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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 DECEMBER 31, 1996
COMMISSION FILE NO. 0-17821
THE CARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2962027
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE HOLLOW LANE, LAKE SUCCESS, NEW YORK 11042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516)869-8383
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 $.001 PER SHARE
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 10K or any amendment in this
Form 10K.[X]
As of March 26, 1997, the registrant had outstanding 12,597,053 shares of
Common Stock, $.001 par value per share.
As of March 26, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $14,683,000
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Stockholders, to be held on or about June 25, 1997,
definitive copies of which will be filed with the Securities and Exchange
Commission within 120 days after the end of the registrant's 1996 fiscal year;
this document will be incorporated into Part III of the Form 10-K.
TABLE OF CONTENTS
PAGE (S)
PART I Item 1. Business 1-9
Item 2. Properties 9-10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security
Holders 10-11
PART II Item 5. Market Information 11-12
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis
of Consolidated Financial Condition and
Results of Operations 14-21
Item 8. Consolidated Financial Statements and
Supplementary Data 22-41
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 42
PART III Item 10. Directors and Executive Officers of the
Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management 42
Item 13. Certain Relationships and Related
Transactions 42
PART IV Item 14. Exhibits, Consolidated Financial Statements,
Financial Statement Schedules, and Reports
on Form 8-K 42-47
SIGNATURES 48
PART I
PRELIMINARY STATEMENT
All statements contained herein that are not historical facts,
including, but not limited to, statements regarding the Company's current
business strategy, the Company's projected sources and uses of cash, and the
Company's plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: the availability of sufficient capital to finance the Company's
ongoing operations and business plans on terms satisfactory to the Company;
competitive factors, including the fact that many of the Company's competitors
have greater resources than the Company, which in fact will be exacerbated by
the industry trend towards consolidation; the Company's ability to win contract
awards from managed care organizations; the pricing pressure exerted by managed
care organizations; the Company's ability to identify and successfully
negotiate agreements with strategic partners; changes in the regulatory
environment in which the Company operates; changes in labor costs; and the
other factors detailed in this report, including, but not limited to, the
factors set forth under the heading "Certain Factors Affecting Operations and
Market Prices of Securities," and the factors described from time to time in
the Company's reports filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements which are made pursuant to the Private Litigation
Reform Act of 1995 and, as such, speak only as of the date made.
ITEM 1. BUSINESS
GENERAL
The Care Group, Inc., a Delaware corporation (the "Registrant"), and
its wholly-owned subsidiaries (collectively, the "Company"), through seven
branches located in four states, provide a full range of home health care
services, including nursing and related patient services, home infusion
therapies, and home durable medical equipment, including equipment for
respiratory therapies. With the formation in 1995 of Mail Order Meds, Inc.
("MOM"), the Company began distributing pharmaceuticals, nutritional
supplements, vitamins, herbal remedies, and related educational materials.
Focusing on disease management for chronic patients and offering a
full-range of home health care services, the Company utilizes its own nursing
staff, in conjunction with the patients' physicians, to assess patients' needs
and deliver all of the Company's services. Specializing in the specific needs
of patients in a number of diagnostic groups, consisting primarily of patients
with Human Immunodeficiency Virus ("HIV") and Acquired Immune Deficiency
Syndrome ("AIDS"), cancer patients and acute pediatric illnesses, enables the
Company, in management's opinion, to distinguish itself from many of its
competitors as a high quality, cost-effective provider of home health care
services. By concentrating its efforts on certain geographic regions,
specifically the greater New York area and Texas, management believes that the
Company will be better positioned to pursue contracts and alliances with
managed care organizations in these locations.
Capitalizing on the increasing use of oral medications instead of
infusion therapies, the Company entered the mail order pharmaceutical business
in 1995. Building on the Company's reputation in the HIV/AIDS field, MOM
specializes in providing pharmaceuticals and related products for, and
currently derives most of its revenue from, HIV and AIDS patients. MOM also
carries a full line of products for the treatment of other illnesses and
management believes other pharmaceutical products will constitute a growing
portion of MOM's revenues, although there can be no assurance that this will
occur.
1
COMPANY HISTORY
In recent years, the Company, which was formed in 1983, has grown
rapidly through a series of acquisitions which have enabled the Company to
expand its patient base and offer even more sophisticated home health care
services. On May 18, 1994, the Company acquired Advanced Care Associates, Inc.,
Advanced Care CPM, Inc. and Millwo Management, Inc., Pennsylvania corporations
("Advanced Care"), a provider of respiratory therapies and durable medical
equipment to patients at home and in rehabilitation centers. On July 18, 1994,
the Company acquired the assets of Clinical Care Services, Inc., a Georgia
corporation ("Clinical"), a provider of home health services, including nursing
services and home infusion therapy. During 1995, the Company commenced the
operations of MOM, a mail order pharmacy located in Austin, Texas. On September
12, 1995, the Company acquired Therapeutic Innovations, Inc., a Texas
corporation ("Therapeutic"), a provider of both in-patient and out-patient care
for the pediatric market. On November 19, 1996, the Company acquired
Commonwealth Certified Home Care, Inc., a New York corporation and a certified
nursing agency located in Nassau County, New York.
The following table sets forth the approximate aggregate percentages
of patient revenues derived by the Company from its designated services in the
year ended December 31, 1996.
Nursing Related Patient Services........................ 34%
Home Infusion Therapies................................. 48%
Durable Medical Equipment............................... 13%
Mail Order Pharmaceuticals.............................. 5%
---
Total...................................................100%
===
Currently, the Company provides its services in Atlanta, GA; Austin,
TX; Dallas, TX; Houston, TX; Los Angeles, CA; Nassau County, NY and New York
City, NY.
OVERVIEW OF THE HOME HEALTH CARE INDUSTRY
One of the major factors contributing to the rapid growth of home
health care has been the use of alternate site health care to contain the
rising costs of health care. Consumers of all types, including governmental
bodies, managed care organizations, insurance companies and private payors are
recognizing the savings that can be realized by offering care in the home as
opposed to institutional settings. In addition, an aging population and
patients' preferences for receiving health care in the comfort of the home,
combined with advances in medical technology making the delivery of
sophisticated treatments in the home a reality, are all contributing to the
continued growth of the home health care industry.
Managed care organizations are becoming important players in the home
health market and have exerted pricing pressure on the providers of home health
care services. Such pressure has negatively impacted the profit margins of home
health care producers. In addition, as the managed care organizