579,000 in both 1995 and 1994 and $188,000 of income in 1995 resulting from an adjustment to accruals related to the deconsolidation of the Heritage Facility, partially offset by unrealized foreign currency translation losses of $309,000 in 1995 and $225,000 in 1994. Minority interest in loss of subsidiary of $353,000 in 1995 and $190,000 in 1994 represents the portion of the net loss of Infu-Tech allocable to minority stockholders. Due to uncertainty about the ability of Infu-Tech, a 59% owned subsidiary which files its own tax returns, to recognize the tax benefit of its 1995 operating loss, Infu-Tech did not record a tax benefit of that loss. Primarily because of this, the Company did not record any tax benefit for the 1995 period. Management of the Company anticipates that Infu-Tech will in the future have sufficient taxable income to recover the benefit of prior period losses which were recorded as deferred tax assets at June 30, 1995. With regard to the six months ended June 30, 1994, the Company recorded a benefit for income taxes of $487,000, consisting of $171,000 absorbed by taxes on extraordinary gains and $316,000 resulting from losses of Infu-Tech. 17 The 1995 loss was $562,000 ($.08 per share) compared to the same period prior year loss before extraordinary gains of $165,000 ($.02 per share). The extraordinary gains of $1,058,000 in the same period of 1994 represented the amounts by which bank loans were satisfied for less than their principal amounts, net of transaction costs and income taxes. The preferred stock dividend related to the 5% exchangeable preferred stock. The net loss applicable to common shareholders in the six months ended June 30, 1995 was $597,000 ($.08 per share) compared to net income applicable to common shareholders in the first six months of 1994 of $858,000 ($.11 per share). 1994 Compared with 1993 Total revenues decreased by $6,892,000, or 11%, in 1994 compared with 1993, as revenues of the Heritage Facility were included for the full year in 1993 but only through March 16 in 1994. Excluding the Heritage Facility in both years, total revenues increased by $942,000, or 2%. Nursing home services revenues decreased by $6,175,000, or 14%. Excluding the Heritage Facility in both years, nursing home services revenues increased by $1,659,000, or 5%, primarily attributed to higher per diem rates and larger retroactive rate adjustments related to prior periods. Excluding the Heritage Facility in both years, total patient days decreased slightly, but due to a 40 bed reduction in the number of available beds at one of the Company's nursing homes during the third quarter of 1994, the occupancy percentage increased from 90.8% in 1993 to 92.3% in 1994. During 1994, restrictions in the agreement governing a loan to Senior Care Foundation, Inc. ("SCF"), the not-for-profit corporation which had purchased the Heritage Facility from the Company, prevented SCF from paying management fees of $406,000 and interest of $174,000, which were due to the Company between March 17 and December 31, 1994. No income was recorded with regard to those management fees and interest. Because the Company waived the right to receive the 1994 management fees and interest, SCF should be able to pay the management fees and interest which become due in 1995. Infusion therapy and other medical services revenues decreased by $717,000, or 4%. The decrease was the result principally of major declines in revenues from orthotic products and enteral therapy, partially offset by increases in home infusion revenues, including revenues from infusion therapy to patients with Gaucher's disease. Orthotic product revenues declined by $2,429,000, or 85%, due to changes in Medicare reimbursement determinations, effective January 1, 1994, which made certain orthotic products no longer eligible for reimbursement under Medicare. In addition, contract services enteral therapy revenues declined $1,471,000, or 23%, due to a continuation of a several year decrease in enteral patients, which is primarily attributed to an increasing number of nursing home operators providing enteral therapy services themselves. Home infusion division revenues increased $2,162,000, or 32%, primarily attributed to a 40% increase in the number of patients serviced. Most of the additional home infusion patients were obtained through successful marketing efforts directed at managed care companies. These patients are normally serviced under agreements with significant price discounts or under other arrangements which substantially reduce prices. The increase in home infusion revenues was also affected by the Company's beginning in 1994 to provide Ceredase(R) enzyme and Cerezyme(TM) infusion therapy ("Ceredase(R)") to patients with Gaucher's disease. Sales of Ceredase(R) in 1994 were approximately $880,000. Ceredase(R) is a very high priced drug therapy (approximately $20,000 per month per patient), but due to its high product cost per revenue dollar, it has a very low gross profit margin percentage. In addition, 1994 revenues included approximately $523,000 related to ostomy 18 irrigation sets which were sold in 1992, which were not recorded as revenues at that time due to the uncertainty of reimbursement. Personnel costs decreased by $2,178,000, or 7%. Excluding the Heritage Facility in both years, personnel costs increased by $1,721,000, or 7%, primarily attributed to normal cost of living increases and the hiring of additional Infu-Tech marketing and sales personnel as part of the strategy to aggressively pursue managed care contracts, as well as to implement recently signed managed care contracts. In addition, Infu-Tech nursing costs increased to support the 40% increase in home infusion volume and Infu-Tech pharmacy personnel costs increased due to new pharmacy operations and the higher home infusion volume. Costs of medical and nutritional products sold to patients and other customers increased by $127,000, or 2%. As a percentage of infusion therapy and other medical services revenues, medical and nutritional product costs increased from 39% in 1993 to 41% in 1994, and excluding the aforementioned ostomy revenue recognized in 1994, costs increased to 43%. The increase in costs as a percentage of sales is primarily attributed to the lower home infusion pricing and the low profit margin Ceredase(R) sales discussed above. Health care and lodging expenses, which are incurred in connection with nursing home services, decreased by $1,260,000, or 10%. Excluding the Heritage Facility in both years, health care and lodging expenses increased by $355,000, or 3%, primarily attributed to general cost increases. Selling, general and administrative costs decreased by $73,000, or 1%. Excluding the Heritage Facility, selling, general and administrative costs increased by $226,000, or 4%, primarily attributed to costs associated with settling a lawsuit. The provision for uncollectible accounts was 3% of revenues in both 1993 and 1994. Depreciation and amortization expenses decreased by $551,000. Excluding the Heritage Facility in both years, depreciation and amortization expenses decreased by $96,000, as certain leasehold improvements became fully amortized during the second quarter of 1994. Interest and dividend income decreased by $86,000, primarily due to lower Infu-Tech cash and cash equivalents and lower notes receivable balances. Interest and other financing costs decreased by $1,601,000, primarily due to lower debt balances. Other income of $877,000 in 1994 and $1,268,000 in 1993 primarily consists of an unrealized foreign currency translation loss of $267,000 in 1994 and an unrealized foreign currency translation gain of $137,000 in 1993, amortization of deferred income pertaining to the 1988 sale and leaseback of three nursing homes of $1,032,000 in both 1994 and 1993, and $126,000 in each year of amortization of a $628,000 payment received by the Company in 1992 as consideration for the Company's releasing the buyer of the Company's former Home Nursing Division from an agreement not to sell infusion therapy services and the Company's agreeing not to provide nursing services in California, Arizona or Tennessee for a period of five years. Minority interest in loss of subsidiary of $375,000 in 1994 and in earnings of subsidiary of $194,000 in 1993 represents the portion of the net income or loss of Infu-Tech allocable to minority stockholders. 19 The benefit for income taxes of $341,000 in 1994 consists of the benefit of the $171,000 income tax provision related to the extraordinary gains and the $220,000 benefit for income taxes for Infu-Tech, a 59% owned subsidiary which files its own Federal income tax return. The benefit for income taxes of $385,000 in 1993 consists of $318,000 of prior period income tax refunds to the Company and the benefit of the $381,000 income tax provision related to the extraordinary gain, partially offset by the provision for income taxes for Infu-Tech. The 1994 loss before extraordinary gains and cumulative effect of accounting change was $707,000 ($.09 per share) compared to prior year income of $208,000 ($.04 per share). The extraordinary gains of $1,058,000 in 1994 represented the amounts by which bank loans were satisfied for less than their principal amounts, net of transaction costs and income taxes. The extraordinary gains of $548,000 in 1993 consisted of a gain of $1,026,000 pertaining to a Bond exchange and a loss of $97,000 pertaining to a Debenture exchange transaction, net of applicable income taxes. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and has recognized a benefit of $973,000 (net of minority interest of $445,000) in 1993 to record the cumulative effect of the change in accounting for income taxes. The preferred stock dividend relates to 5% exchangeable preferred stock issued in October and November 1993 in exchange for 6% Swiss franc denominated Bonds. Net income available to common shareholders in 1994 was $282,000 or $.04 per share, compared to $1,729,000, or $.33 per share, in 1993. Liquidity and Capital Resources At June 30, 1996, the Company had stockholders' equity of $2,196,000 and total liabilities of $71,347,000. The total liabilities at June 30, 1996 included debt of $54,057,000, which included SFr 830,000 (approximately $662,000) principal amount of 6% Swiss franc denominated convertible bonds which remain unpaid although they matured on June 27, 1995 (the "Bonds"); SFr 619,500 (approximately $494,000) principal amount of 8% Swiss franc denominated bonds due June 27, 1998; $272,000 principal amount of a secured loan ("Secured Loan") due November 1997; $1,200,000 principal amount of 141/8% subordinated debentures due September 1996 (the "Subordinated Debentures"); $1,213,000 principal amount of 8% notes due 1999; and $3,400,000 principal amount of 6% notes due 2003. In August 1996, the Company made an offer to exchange shares of a new 11% Convertible Preferred Stock for all its remaining 141/8% Subordinated Debentures due September 1, 1996. For each $1,000 face amount of debentures exchanged, the holder would receive one share of 11% Convertible Preferred Stock; with a liquidation preference of $1,000; convertible until September 1, 1999 to common stock which has a market value of $1,100, and after September 1, 1999, a market value of $1,000; entitled to annual dividends of $110. The Company has deposited in escrow with the Debenture Trustee, funds sufficient to pay redemption of all outstanding debentures plus interest. Because of this escrow deposit, the debentures are not in default although due on September 1, 1996. The Exchange Offer expires on October 4, 1996. 20 On October 31, 1995, the Company made a 15 year borrowing of $41.0 million secured by mortgages on four of the Company's nursing homes and a five year borrowing of $1.5 million secured by 8 acres of land in West Orange, New Jersey. In addition, four subsidiaries of the Company sold preferred stock for a total of $3.5 million. The $46.0 million proceeds of those transactions were used to purchase the four nursing homes which secure the $41.0 million borrowing (three of which previously had been operated by the Company under leases and the fourth of which the Company had sold in 1990 and managed under a management contract since then) and to repay $301,000, and extend the balance of a $601,000 secured note which would have matured in December 1995. At the same time, the Company converted $1,476,000 of trade payables into a three year note. The current portion of the total borrowings issued on October 31, 1995 totals $1.2 million. When the Bonds matured on June 27, 1995, SFr 2,900,000 (approximately $2,525,000) principal amount, together with accrued interest of SFr 174,000 (approximately $152,000), was outstanding. Between June 30, 1995 and June 30, 1996, the Company acquired SFr 2,070,000 principal amount of Bonds, including accrued interest on those Bonds, for a total of SFr 1,028,170 and $315,000 plus a SFr 619,500 note maturing in June 1998. The Company's cash and cash equivalents balance increased from $546,000 at June 30, 1995 to $2,900,000 at June 30, 1996. Included in the June 30, 1996 balance is $691,000 held by Infu-Tech. Of the remaining cash of $2,209,000 held by the Company, $1,033,000 is held in escrow. In connection with the initial public offering of Infu-Tech common stock, the Company entered into a management and non-competition agreement with Infu-Tech, expiring September 30, 1997, which prohibits Infu-Tech from lending money to (or borrowing money from) the remainder of the Company. The Company in total used $6,025,000 of cash in operating activities primarily due to an increase accounts receivable of $5,349,000, an increase in other assets of $2,755,000, a decrease in accounts payable of $2,174,000 offset by an increase in other current liabilities of $1,717,000 and net income of $856,000. Of the $5,349,000 increase in accounts receivable, $2,835,000 is attributable to Infu-Tech. At June 30, 1996, the balance in net accounts receivable for Infu-Tech was 57% higher than the balance at June 30, 1995. Infu-Tech's overall outstanding net accounts receivable has increased from 59 days' sales at June 30, 1995 to 84 days' sales at June 30, 1996, primarily as a result of a slow-down in payments from Medicare and managed care companies. Medicare payments have been delayed due to changes in reimbursement policies, while managed care companies have experienced delays in processing payments due to a higher volume of claims. As a result, Infu-Tech has experienced increased delays in having its claims processed as well as an increase in the number of initial claims rejected. This is an industry-wide problem and Infu-Tech believes that claims processing will improve and the days' sales outstanding of accounts receivable will decrease as these problems are resolved. The increase in accounts receivable attributable to the nursing home division was due to an accrual of retroactive Medicare payments resulting from anticipated rate adjustments. The Company (excluding Infu-Tech) used $6,248,000 of cash in operating activities. 21 The Company has no arrangements under which it can make borrowings. At June 30, 1996, the Company had working capital of $45,000. Excluding Infu-Tech, which had working capital of $4,696,000, the Company's working capital was a deficit of $4,651,000. Further, at June 30, 1996, Infu-Tech's cash and cash equivalents of $691,000 were $145,000 less than the balance of $546,000 at June 30,1995 and its accounts payable of $2,779,000 were, as discussed above, $437,000 higher than the $2,342,000 at June 30, 1995. During 1996, the Company invested a net of $45,007,000 in property, plant and equipment, consisting mostly of the nursing home facilities purchased as a result of the October 31, 1995 financing and nursing home facility improvements. During the twelve months ended June 30, 1996, the Company repaid $1,063,000 of short-term borrowings and $643,000 of long-term borrowings and paid preferred dividends of $70,000. At June 30, 1996, the Company had approximately $3.3 million of debt due in 1997 (consisting primarily of the outstanding Bonds, which had already matured, $1.2 million of Subordinated Debentures due in September and debt relating to the Nomura financing. In November 1996, the Company will begin to make mandatory redemption payments of its Preferred Stock of $73,000 per month. The Company does not have any material commitments for capital expenditures. The Company believes that it will be able to generate sufficient funds to meet ongoing obligations from operating cash flow or the realization of assets into cash. Recently Issued Accounting Standards In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which will become effective on July 1, 1996 for the Company. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed. The effect of the adoption of SFAS No. 121 has not been determined by the Company. In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes an alternative method of accounting for stock-based compensation awarded to employees such as the stock options the Company grants to employees. SFAS No. 123 provides for the recognition of compensation expense based on the fair value of the stock-based award. The standard allows companies to continue to measure compensation cost in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Companies electing to retain this method must make pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. The Company plans to continue to use APB No. 25, which does not require the Company to record compensation expense for the stock options it awards to employees. In 1997, the Company will disclose the pro forma effect of the fair value method on 1996 and 1997 net income and earnings per share. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements and supplementary data required by this item appear beginning at page F-1. Item 9. Disagreements on Accounting and Financial Disclosure. None. 22 PART IV Item 14. Exhibits, Financial Statements Schedule, and Reports on Form 8-K. (a) Documents filed as part of this Report. 1. Financial Statements Listed on Index to Consolidated Financial Statements and Financial Statement Schedule. 2. Financial Statement Schedule Listed on Index to Consolidated Financial Statements and Financial Statement Schedule. 3. The following exhibits are filed with this Report or incorporated by reference: 3(a) Certificate of Incorporation, as amended. (1)(6) 3(b) By-Laws, as amended. (1) 4(a) Specimen of Common Stock Certificate. (1) 4(b) Public Bond Issue Agreement dated as of May 31, 1985 with Banque Gutzwiller, Kurz, Bungener S.A. as representative of a consortium of Swiss financial institutions. (2) 4(c) Indenture dated as of September 4, 1986 relating to 14-1/8% Subordinated Debentures due 1996. (3) 4(d) Supplemental Indenture No. 1 dated as of September 27, 1991. (10) 10(a) Agreement dated July 20, 1987 among Continental Teaneck Realty Inc., Forest City Residential Development Inc. and the Company. (4) 1O(b) Certificate and Articles of Limited Partnership of CR Teaneck Limited Partnership. (4) lO(c) Lease dated November 28, 1988 between Midlantic National Bank, Trustee, and Pompton Avenue Associates Inc. (5) 10(d) Lease dated November 28, 1988 between Midlantic National Bank, Trustee, and Jayber, Inc. (5) 10(e) Lease dated December 28, 1988 between Midlantic National Bank & Trust Company/Florida, Trustee, and P.V.M. Associates, Inc. (5) lO(f) 1989 Key Employees and Key Personnel Stock Option Plan. (6) 23 lO(g) lndenture dated September l, 1993 between the Company and American Stock Transfer & Trust Company. (7) 10(h) Debenture Purchase Agreement dated September 7, 1993 between the Company and USLIFE Income Fund, Inc. (7) 10(i) Debenture Purchase Agreement dated September 7, 1993 between the Company and The United States Life Insurance Company in the City of New York. (7) lO(j) Option Agreement dated October 13, 1993 between the Company and Carl D. Glickman. (7) 10(k) Bond Purchase Agreement dated October 27, 1993 among the Company, Andrew J. McLaughlin, Jr. and Gerald T. McLaughlin. (7) 10(1) Debenture Purchase Agreement dated October 27, 1993 among the Company, Andrew J McLaughlin and Gerald T. McLaughlin. (7) 10(m) Restatement Modification and Extension of Loan Agreement and Note dated as of July 13, 1993 between Barclays Bank, N.A. and the Company. (7) 10(n) Mutual Release dated March 16, 1994 between Barclays Bank, N.A, the Company, Senior Care Foundation and the Company's Subsidiaries. (8) 10(o) Unconditional and Continuing Guaranty dated as of March 16, 1994 from the Company and Continental Norwood, Inc. to Health Care REIT, Inc. (8) lO(p) Mortgage Note dated March 16, 1994 from Senior Care Foundation to Continental Norwood Holdings, Inc. (8) lO(q) Mortgage dated March 16, 1994 from Senior Care of Continental Norwood Holdings, Inc. (8) 10(r) Intercreditor Subordination Agreement dated as of March 16, 1994 between Health Care REIT, Inc., Company, Continental Norwood, Inc., and Continental Norwood Holdings, Inc. (8) 10(s) Management Agreement dated as of January 1, 1994 between Senior Care Foundation and Continental Norwood, Inc. (8) 10(t) Distribution Agreement between Infu-Tech Inc. and Genzyme Corporation dated November 11, 1994. 11 Calculation of Earnings Per Share. 13 1994 Annual Report to Stockholders--to be furnished by amendment--that report, except for any portions which are expressly incorporated by reference in this filing, is not to be deemed "filed" as part of this filing. 21 List of Subsidiaries. 24 (b) Reports on Form 8-K filed during the quarter ended December 31, 1994. None. (c) The exhibits to this Report are listed in Item 14(a)3. (d) The financial statement schedule required by Regulation S-X which is excluded from the Annual Report to Stockholders by Rule 14a-3(b)(1) is listed in Item 14(a)(2) FOOTNOTES (1) Incorporated by reference to Registration Statement No. 2-81823. (2) Incorporated by reference to Registration Statement No. 33-611. (3) Incorporated by reference to Registration Statement No. 33-6341. (4) Incorporated by reference to Report on Form 10-K for the year ended December 31, 1987. (5) Incorporated by reference to Report on Form 10-K for the year ended December 31, 1988. (6) Incorporated by reference to definitive proxy statement dated July 13, 1989. (7) Incorporated by reference to Registration Statements Nos. 33-74474 and 33-7476. (8) Incorporated by reference to Report on Form 10-K for the year ended December 31, 1993. 25 CONTINENTAL HEALTH AFFILIATES, INC. - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 and 1995 and December 31, 1994 and 1993 (With Independent Auditors' Report Thereon) CONTINENTAL HEALTH AFFILIATES, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements and Financial Statement Schedules - --------------------------------------------------------------------------------
Page ---- (1) FINANCIAL STATEMENTS: Independent Auditors' Report ...................................................................................... F - 1 Consolidated Financial Statements: Balance Sheets: June 30, 1996 and 1995 ........................................................................................ F - 2 Statements of Operations: Year ended June 30, 1996, Six-month period ended June 30, 1995, Years ended December 31, 1994 and 1993 ...................................................................... F - 3 Years ended June 30, 1996 and unaudited 1995 ................................................................ F - 4 Statements of Stockholders' Equity: Year ended June 30, 1996, Six-month period ended June 30, 1995, Years ended December 31, 1994 and 1993 ..................................................................... F - 5 Statements of Cash Flows: Year ended June 30, 1996, Six-month period ended June 30, 1995 Years ended December 31, 1994 and 1993 ...................................................................... F - 6 Notes to Consolidated Financial Statements ...................................................................... F - 7 (2) FINANCIAL STATEMENT SCHEDULE: II - Valuation and Qualifying Accounts ....................................................................... S - 1
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Continental Health Affiliates, Inc.: We have audited the consolidated financial statements of Continental Health Affiliates, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion of these consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Continental Health Affiliates, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for the year ended June 30, 1996, the six-month period ended June 30, 1995 and each of the years in the two year period ended December 31, 1994 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein. As discussed in note 9 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." KPMG Peat Marwick LLP New York, New York September 27, 1996 F - 1 CONTINENTAL HEALTH AFFILIATES, INC.
CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ======================================================================================================== June 30, ---------------------- Assets 1996 1995 ------ -------- -------- Current assets: Cash and cash equivalents $2,900 $546 Patients' funds 184 200 Accounts receivable, net of allowances for uncollectible accounts of $4,193 and $3,712 10,177 6,038 Inventories 1,996 1,686 Deferred income taxes 822 849 Prepaid expenses and other current assets 1,151 1,116 -------- -------- Total current assets 17,230 10,435 Property and equipment, at cost, net of accumulated depreciation and amortization of $4,363 and $3,875 54,453 9,934 Mortgage note receivable 7,399 Goodwill, net of accumulated amortization of $601 339 Deferred income taxes 52 220 Other assets 3,837 1,348 -------- -------- Total assets $75,572 $29,675 ======== ======== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Short-term borrowings $128 $ Current portion of long-term debt 3,355 3,424 Accounts payable 7,913 8,660 Other current liabilities 5,789 4,411 -------- -------- Total current liabilities 17,185 16,495 Long-term debt, net of current portion 50,574 10,766 Deferred income 72 615 Other liabilities 16 243 Minority interest in subsidiary 2,029 1,524 Manditorily redeemable preferred stock (includes $584 current portion) 3,500 Commitments and contingencies Stockholders' equity: Preferred stock, $.02 par value; $100 liquidation preference; 1,000,000 shares authorized; 13,884 shares outstanding 1 1 Common stock, $.02 par value; 15,000,000 shares authorized; 9,286,216 and 7,830,059 shares outstanding 186 156 Additional paid-in capital 21,470 20,192 Accumulated deficit (19,461) (20,317) -------- -------- Total stockholders' equity 2,196 32 -------- -------- Total liabilities and stockholders' equity $75,572 $29,675 ======== ========
See accompanying notes to consolidated financial statements. F - 2 CONTINENTAL HEALTH AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) ============================================================================================================================== Six-month period Year ended ended Years ended December 31, June 30, June 30, --------------------------- 1996 1995 1994 1993 ----------- ----------- ----------- ----------- Revenues: Nursing home services $44,440 $18,248 $38,182 $44,357 Infusion therapy and other medical services 25,440 10,476 16,196 16,913 ----------- ----------- ----------- ----------- Total revenues 69,880 28,724 54,378 61,270 ----------- ----------- ----------- ----------- Operating expenses: Personnel 35,459 14,493 28,689 30,867 Medical and nutritional product 12,001 5,300 6,714 6,587 Health care and lodging 8,699 5,496 11,511 12,771 Selling, general and administrative 6,858 3,014 5,931 6,004 Provision for uncollectible accounts 1,210 979 1,622 2,015 Depreciation and amortization 1,537 366 828 1,379 ----------- ----------- ----------- ----------- Total operating expenses 65,764 29,648 55,295 59,623 ----------- ----------- ----------- ----------- Income (loss) from operations 4,116 (924) (917) 1,647 Interest and dividend income 221 183 98 184 Interest and other financing costs (4,044) (632) (1,481) (3,082) Other income, net 550 458 877 1,268 Minority interest in loss (earnings) of subsidiary (494) 353 375 (194) ----------- ----------- ----------- ----------- Income (loss) before income taxes, extraordinary gains and cumulative effect of accounting change 349 (562) (1,048) (177) Provision (benefit) for income taxes 270 -- (341) (385) ----------- ----------- ----------- ----------- Income (loss) from continuing operations before extraordinary gains and cumulative effect of accounting change 79 (562) (707) 208 Extraordinary gains: Net gains on extinguishment of debt (net of income taxes of $171 and $381 in 1994 and 1993) 84 -- 1,058 548 Gain on disposal of assets 693 Cumulative effect of change in accounting for income taxes, net of minority interest (note 8) -- -- 973 ----------- ----------- ----------- ----------- Net income (loss) 856 (562) 351 1,729 Preferred dividends (70) (35) (69) -- ----------- ----------- ----------- ----------- Net income (loss) available to common shareholders $786 ($597) $282 $1,729 =========== =========== =========== =========== Income (loss) per share: Income (loss) before extraordinary gains and cumulative effect of accounting change $0.00 ($0.08) ($0.09) $0.04 Extraordinary items 0.09 -- 0.13 0.10 Cumulative effect of change in accounting for income taxes, net -- -- -- 0.19 ----------- ----------- ----------- ----------- Net income (loss) available to common shareholders $0.09 ($0.08) $0.04 $0.33 =========== =========== =========== =========== Weighted average number of common and common equivalent shares 8,418,358 7,826,309 7,783,425 5,189,519
See accompanying notes to consolidated financial statements. F - 3 CONTINENTAL HEALTH AFFILIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) ============================================================================================== Years ended June 30, --------------------------- 1996 1995 ----------- ----------- (Audited) (Unaudited) Revenues: Nursing home services $44,440 $36,365 Infusion therapy and other medical services 25,440 19,679 ----------- ----------- Total revenues 69,880 56,044 ----------- ----------- Operating expenses: Personnel 35,459 28,698 Medical and nutritional product 12,001 9,144 Health care and lodging 8,699 11,099 Selling, general and administrative 6,858 6,211 Provision for uncollectible accounts 1,210 1,726 Depreciation and amortization 1,537 693 ----------- ----------- Total operating expenses 65,764 57,571 ----------- ----------- Income (loss) from operations 4,116 (1,527) Interest and dividend income 221 229 Interest and other financing costs (4,044) (1,193) Other income, net 550 995 Minority interest in loss (earnings) of subsidiary (494) 538 ----------- ----------- Income (loss) before income taxes and extraordinary gains 349 (958) Provision for income taxes 270 -- ----------- ----------- Income (loss) before extraordinary gains 79 (958) Extraordinary gains on extinguishment of debt 84 -- Gain on disposal of assets 693 -- ----------- ----------- Net income (loss) 856 (958) Preferred dividends (70) (69) ----------- ----------- Net income (loss) applicable to common shareholders $786 ($1,027) =========== =========== Income (loss) per share: Income (loss) before extraordinary gains $0.00 ($0.13) Extraordinary gains 0.09 -- ----------- ----------- Net income (loss) applicable to common shareholders $0.09 ($0.13) =========== =========== Weighted average number of common and common equivalent shares 8,418,358 7,824,747
See accompanying notes to consolidated financial statements. F - 4 CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Stockholders' Equity (Deficit) Year ended June 30, 1996, six-month period ended June 30, 1995 and years ended December 31, 1994 and 1993 (Dollars in thousands) ================================================================================================================================== Total Preferred Stock Common Stock Additional Stockholders' ---------------------- ---------------------- Paid-in Accumulated Equity Shares Amount Shares Amount Capital Deficit (Deficit) --------- --------- --------- --------- --------- --------- --------- Balance, January 1, 1993 -- -- 4,964,799 $99 $13,976 ($21,835) ($7,760) Issuance of preferred stock 13,884 1 -- -- 1,313 -- 1,314 Issuance of common stock -- -- 2,696,640 54 4,776 -- 4,830 Net income -- -- -- -- -- 1,729 1,729 --------- --------- --------- --------- --------- --------- --------- Balance, December 31, 1993 13,884 1 7,661,439 153 20,065 (20,106) 113 Issuance of common stock -- -- 161,120 3 281 -- 284 Exercise of stock options -- -- 2,500 -- 1 -- 1 Additional costs related to issuance of preferred stock in 1993 -- -- -- -- (52) -- (52) Preferred dividends -- -- -- -- (69) -- (69) Net income -- -- -- -- -- 351 351 --------- --------- --------- --------- --------- --------- --------- Balance, December 31, 1994 13,884 1 7,825,059 156 20,226 (19,755) 628 Exercise of stock options -- -- 5,000 -- 1 -- 1 Preferred dividends -- -- -- -- (35) -- (35) Net loss -- -- -- -- -- (562) (562) --------- --------- --------- --------- --------- --------- --------- Balance, June 30, 1995 13,884 1 7,830,059 156 20,192 (20,317) 32 Exercise of stock options -- -- 21,000 -- 21 -- 21 Debt to equity conversion -- -- 1,435,157 30 1,327 -- 1,357 Preferred dividends -- -- -- -- (70) -- (70) Net income -- -- -- -- -- 856 856 --------- --------- --------- --------- --------- --------- --------- Balance, June 30, 1996 13,884 $1 9,286,216 $186 $21,470 ($19,461) $2,196 ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F - 5 CONTINENTAL HEALTH AFFILIATES, INC.
Consolidated Statements of Cash Flows (Dollars in thousands) ============================================================================================================================== Six-month Years ended Year ended period ended December 31, June 30, June 30, --------------------- 1996 1995 1994 1993 -------- -------- -------- -------- Operating activities: Net income (loss) $856 ($562) $351 $1,729 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,537 366 828 1,379 Amortization of deferred financing costs 266 32 104 212 Provision for uncollectible accounts 1,210 979 1,622 2,015 Amortization of deferred income (543) (579) (1,158) (1,158) Cumulative effect of accounting change -- -- -- (973) Provision for deferred income taxes 195 -- -- 2 (Gain) loss on foreign currency debt (130) 309 267 (137) Gain on diposal of assets (693) -- Minority interest 494 (353) (375) 194 Net gains on extinguishment of debt (84) -- (1,229) (929) Increase (decrease) in cash due to changes in: Accounts receivable (5,349) (753) (1,702) (2,228) Inventories (310) (279) (147) (77) Prepaid expenses and other current assets (35) 115 (158) (274) Other assets (2,755) 71 (223) 320 Accounts payable (2,174) 1,209 1,518 456 Other current liabilities 1,717 (476) 73 236 Other liabilities (227) (228) (521) (332) -------- -------- -------- -------- Net cash provided by (used in) operating activities (6,025) (149) (750) 435 -------- -------- -------- -------- Investing activities: Expenditures for property and equipment (39,848) (294) (1,021) (513) Net proceeds from sales of assets 2,390 -- -- -- Purchase by Infu-Tech of treasury stock -- -- (73) -- -------- -------- -------- -------- Net cash provided by (used in) investing activities (37,458) (294) (1,094) (513) -------- -------- -------- -------- Financing activities: Net proceeds from not-for-profit borrowings -- -- 12,905 -- Net proceeds from long-term borrowings 47,592 -- 790 -- Payments of short-term borrowings (1,083) -- (13,750) -- Payments of long-term borrowings (643) (138) (327) (311) Payment of preferred dividends (70) (35) (69) -- Cost of debt exchange offers -- -- (71) (520) Net proceeds from exercise of common stock options 21 1 -- -- -------- -------- -------- -------- Net cash used in financing activities 45,837 (172) (522) (831) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 2,354 (615) (2,366) (909) Cash and cash equivalents, beginning of the period 546 1,161 3,527 4,436 -------- -------- -------- -------- Cash and cash equivalents, end of the period $2,900 $546 $1,161 $3,527 ======== ======== ======== ======== Supplemental disclosure of cash flow data: Interest paid $4,292 $284 $1,483 $3,341 ======== ======== ======== ======== Income taxes paid $26 $26 $109 $374 ======== ======== ======== ======== Non cash investing and financing activity: Property and equipment obtained under capital lease obligation $223 -- -- -- Acquisition of property and equipment for foregiveness of receivable $7,399 -- -- -- Conversion of convertible notes $1,357 -- -- --
See accompanying notes to consolidated financial statements. F - 6 CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- 1. The Company The Company's operations consist primarily of nursing home services and infusion therapy and other medical services. Nursing home services include the ownership, leasing, operation and management of nursing homes. Infusion therapy and other medical services include enteral and other medical services, primarily for patients in nursing homes, and intravenous and other infusion therapies for patients at home and in nursing homes. The Company is subject to certain risks and uncertainties as a result of changes that could occur in the healthcare industry, including Medicare and Medicaid reimbursement rates. 2. Significant Accounting Policies Basis of consolidation The consolidated financial statements include the accounts of Continental Health Affiliates, Inc. ("Continental") and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Continental owns 59% of the common stock of Infu-Tech, Inc. ("Infu-Tech"); the other 41% is publicly traded. The minority interest in the consolidated financial statements represents the minority stockholders' proportionate share of equity in Infu-Tech. Accounting estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents at June 30, 1996 and 1995 includes $691 and $546, respectively, held by Infu-Tech. In connection with Infu-Tech's initial public offering (see note 3), a management and non-competition agreement between Continental and its 59% owned subsidiary, Infu-Tech, expiring September 30, 1997, prohibits Infu-Tech from lending money to (or borrowing money from) Continental and its other subsidiaries subsequent to December 31, 1992. The Company classifies all highly liquid investments with maturities of three months or less when purchased as cash equivalents. Patients' Funds Patients' funds represent cash balances which have been deposited by the Company into separate bank accounts and are restricted for the use of patients. The related liability is included in other current liabilities. Revenue Recognition Revenue is reported at the net amounts estimated to be realized from patients, third-party payors and others for services rendered. The Company receives payments for services to eligible patients under Medicare and various state Medicaid programs. Approximately 60% (1996), 59% (1995), 60% (1994), F - 7 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- 60% (1993) and 61% (1992) of total revenues were derived from such medical assistance programs. Revenues under these programs are based upon government approved rates which are subject to audit. In the opinion of management, retroactive adjustments, if any, would not be material to the Company's financial position or results of operations. Inventories Inventories, which consist of medical and nutritional products and supplies, are valued at the lower of cost (first-in, first-out method) or market. Property and Equipment Depreciation of property and equipment is computed using the straight-line method at rates that charge the cost of various classes of assets over the periods of expected use. The range of useful lives estimated for buildings and improvements is generally 7 to 40 years, and the range for furniture and equipment is three to ten years. Leasehold improvements are amortized over the lesser of the term of the lease or the estimated life of the asset. Goodwill The excess of the Company's cost of acquired businesses over the fair values at the dates of acquisition of the net assets acquired has been attributed to goodwill, except as explained in note 3. Goodwill is being amortized over periods ranging from 7 to 40 years. Impairment is assessed based upon the profitability of the related businesses relative to planned levels. Deferred Financing Costs Deferred financing costs (included in other assets) incurred in connection with the issuance of long-term debt are being amortized on a straight-line basis over the term of the related debt agreements. In the event of an early retirement of debt, these costs would be written off in an amount relative to the amount of principal retired. Sales of Stock by Subsidiaries The Company recognizes income or loss on the sale of stock by its subsidiaries. Income Taxes Income taxes are provided for on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings Per Share Earnings per share is computed based upon the weighted average number of common shares and common share equivalents outstanding during each year. Common share equivalents reflect the dilutive effect of stock options. The effects of the assumed conversion of the convertible bonds outstanding, which are also common stock equivalents, have not been included since they are antidilutive. The weighted average number of common and common equivalent shares used in computing earnings per share total 8,418,358 (1996), 7,826,309 (1995), 7,783,425 (1994) and 5,189,519 (1993). F - 8 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- 3. Acquisitions and Dispositions The Heritage Facility Between 1986 and 1989, the Company built a long-term care facility (the "Heritage Facility") on a property owned by a corporation in which the Company had a significant preferred stock interest and which the Company had the option to purchase in its entirety. The accounts of this corporation were included in the consolidated financial statements because the Company had the right to elect the directors, although it did not do so, and exercise financial control of the corporation. In connection with the construction of the Heritage Facility, the corporation incurred a $10,000 mortgage debt to a bank and an $11,649 second mortgage debt to the Company. In 1990, (i) the corporation completed the transfer of the Heritage Facility to a newly-formed, not-for-profit corporation ("SCF") in exchange for the assumption by SCF of the $10,000 and $11,649 mortgage debts, and (ii) the Company exercised its option to purchase the corporation. In addition, SCF entered into a management agreement under which the Company manages the Heritage Facility for a fee. The Company had agreed to provide funds to the Heritage Facility for cash deficiencies. In March 1994, SCF obtained a $14,100 mortgage loan secured by the Heritage Facility and used $12,905 of the proceeds of that loan to (i) repay the $10,000 construction mortgage loan which had been incurred by the Company and assumed by SCF, but for which the Company had continued to be responsible (which SCF was able to do for $9,167) and (ii) pay the Company an additional $3,738 of the Heritage Facility purchase price. The Company used the $3,738 plus the net proceeds of $830 of new secured borrowings ("Secured Loan") to repay the balance of a $5,000 bank revolving credit (which it was able to do for $4,583). The Company guaranteed $2,000 of the $14,100 mortgage loan. SCF gave the Company a $7,399 second mortgage note to evidence its remaining obligations to the Company. The second mortgage note is due in 2004, with interest at 3%, escalating 1% each January 1 until January 1999, after which it remains at 8%. Principal and interest are to be paid by SCF as promptly as possible and permitted under the mortgage loan. In addition, the Company forgave $4,113 of working capital advances, fees, interest and second mortgage debt owed to it by SCF. Pursuant to SCF's mortgage loan, specified financial covenants must be met by both the Company and SCF. At June 30, 1994 and September 30, 1994, SCF was not in compliance with certain financial covenants of the mortgage loan, which were waived by the lender. Since December 31, 1994, SCF has been in compliance with the financial covenants. Since September 30, 1994, the Company has not been in compliance with certain financial covenants of the mortgage loan, which were waived by the lender. Because the above transactions resulted in the Company no longer being responsible for SCF's construction mortgage loan or being required to fund losses at the Heritage Facility, after March 16, 1994 the Heritage Facility was no longer included in the consolidated financial statements of the Company. As the net assets of the Heritage Facility approximated the amount of the second mortgage note, no gain or loss was recorded in 1994. Included in the consolidated statements of operations of the Company are revenues of $1,987, $9,821 and $8,781 for 1994, 1993 and 1992, respectively, and income from operations of $284, $1,813 and $1,249 for 1994, 1993 and 1992, respectively, pertaining to the Heritage Facility. Pursuant to a management agreement entered into in January 1994, the Company is entitled to fees for managing the Heritage Facility. However, the mortgage loan entered into by SCF prohibits any payments (including principal and interest on the second mortgage note) to the Company until the Heritage Facility F - 9 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- attains certain specified financial levels (coverage ratio of 1.25 to 1, current ratio of 1.1 to 1 and net worth of $100). Because the Heritage Facility attained the specified financial levels at December 31, 1994 and March 31, 1995, the Company received and recorded in 1995 management fees of $261,000 and interest income of $148,000. In 1994, the Company did not receive any payments from SCF and did not record any management fees or interest income. As a result of the March 1994 transactions, the Company recorded extraordinary gains on extinguishment of debt in 1994 of $1,058, net of income taxes and transaction costs. The Hilltop Facility In May 1996, the Company closed its nursing home in Pine Brook, New Jersey and sold the assets of that nursing home, other than the land and buildings and certain current assets, to another health care provider for $2,390. The Company recorded an extraordinary gain of $693. Infu-Tech, Inc. On December 31, 1992, the Company completed an initial public offering of 1,330,000 shares, at $6 per share, of its Infu-Tech subsidiary, and received net proceeds of $6,558. Infu-Tech sold 600,000 newly issued shares and received net proceeds of $2,923. Continental, which owned 100% of the outstanding common stock of Infu-Tech prior to the offering, sold 730,000 shares which, together with the sale of shares by Infu-Tech, reduced its ownership of Infu-Tech to 59%, and received net proceeds of $3,635. As a result of this transaction, the Company realized a gain of $3,316 on the sale of its shares of Infu-Tech. In addition, the Company recorded a gain of $1,555 in recognition of the net increase in the value of Continental's remaining investment in Infu-Tech. In connection with the initial public offering, the representative of the underwriters was issued warrants to purchase up to 133,000 shares (73,000 shares from Continental and 60,000 shares from Infu-Tech) of Infu-Tech's common stock at 125% of the initial public offering price for a period of four years. As of June 30, 1996, none of these warrants have been exercised. Home Health Care Division In 1990, the Company sold certain assets, including accounts receivable under 150 days old, of its Home Health Care Division (the "Division") to Hospital Staffing Services, Inc. ("HSSI"). Cash on accounts receivable collected in excess of those net balances purchased revert back to the Company. In 1992, the Company recorded a gain on disposal of $150, which represents cash receipts pertaining to these accounts receivable, net of additional costs and income taxes. In February 1992, the Company received $628 in consideration of its agreement not to compete with HSSI in providing nursing services in California, Arizona and Tennessee for a period of five years and the termination of a non-competition provision which had barred HSSI from providing infusion therapy services. The $628 was recorded as deferred income and is being amortized to other income over five years. Nursing Home Group In 1986, the Company, through a wholly owned subsidiary, acquired all of the outstanding common stock of four corporations and 60% of the outstanding common stock of a fifth corporation, each of which operates a nursing home (the "Nursing Home Group"). The total cost of the acquisition of the Nursing Home Group was approximately $18,415. Three individuals (the "Principal Stockholders"), one of whom is the Company's Chairman of the Board, who beneficially owned approximately 60% of the common F - 10 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- stock of the Company at the date of the acquisition, owned 100% of the common stock of one of the five corporations and between 45% and 75% of the common stock of the other four corporations. The Principal Stockholders received total consideration of approximately $15,580 for their interests in the corporations acquired. Since the Principal Stockholders controlled the Company and the Nursing Home Group before and after the acquisition, the Company recorded net liabilities for the Nursing Home Group based on the Principal Stockholders' proportionate interest in the historical carrying values of the assets and liabilities of the acquired corporations at the date of acquisition. The aggregate consideration paid to the Principal Stockholders was recorded as a distribution and, accordingly, a reduction of retained earnings. The cost to acquire the minority interests in the Nursing Home Group was allocated to the assets and liabilities of the acquired corporations at the date of acquisition based on their respective fair values. The excess of cost over net liabilities acquired was allocated to goodwill. On October 31, 1995, the Company obtained $41,000 in mortgage loans secured by four nursing home facilities located in West Orange, Cedar Grove and Norwood, New Jersey and West Palm Beach, Florida, and proceeds from the issuance of subsidiary Floating Rate Series A Cumulative Preferred Stock totalling $3,500. In addition, the Company obtained a $1,500 loan secured by a mortgage on approximately 8 acres of land located in West Orange, New Jersey. The combined proceeds, totalling $46,000 were used to purchase the West Orange, Cedar Grove and West Palm Beach facilities which were previously operated under operating leases and to purchase the real property of the long term and residential care facility located in Norwood, NJ (the "Heritage Facility"), which the Company has been managing since 1988. The transaction in which the Company purchased the Norwood facility also released a $2,000 guarantee which the Company had given to the prior mortgage lender. Proceeds totalling $301 were also used to release pledged receivables and restructure a secured loan due December 1, 1995 totalling $601 for which a new three year note was issued for the balance of $300, secured by a first mortgage on the Company's nursing home facility in Atlantic City, New Jersey. As a result of the previously noted purchase of the Heritage Facility by the Company, the Company now owns the facility and manages the operations of SCF. Commencing October 31, 1995, SCF is included in the consolidated financial statements of the Company. The mortgage note receivable of $7,399 was forgiven along with other advances in exchange for The Heritage Facility. For the year ended June 30, 1996, SCF had revenues of $11,166 and net income of $850. For the eight months that SCF was included in the consolidated financial statements, SCF revenues of $7,440 and net income of $567 have been reflected. F - 11 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - --------------------------------------------------------------------------------
4. Property and Equipment Property and equipment, at cost, is comprised as follows: June 30, ----------------------- 1996 1995 -------- ------- Land and improvements $ 8,573 $ 2,047 Buildings and improvements 44,064 7,495 Furniture and equipment 4,742 2,030 Leasehold improvements 1,393 1,400 Construction in progress 44 837 -------- -------- 58,816 13,809 Less: accumulated depreciation and amortization 4,363 3,875 ------- ------- $54,453 $ 9,934 ====== ======= 5. Long-Term Debt Long-term debt is comprised as follows: June 30, --------------------- 1996 1995 -------- -------- 14 1/8% subordinated debentures due September 1, 1996 (a) $ 1,200 $ 1,200 6% convertible bonds in the face amount of 830,000 Swiss francs, due June 27, 1995 (c) 662 2,525 6% notes due 2003 (b) 3,400 3,400 6% convertible notes due 2003 (b) -- 1,606 8% notes due 1999 (d) 1,213 1,213 8 1/2% to 11% mortgage notes (f) 3,244 3,463 8% face amount of Swiss francs 619,500 due June 27, 1998 (c) 494 --- Nomura financing (e) (excludes Preferred stock) 42,148 --- Other (g) 1,568 783 ------- -------- 53,929 14,190 Less: current portion 3,355 3,424 ------- ------- $50,574 $10,766 ======= =======
(a) The 14 1/8% subordinated debentures (the "Debentures") are redeemable, at the option of the Company, in whole or in part, at par plus accrued interest. Interest is payable on March 1 and September 1. In August 1996, the Company made an offer to exchange shares of a new 11% Convertible Preferred Stock for all its remaining 14 1/8% Subordinated Debentures due September 1, 1996. For each $1,000 face amount of debentures exchanged, the holder would receive one share of 11% Convertible Preferred Stock; with a liquidation preference of $1,000; convertible until September 1, 1999 to common stock which has a market value of $1,100, and after September 1, 1999, a market value of $1,000; entitled to annual dividends of $110. The Company has deposited in escrow with the Debenture Trustee, funds sufficient to pay redemption of all outstanding debentures plus interest. Because of this escrow deposit, the debentures are not in default F - 12 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- although due on September 1, 1996. The Exchange Offer expires on October 4, 1996. (b) In September 1993, the Company acquired $3,400 principal amount of Debentures in exchange for 6% notes due 2003 ("6% Notes") in that amount. In December 1993, the Company acquired an additional $1,500 principal amount of Debentures in exchange for 6% convertible notes due 2003 ("6% Convertible Notes") in the principal amount of $1,606 (which included accrued interest on those Debentures), which is convertible (at a price as defined in the agreement) into the Company's common stock after August 31, 1995. The 6% convertible notes were converted into 1,435,157 shares of common stock. Interest on the 6% Notes and the 6% Convertible Notes is payable on March 1 and September 1. These transactions resulted in a loss of $97 in 1993, which represents the amount of related deferred financing costs. This loss was recorded as an extraordinary item, net of income tax benefits. In November 1993, the Company acquired $5,088 principal amount of Debentures, including a waiver of interest on those Debentures since March 1, 1993, in exchange for 2,696,640 shares of its common stock. In April 1994, the Company acquired $304 principal amount of Debentures, including a waiver of interest on those Debentures since November 1994, in exchange for 161,120 shares of its common stock. The amount by which the principal amount of the acquired Debentures exceeded the par value of the newly issued shares, net of related deferred financing costs and transaction costs, was credited to additional paid-in capital. (c) The principal balance of SFr 2,900,000 (approximately $2,525,000) and accrued interest of SFr 174,000 (approximately $152,000) pertaining to the Company's 6% Swiss franc denominated convertible bonds (the "Bonds") was due on June 27, 1995. The Company did not make these payments. Non-payment of these obligations did not result in a default under any other financing agreements. Since June 27, 1995, the Company has acquired SFr 2,070,000 principal amount of Bonds, including accrued interest on those Bonds, for a total of SFr 1,028,170 and $315,000 plus a SFr 619,500 note maturing in June 1998. (d) In September 1993, the Company acquired Sfr 4,005,000 (approximately $2,647) principal amount of Bonds in exchange for 10,579 shares of 5% exchangeable preferred stock ("Preferred Stock") (see note 7) and $965 principal amount (which included accrued interest on those Bonds) of 8% notes due 1999 ("8% Notes"). In October 1993, the Company acquired an additional Sfr 1,250,000 (approximately $826) principal amount of Bonds in exchange for 3,305 shares of Preferred Stock and $248 principal amount of 8% Notes. Interest on the 8% Notes is payable on January 27 and July 27. The Company has the option to redeem in part or in full the 8% Notes at any time for 104% of their principal amount, declining 1% on July 28, 1994 and each July 28 after that to 100% after July 28, 1997. These transactions resulted in a gain, net of related deferred financing costs, of $1,026 in 1993, which was recorded as an extraordinary item, net of income taxes. (e) On October 31, 1995, the Company obtained mortgage loans of $41.0 million and $1.5 million and subsidiaries issued $3.5 million of preferred stock. The proceeds of this financing were used to purchase three nursing homes which had been sold and leased back in 1988, to reacquire the Heritage Facility, which the Company had sold in 1990 to a non-profit corporation and had been operating under a management agreement, and to retire debt. The $41.0 million mortgage loan bears interest at 9.86% per annum and requires payments of principal and interest totalling $4.28 million per year for 15 years. If the Company is unable to pay the balance of $28.19 million which will remain due at the end of 15 years, the interest rate on the mortgage loan will increase, and all F - 13 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- cash flow from the mortgaged facilities will have to be used to amortize the balance of the mortgage loan. The $1.5 million mortgage loan payable over five year, bears interest at 2% per annum above the prime rate and requires principal payments of $384,000 per year. The $3.5 million of subsidiary preferred stock requires cumulative dividends which have been charged to interest expense equal to the liquidation preference of the preferred stock (initially $3.5 million at LIBOR plus 13% of the liquidation preference of the preferred stock and is mandatorily redeemable in monthly installments at the rate of $876,000 per year in 1997 through 2000. Earlier redemption is required if the Company sells its West Palm Beach nursing home. Based upon the 8.5% per annum prime rate and the 5-7/16% per annum LIBOR rate on December 29, 1995, the payments during the period from October 31, 1995 to June 30, 1996 with regard to the $42.5 million of mortgage loans and the $3.5 million subsidiary preferred stock totalled approximately $3.6 million. Under the terms of the $41 million loan and $3.5 million subsidiary preferred stock, the cash receipts of the four facilities are restricted to: mortgage payments, real estate taxes, insurance and carrying charges, operating expenses, and payment of preferred stock dividends, with any excess retained by the facility. Aggregate maturities of debt relating to the October 31, 1995 refinancing in each of five-year periods ending June 30 subsequent to June 30, 1995 are as follows: 1997 - $1,303; 1998 - $1,621; 1999 -$1,702; 2000 - $1,791 and 2001 - $1,087. (f) The 8 1/2% to 11% mortgages include debt consisting of an Economic Development Authority mortgage loan ("EDA loan") with a principal balance of $801 at June 30, 1996 payable in monthly installments, including interest at 11%, through 2009. The EDA loan is secured by property with a net book value of approximately $1,549 at June 30, 1996. The remaining mortgage notes are payable in monthly installments, including interest at notes ranging from 10% to 12% with final payments due between 1997 and 2009. These are secured by properties with an aggregate net book value of approximately $2,503,000 at June 30, 1996. (g) On October 31, 1995, the Company negotiated terms to convert $1,464 trade accounts payable into a three year note due in 1998. The interest rate is 10%. The monthly payment of principal and interest of $47 will fully amortize the loan at the end of the term. Current principal payments due under the terms of the note total $440. A secured loan ("Secured Loan") with a principal balance of $342 at June 30, 1996 is payable in monthly installments of $24, based upon a 34 month amortization schedule, including interest at 13.5%, through December 1, 1995. The Secured Loan is secured by a mortgage on one of the Company's nursing homes and most of the Company's nursing home accounts receivable. Aggregate scheduled amounts maturing in each of the five year periods ending June 30 subsequent to June 30, 1996 are as follows: 1997 - $3,355; 1998 - $4,904; 1999 - $1,977; 2000 - $3,081 and 2001 - $1,171. F - 14 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - --------------------------------------------------------------------------------
6. Other Current Liabilities Other current liabilities are comprised as follows: June 30, ------------------------- 1996 1995 -------- -------- Accrued interest $ 234 $ 358 Accrued payroll and related expenses 3,555 2,551 Other accrued liabilities 2,000 1,502 ----- ------ $ 5,789 $ 4,411 ===== ======
In 1993, the Company established a self-insured health insurance program for most of the employees at the Company's nursing homes, up to policy limits, as defined. Claims in excess of such limits are insured by third- party reinsurers. The Company's estimate of its liability for both outstanding as well as incurred but not reported claims is based upon its historical loss experience. As of June 30, 1996 and 1995, reserves for these estimated liabilities totalled approximately $517 and $392, respectively, and are included as a component of accrued payroll and related expenses. Differences between actual losses incurred and reserve estimates are recognized in the period when such differences become known. 7. Stockholders' Equity Preferred Stock In 1993, the Company issued 13,884 shares of Preferred Stock as part of an exchange offer to holders of its Bonds (see note 5). Each share of Preferred Stock has a liquidation preference of $100. Dividends on the Preferred Stock are cumulative and are payable on January 27 and July 27 at the annual rate of $5 per share, when and as declared by the Company's Board of Directors. The Preferred Stock is exchangeable for Infu-Tech common stock at an exchange price of $6.20 liquidation preference of Preferred Stock per share of Infu-Tech common stock, subject to adjustment to prevent dilution. The shares of Infu-Tech common stock issuable upon the exchange of Preferred Stock are shares owned by Continental. All (but not less than all) of the Preferred Stock is redeemable at the Company's option at any time when the current market price of Infu-Tech common stock has for at least 20 consecutive trading days been at least 120% of the exchange price, upon at least 45 days' notice at a redemption price equal to the liquidation preference of the shares being redeemed plus accumulated unpaid dividends on those shares. Shares may be exchanged for Infu-Tech common stock during the 45-day period. The Company may not pay any dividends or make any other distributions on, or repurchase, its common stock or any other of its stock which ranks junior to the Preferred Stock if Continental is not at the time current in its dividend payments on the Preferred Stock. Stock Option Plans Under Continental's incentive stock option plan adopted in 1983 (the "1983 Plan"), options to purchase 343,750 shares of common stock could have been granted to key employees of the Company. Options which have been granted are exercisable for a term of up to ten years. The 1983 Plan was terminated in 1989 upon the approval by the stockholders of the 1989 Key Employees and Key Personnel Stock Option Plan (the "1989 Plan"). No options were granted under the 1983 Plan after July 1989. F - 15 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- The 1989 Plan authorizes the Company to grant stock purchase options relating to a maximum of 400,000 shares of common stock. Options may not be granted at a price that is less than 100% of fair market value on the date of the grant (110% of fair market value for persons owning 10% or more of the Company's common stock). Options become exercisable six months after the date of the grant or after the employee has been employed for 12 months, whichever is later, and are exercisable for a term of up to ten years. Stock option transactions for the year ended June 30, 1996, the six months ended June 30, 1995 and each of the years ended December 31, 1994 and 1993 are summarized as follows:
Number Option Price of Shares Per Share --------- --------------- Outstanding, January 1, 1993 354,575 $0.25 - $10.25 Cancelled (1983 Plan) (34,725) $1.00 - $10.25 Granted (1989 Plan) 115,825 $0.69 - $1.00 Cancelled (1989 Plan) (141,900) $0.25 - $3.50 -------- Outstanding, December 31, 1993 293,775 $0.25 - $8.50 Cancelled (1983 Plan) (8,250) $1.00 - $8.50 Granted (1989 Plan) 26,250 $1.00 Cancelled (1989 Plan) (23,500) $0.25 - $8.50 Exercised (1989 Plan) (2,500) $0.25 -------- Outstanding, December 31, 1994 285,775 $0.25 - $3.50 Granted (1989 Plan) 67,500 $1.03 - $1.44 Cancelled (1989 Plan) (12,225) $0.25 - $1.00 Exercised (1989 Plan) (5,000) $0.25 -------- Outstanding, June 30, 1995 336,050 $0.25 - $3.50 Granted (1989 Plan) 24,750 $1.25 Cancelled (1989 Plan) (4,050) $0.25 - $1.50 Exercised (1989 Plan) (21,000) $0.25 - $1.00 -------- Outstanding, June 30, 1996 335,750 $0.25 - $3.50 ========
At June 30, 1996, 335,750 options were exercisable. Options to purchase 35,000 shares were available for grant at June 30, 1996 under the 1989 Plan. In July 1992, Infu-Tech adopted a stock option plan (the "Infu-Tech Plan") under which it is authorized to grant stock options to designated employees, officers and directors of the Company. The Infu-Tech Plan authorized grant of stock options up to a maximum of 150,000 shares of common stock. In 1994, the maximum number of shares which may be granted under the Plan was increased to 300,000 shares of common stock. Options may not be granted at a price that is less than 100% of fair market value on the date of the grant (110% of fair market value for persons owning 10% or more of Infu-Tech common stock). Options become exercisable 12 months after the date of the grant and are exercisable until ten years from the date of grant. F - 16 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- Stock option transactions for the year ended June 30, 1996, six months ended June 30, 1995 and of the years ended December 31, 1994 and 1993 are summarized as follows:
Number Option Price of shares Per Share --------- ------------- Granted 128,700 $5.00 - $6.13 Cancelled (6,500) $5.125 -------- Outstanding, December 31, 1993 122,200 $5.00 - $6.13 Granted 49,750 $1.00 - $4.50 Cancelled (7,300) $1.00 - $5.375 -------- Outstanding, December 31, 1994 164,650 $1.00 - $6.13 Granted 22,000 $1.59 - $1.95 Cancelled (8,400) $1.00 - $5.125 -------- Outstanding, June 30, 1995 178,250 $1.00 - $6.13 Granted 60,100 $2.25 - $3.44 Cancelled (30,050) $1.00 - $5.69 -------- Outstanding, June 30, 1996 208,300 $1.00 - $6.13 ========
At June 30, 1996, options to purchase 190,300 shares were exercisable at prices ranging from $1.00 to $6.13 per share. Other Stock Options In January 1994, the Company's Chairman of the Board was granted a seven-year option to purchase 500,000 shares of the Company's common stock for $1 per share. 8. Related Party Transactions (Note: The Chairman of the Board of the Company no longer has an ownership interest in two of the nursing homes described below.) At December 31, 1989, three nursing homes controlled and partially owned by the Principal Stockholders (including the Chairman of the Board of the Company) owed the Company $2,804, which included amounts for supplies, services and management fees. However, the Principal Stockholders asserted on behalf of the three nursing homes that management fees for all years should have been limited to amounts eligible for reimbursement from Medicare and Medicaid. Early in 1990, this dispute was resolved, with the three nursing homes agreeing to pay a total of $1,940 in satisfaction of all their obligations to the Company at December 31, 1989. In 1992, the settlement agreement between the Company and the three nursing homes was modified, whereby the February 1992 balance of $1,046 would be paid in sixteen equal quarterly payments of $76 (including interest at 7 1/2%) beginning June 15, 1992 and continuing through March 15, 1996. The balance remaining on the modified settlement agreement at December 31, 1994 and 1993 was $839 and $783, respectively. In January 1995, the settlement agreement was further modified to provide for a $227 principal and interest payment to be F - 17 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- made on or before March 30, 1995 (which payment was received) and the remaining principal balance of $626 to be paid in twelve equal quarterly payments of $60 (including interest at 8 1/2%) beginning July 1, 1995 and continuing through March 31, 1998. The $227 payment included all previously unpaid principal under the prior agreement through December 31, 1993 and all accrued interest under that agreement through March 30, 1995. The balance remaining on the modified settlement agreement at June 30, 1996 was $623. Interest income includes $44, $27, $56 and $57 of interest on this receivable for 1996, 1995, 1994 and 1993, respectively. As of June 30, 1996, scheduled principal and interest payments in arrears relating to the July 1995 settlement agreement amounted to $179. One of the Company's nursing homes was on several occasions forced to temporarily evacuate its residents due to weather-related emergencies. The residents were evacuated to a nursing home controlled and partially owned by the Principal Stockholders. Management believes this course of action was preferable to the alternatives. The Company paid the nursing home to which the residents were evacuated at that nursing home's daily Medicaid rate. Amounts charged to health care and lodging expenses were $31, $27 and $71 and in 1996, 1994 and 1993, respectively. In 1996, 1995 (June), 1994 and 1993, the Company was charged $73, $39, $89 and $60, respectively, by a corporation owned by the Company's Chairman of the Board for use of an airplane owned by that corporation. The Company believes the rates it was charged for use of that airplane were lower than those which would have been available from an independent charter company for use of a similar airplane. Included in selling, general and administrative expenses in 1996, 1995 (June) and 1994 is rent expense of $326, $159 and $110, respectively, for office space leased from an entity owned by the Principal Stockholders. The Company administered a self-funded health plan on behalf of three nursing homes controlled and partially owned by the Principal Stockholders (the "Principal Stockholders' Nursing Homes"). Revenues derived from services provided to the Principal Stockholders' Nursing Homes were $19 and $35 in 1995 and 1994, respectively. Included in accounts receivable at June 30, 1996 and 1995 are amounts due from the Principal Stockholders' Nursing Homes of $15 and $15. Included in other assets were additional amounts due from entities owned by the Principal Stockholders totalling $232 at June 30, 1996 and $200 at June 30, 1995. Included in other current liabilities were amounts due to an entity controlled by the Principal Stockholders totalling $19 and $22 at June 30, 1995 and December 31, 1994, respectively. In January 1992, Infu-Tech and Medline Industries, Inc. ("Medline") entered into a joint venture, MedTech Uro Services ("MedTech"). This joint venture was established as part of the settlement of a lawsuit against the Company by Medline. In accordance with the joint venture agreement, Infu-Tech is paid to provide sales and marketing services to MedTech. In addition, Infu-Tech will share in the net profits of MedTech to the extent they exceed approximately $200 per year over each of four years. Infu-Tech's participation in MedTech allows Infu-Tech to market urological, tracheostomy and other services in conjunction with Infu-Tech's marketing of contract services to residents of long-term care facilities. During 1995, 1994 and 1993, Infu-Tech recorded revenues of $45, $139 and $204, respectively, under this agreement, which included $14 in 1994 as its share of net profits. F - 18 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- John A. Schepisi is the president of Senior Care Foundation, Inc., the owner of the Heritage Facility (see note 3), which is included in the consolidated financial statements (see note ). He is also a partner in a law firm which provides legal services to the Company and during 1996, was paid legal fees of $410 primarily for services rendered in connection with the Nomura transactions. 9. Income Taxes Prior to 1993, the Company filed a consolidated Federal income tax return. Due to the reduction in Continental's ownership of Infu-Tech, commencing in 1993, Infu-Tech filed its own Federal income tax return. Effective January 1, 1993, the Company adopted Statement 109 and, accordingly, has recognized a benefit of $973 (net of minority interest of $445) to record the cumulative effect of the change in accounting for income taxes in the consolidated statement of operations for 1993. During 1993, the Internal Revenue Service completed its examination for the years 1986 through 1990, which resulted in the Company receiving a refund of $169 in 1993. The provision (benefit) for income taxes on income (loss) from continuing operations is presented below:
Year Six months ended ended Years ended June 30, June 30, December 31, 1996 1995 1994 1993 --------- ---------- ---- ---- Current: Federal $ 70 $ --- $ (357) $ (225) State 5 --- 16 (162) ------ ------ ----- ----- 75 --- (341) (387) ------ ------ ---- ----- Deferred: Federal rate change 165 --- --- (27) State 30 --- --- --- Other --- --- --- 29 ------- ------ ------- ------ 195 --- --- 2 ----- ------ ------- ------ $ 270 $ --- $ (341) $ (385) ===== ====== ==== =====
Infu-Tech had recorded a Federal and state income tax payable of $75 which is included in other current liabilities in the accompanying June 30, 1996 consolidated balance sheet and a refund receivable of $225 in 1994, which was included in prepaid expenses and other current assets in the accompanying June 30, 1995 consolidated balance sheet. F - 19 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- The following table reconciles the Federal income tax provision (benefit) computed at statutory Federal income tax rates applied to income (loss) from continuing operations to the provision (benefit) for income taxes.
Year Six- month Years ended ended period ended December 31, June 30, June 30, ----------------- 1996 1995 1994 1993 ----------- ---------- ---- ---- Federal income tax provision (benefit) at statutory rate applied to income (loss) from continuing operations $393 $(197) $(367) $ (62) State income tax provision (benefit), net of Federal income tax benefit 69 (34) (63) (105) Book loss (income) for which tax benefit (expense) not recorded --- --- --- (63) Change in valuation allowance (114) 456 (70) --- Allowance for temporary differences --- (236) 112 --- Permanent differences arising from acquisitions and dispositions (78) --- 30 26 Refunds of prior years' Federal income taxes --- --- --- (169) Other --- 11 17 (12) ------- ----- ----- ----- $ 270 $ --- $(341) $(385) ===== ====== ==== ====
The Company has approximately $8,059 of net operating tax loss carryforwards for Federal income tax purposes which will expire in the years 2005 through 2011. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
June 30, -------- 1996 1995 ---- ---- Net deferred income tax assets: Deferred income $ 154 $ 251 Allowances for uncollectible accounts receivable 1,878 1,522 Net operating tax loss carryforwards 3,304 3,820 Cumulative unrealized losses on translation of foreign currency debt (53) 567 Deferred rent payable --- 99 Provision for judgment --- --- Compensated absences, principally due to accrual for financial reporting purposes 147 151 Difference between book and tax bases of investment in subsidiary (638) (638) Difference between book and tax bases of property and equipment 87 (584) Other 72 72 ------- ------- Sub-total 4,951 5,260 Valuation allowance (4,077) (4,191) ------ ------ Net deferred income tax assets $ 874 $ 1,069 ======= ======
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based upon the Company's historical losses from continuing operations before extraordinary gains, the Company has recorded a valuation allowance of $4,077. This represents a 100% valuation allowance for all net deferred income tax assets, except for part of those pertaining to F - 20 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- its 59% owned subsidiary, Infu-Tech. Infu-Tech has historically been profitable and anticipates taxable income in 1996 and future years. In the opinion of management, Infu-Tech will realize the net deferred income tax assets. 10. Other Income, Net Other income (expense) is comprised as follows:
Year Six months ended ended Years ended June 30, June 30, December 31, 1996 1995 1994 1993 ---------- ---------- ---- ---- Gains on sales and leasebacks of property and equipment $ 417 $ 516 $ 1,032 $1,032 Gains (losses) on translation of foreign currency debt 130 (309) (267) 137 Amortization of deferred income related to non-compete agreement (note 2) 126 63 126 126 Other, net (123) 188 (14) (27) ------ ----- ------- ------- $ 550 $ 458 $ 877 $1,268 ====== ====== ======= =====
11. Commitments and Contingencies Lease Commitments The Company is obligated under various operating leases for nursing homes, office space and equipment with initial terms expiring at various dates through 2002. The leases generally require the Company to pay all costs of maintaining the leased properties. The Company has options to renew certain of these leases for periods ranging from 7 to 80 years. The following is a schedule of future minimum annual rental payments required under operating leases as of June 30, 1996:
Year ending Nursing June 30, Homes Office Equipment Total ----------- ------- ------ --------- ----- 1997 $ 314 $ 486 $ 42 $ 842 1998 318 370 3 691 1999 321 325 --- 646 2000 286 49 --- 335 2001 266 25 --- 291 Thereafter 200 4 --- 204 ------ ------- ----- ------ $1,705 $1,259 $ 45 $3,009 ===== ===== ==== =====
Rent expense was $2,764, $2,058, $3,743 and $3,957 in 1996, 1995, 1994 and 1993, respectively. Also see note 14. Contingencies The occupancy at the West Palm Beach, Florida nursing home was impacted by a moratorium on admissions imposed in December 1995 as a result of state survey deficiencies. The statement resurveyed F - 21 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- the facility and the moratorium was lifted (opening the facility to admissions) in May 1996. Although the facility had been re-opened to admissions, because certain deficiencies had remained uncorrected for more than six months, applicable regulations require a recommendation of termination of Medicare and Medicaid participation. Although such a recommendation was made by the state agency, notice of such termination has not yet been received. Regulatory practice permits the facility to demonstrate that it has achieved substantial compliance prior to any proposed termination taking effect. Further, the facility could be subject to fines of up to $1,500 per day while it is deemed to have been out of compliance. If levied, the fines will be subject to appeal and administrative review. The Company recorded as a receivable an amount of $591 based on a settlement of Medicaid audits. The Company has received a payment of $175, while the balance is being held by the State agency. The Company is in the early stages of investigating the dispute and will vigorously seek to defend its position to receive the balance of the settlement amount. Participants in the health care market are subject to lawsuits based upon alleged negligence or similar legal theories. The Company currently has in force general liability insurance, including professional and product liability, with coverage limits of $10 million, which is subject to annual renewal. The Company has not recorded any related loss liabilities as of June 30, 1996. In the opinion of management, the ultimate liability with respect to these activities will not materially affect the financial position or results of operations of the Company. 12. Distribution Agreement In November 1994, Infu-Tech entered into a distribution agreement with a drug manufacturer under which the Company provides a specific home infusion therapy utilizing the manufacturer's drug. Under this agreement, accounts payable to the drug manufacturer ($1,396 at June 30, 1996) are secured by the Company's inventories of the drug ($606 at June 30, 1996) as well as any accounts receivable ($901 at June 30, 1996) arising from the sale of this drug. 13. Business and Credit Concentrations The Company generally does not require collateral or other security in extending credit to patients; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) patients' benefits payable under health insurance programs, plans or policies (e.g., Medicare, Medicaid, Blue Cross, health maintenance organizations, and commercial insurance policies). At June 30, 1996, the Company had gross receivables from the Federal Government (Medicare) of approximately $4,018 and from various state Medicaid programs of approximately $2,746. F - 22 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- 14. Business Segment Data The Company's operations are conducted primarily through two business segments: nursing home services and Infu-Tech, which provides infusion therapy and other medical services to the non-hospital based health care market. Information about the Company's operations is presented below. Operating income is comprised of total revenues less operating expenses, excluding expenses incurred at the corporate headquarters. The elimination of inter-segment revenues is included in other services and eliminations.
Year Six months ended ended Years ended June 30, June 30, December 31, 1996 1995 1994 1993 ---------- ---------- ---- ---- Revenues: Nursing home services $ 44,440 $18,248 $38,273 $ 44,357 Infu-Tech 24,114 10,601 16,289 17,011 Other services and eliminations 1,326 (125) (184) (98) ------- -------- ------- --------- Consolidated $ 69,880 $ 28,724 $ 54,378 $ 61,270 ====== ======= ======= ======= Operating income (loss): Nursing home services $ 4,329 $ 1,106 $ 2,263 $ 2,786 Infu-Tech 1,745 (746) (1,024) 854 Expenses incurred at corporate headquarters (1,958) (1,284) (2,156) (1,993) Interest and dividend income 221 183 98 184 Interest and other financing costs (4,044) (632) (1,481) (3,082) Other income, net 550 458 877 1,268 Minority interest in earnings (loss) of subsidiary (494) 353 375 (194) ------- ------- ------- -------- Consolidated $ 349 $ (562) $ (1,048) $ (177) ======== ======= ======= ======= Assets: Nursing home services $ 61,592 $19,487 $19,894 $35,066 Infu-Tech 9,484 7,366 7,586 8,124 Corporate 4,496 2,822 3,005 3,004 ------- ------- ------- -------- Consolidated $ 75,572 $ 29,675 $ 30,485 $ 46,194 ====== ======= ======= ======= Depreciation and amortization of property and equipment: Nursing home services $ 1,275 $ 196 $ 515 $ 1,000 Infu-Tech 108 66 58 48 Corporate 98 49 145 219 ------- -------- ------- -------- Consolidated $ 1,481 $ 311 $ 718 $ 1,267 ====== ======= ======= ======= Capital expenditures: Nursing home services $ 47,472 $ 267 $ 710 $ 447 Infu-Tech 19 14 98 64 Corporate 101 13 213 2 -------- -------- ------- -------- Consolidated $ 47,592 $ 294 $ 1,021 $ 513 ====== ======= ======= ========
F - 23 (Continued) CONTINENTAL HEALTH AFFILIATES, INC. Notes to Consolidated Financial Statements (Dollars in thousands) June 30, 1996 and 1995, and December 31, 1994 and 1993 - -------------------------------------------------------------------------------- 15. Estimated Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined based upon available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company might realize in a current market exchange. The use of different market assumptions and or estimation methodologies may have a material effect on the estimated fair value. The carrying amounts of short term financial instruments are reasonable estimates of their fair values. The carrying value of long term debt approximates its fair value due primarily to the Nomura financing which occurred during the year. Interest rates have not significantly changed during that time. 16. Subsequent Event In August 1996, the Company made an offer to exchange shares of a new 11% Convertible Preferred Stock for all it remaining outstanding 14 1/8% Subordinated Debentures due September 1, 1996. For each $1,000 face amount of debentures exchanged, the holder would receive one share of 11% Convertible Preferred Stock: with a liquidation preferance of $1,000; convertible until September 1, 1999 to common stock which has a market value of $1,100, and after September 1, 1999, a market value of $1,000; entitled to annual dividends of $110. The Company has deposited in escrow with the Debenture Trustee, funds sufficient to pay redemption of all outstanding debentures plus interest. Because of this escrow deposit, the debentures are not in default although due on September 1, 1996. The Exchange Offer expires on October 4, 1996. F - 24 Schedule II CONTINENTAL HEALTH AFFILIATES, INC. Valuation and Qualifying Accounts (Dollars in thousands) - --------------------------------------------------------------------------------
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at Charged to Balance beginning cost and at end Description of period expenses Other Deductions (a) of period Allowance for uncollectible accounts: 1996 (June) $3,712 $1,210 $ -- $ 729 $4,193 ===== ===== ========= ===== ===== 1995 (June) $3,137 $ 979 $ -- $ 404 $3,712 ===== ====== ========= ===== ===== 1994 (December) $3,188 $1,622 $ -- $1,673 $3,137 ===== ===== ========= ===== ===== 1993 (December) $2,831 $2,015 $ -- $1,658 $3,188 ===== ===== ========= ===== =====
(a) Uncollectible accounts charged-off during the year, net of recoveries. S - 1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONTINENTAL HEALTH AFFILIATES, INC. Date: September 30, 1996 By: /s/ JACK ROSEN --------------------------------- Jack Rosen Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ JACK ROSEN Chairman of the Board, September 30, 1996 -------------------- Director (Principal Jack Rosen Executive Officer) /s/ JOSEPH ROSEN Director September 30, 1996 -------------------- Joseph Rosen /s/ BENJAMIN GEIZHALS Vice President, Assistant September 30, 1996 --------------------- Secretary and General Counsel Benjamin Geizhals (Principal Financial Officer) /s/ ALISON KURUS ALLEN Principal Accounting September 30, 1996 ---------------------- Officer Alison Kurus Allen /s/ ISRAEL INGBERMAN Director September 30, 1996 -------------------- Israel Ingberman /s/ JOSEPH M. GIGLIO Director September 30, 1996 -------------------- Joseph M. Giglio /s/ Carl D. Glickman Director September 30, 1996 -------------------- Carl D. Glickman /s/ Bruce Slovin Director September 30, 1996 -------------------- Bruce Slovin EX-11 2 CALCULATION OF EARNINGS PER SHARE Exhibit 11 CONTINENTAL HEALTH AFFILIATES, INC. Calculation of Earnings Per Share (Dollars in thousands) - --------------------------------------------------------------------------------
Year ended June 30, 1996 Primary Earnings Per Share: Net income available to common shareholders $ 786 ========== Adjustment of shares outstanding: Weighted average number of shares outstanding 8,021,638 Average net additional equivalent shares issuable 396,720 ---------- Weighted average number of common and common equivalent shares 8,418,358 ========== Earnings per share $ .09 ========== The above does not give effect to the assumed conversion of the 6% SFr convertible bonds since the effect is antidilutive as shown below: Net income available to common shareholders $ 786 Add after tax effect of eliminating interest expense applicable to 6% SFr convertible bonds 55 ---------- Net income as adjusted $ 841 ========== Weighted average number of common and common equivalent shares 8,418,358 Additional weighted average shares from assuming conversion of 6% SFr convertible bonds 18,758 ---------- Weighted average number of common and common equivalent shares, as adjusted 8,437,116 ========== Earnings per share $ .10 ==========
EX-11.1 3 CALCULATION OF LOSS PER SHARE Exhibit 11.1 CONTINENTAL HEALTH AFFILIATES, INC. Calculation of Loss Per Share (Dollars in thousands) - --------------------------------------------------------------------------------
Year ended June 30, 1995 Primary Loss Per Share: Net loss applicable to common shareholders $ (597) =========== Adjustment of shares outstanding: Weighted average number of shares outstanding 7,826,309 Average net additional equivalent shares issuable -- ----------- Weighted average number of common and common equivalent shares 7,826,309 =========== Loss per share $ (.08) =========== The above does not give effect to the assumed conversion of the 6% SFr convertible bonds since the effect is antidilutive as shown below: Net loss applicable to common shareholders $ (597) Add after tax effect of eliminating interest expense applicable to 6% SFr convertible bonds 78 ----------- Net loss as adjusted $ (519) =========== Weighted average number of common and common equivalent shares 7,877,866 Additional weighted average shares from assuming conversion of 6% SFr convertible bonds 65,540 ----------- Weighted average number of common and common equivalent shares, as adjusted 7,943,406 =========== Loss per share $ (.07) =========== Fully Diluted Earnings Per Share: Net loss applicable to common shareholders $ (597) =========== Weighted average number of shares outstanding 7,826,309 Add: Weighted average number of shares which could have been issued upon exercise of outstanding options 51,557 ----------- Weighted average number of shares used to compute fully diluted earnings per share 7,877,866 =========== Fully diluted loss per share $ (.08) ===========
EX-11.2 4 CALCULATION OF EARNINGS PER SHARE Exhibit 11.2 CONTINENTAL HEALTH AFFILIATES, INC. Calculation of Earnings Per Share (Dollars in thousands) - --------------------------------------------------------------------------------
Year ended December 31, 1994 Primary Earnings Per Share: Net income available to common shareholders $ 282 ========== Adjustment of shares outstanding: Weighted average number of shares outstanding 7,783,425 Average net additional equivalent shares issuable -- ---------- Weighted average number of common and common equivalent shares 7,783,425 ========== Earnings per share $ .04 ========== The above does not give effect to the assumed conversion of the 6% SFr convertible bonds since the effect is antidilutive as shown below: Net income available to common shareholders $ 282 Add after tax effect of eliminating interest expense applicable to 6% SFr convertible bonds 150 ---------- Net income as adjusted $ 432 ========== Weighted average number of common and common equivalent shares 8,033,994 Additional weighted average shares from assuming conversion of 6% SFr convertible bonds 65,540 ---------- Weighted average number of common and common equivalent shares, as adjusted 8,099,534 ========== Earnings per share $ .05 ========== Fully Diluted Earnings Per Share: Net income available to common shareholders $ 282 ========== Weighted average number of shares outstanding 7,783,425 Add: Weighted average number of shares which could have been issued upon exercise of outstanding options 250,569 ---------- Weighted average number of shares used to compute fully diluted earnings per share 8,033,994 ========== Fully diluted earnings per share $ .04 ==========
EX-11.3 5 CALCULATION OF EARNINGS PER SHARE Exhibit 11.3 CONTINENTAL HEALTH AFFILIATES, INC. Calculation of Earnings Per Share (Dollars in thousands) - --------------------------------------------------------------------------------
Year ended December 31, 1993 Net income $ 1,729 ========== Adjustment of shares outstanding: Weighted average number of shares outstanding 5,189,519 Average net additional equivalent shares issuable -- ---------- Weighted average number of common and common equivalent shares 5,189,519 ========== Earnings per share $ .33 ========== The above does not give effect to the assumed conversion of the 6% SFr convertible bonds since the effect is antidilutive as shown below: Net income $ 1,729 Add after tax effect of eliminating interest expense applicable to 6% SFr convertible bonds 264 ---------- Net income as adjusted $ 1,993 ========== Weighted average number of common and common equivalent shares 5,261,870 Additional weighted average shares from assuming conversion of 6% SFr convertible bonds 65,540 ---------- Weighted average number of common and common equivalent shares, as adjusted 5,327,410 ========== Earnings per share $ .37 ==========
EX-21 6 LIST OF SUBSIDIARIES CONTINENTAL HEALTH AFFILIATES, INC. AND SUBSIDIARIES Exhibit 21 List of Subsidiaries The following are the subsidiaries of Continental Health Affiliates, Inc. ("Continental" or the "Company"). A) Alternative Care, Inc. (a Massachusetts corporation). B) TNS Nur-Temps, Inc. (a New York corporation). C) Temporary Nursing Services of California, Inc. (a California corporation). D) Temporary Nursing Services of Florida, Inc. (a Florida corporation). E) Temporary Nursing Services of Philadelphia, Inc. (a Pennsylvania corporation). F) Temporary Nursing Services of Kansas, Inc. (a Kansas corporation). G) Temporary Nursing Services of Texas, Inc. (a Texas corporation). H) Infu-Tech, Inc. (a Delaware corporation). 1) Infu-Tech, Inc. (a New Jersey corporation) (formerly Temporary Nursing Services, Inc.). 2) Infu-Tech of Florida, Inc. (a Florida corporation). 3) Infu-Tech of Massachusetts, Inc. (a Massachusetts corporation). 4) Infu-Tech of New York, Inc. (a New York corporation). 5) Infu-Tech of Tennessee, Inc. (a Tennessee corporation). 6) Intrx Medical, Inc. (a New Jersey corporation). I) TNS Nursing Homes, Inc. (a Delaware corporation). 1) Jayber Inc. (a New Jersey corporation). 2) Pompton Avenue Associates, Inc. (a New Jersey corporation). 3) Cape May Care Center, Inc. (a New Jersey corporation). 4) Hilltop Care Center, Inc. (a New Jersey corporation). 5) P.V.M. Associates, Inc. (a Florida corporation). 6) Continental Beachview, Inc. (a New Jersey corporation). 7) Continental Beachview Realty, Inc. (a New Jersey corporation). CONTINENTAL HEALTH AFFILIATES, INC. AND SUBSIDIARIES List of Subsidiaries (continued) 8) Continental Norwood, Inc. (a New Jersey corporation). 9) Continental Norwood Holdings, Inc. (a New Jersey corporation). 10) TNS Nursing Homes of Pennsylvania, Inc. (a Pennsylvania corporation). 11) Continental Teaneck Realty, Inc. (a New Jersey corporation). 12) Continental Riverview, Inc. (a New Jersey corporation). J) Continental Media, Inc. (a Delaware corporation). K) Continental Home Care, Inc. (a New Jersey corporation). 1) Marketech, Inc. (a Delaware corporation). L) TNS Certified Home Health Care Corp. (a New York corporation). M) Mid-South Comprehensive Home Health and Hospice, Inc. (a Tennessee corporation). N) Mid-South Staffing Services, Inc. (a Tennessee corporation). O) Continental Florida Management, Inc. (a Delaware corporation). P) TNS Home Life Support Systems, Inc. (a New Jersey corporation). Q) CH Acquisition, Inc. (a Delaware corporation). R) Compremedx Corporation (a Delaware corporation) (formerly Compremedx Cancer Centers Corporation). 1) Medparc Development Corp. (a New Jersey corporation). 2) Compremedx Medical Management, Inc. (a New Jersey corporation). 3) Continental Property Management Corp. (a New Jersey corporation). 4) Continental Nutrition Corp. (an Ohio corporation). 5) Compremedx Case Management, Inc. (a Delaware corporation) (formerly Compremedx, Inc.). 6) Compremedx Rehabilitation Services, Inc. (a New Jersey corporation). S) First American Norwood, Inc. (a New Jersey corporation). T) Cambridge Home Health Care (a Delaware corporation). CONTINENTAL HEALTH AFFILIATES, INC. AND SUBSIDIARIES List of Subsidiaries (continued) U) Continental Pharmaceuticals International, Inc. (a Delaware corporation) (formerly known as Continental Sana International, Inc.) V) Continental Pharmaceuticals, Inc. (a Delaware corporation). EX-27 7 FINANCIAL DATA SCHEDULE
5 1000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 2,900 0 14,370 4,193 1,996 17,230 58,816 4,363 75,572 17,185 50,574 3,500 1,000 186 2,009 75,572 69,880 69,880 12,001 65,764 0 1,210 3,823 349 270 79 0 777 0 786 0.09 0.000
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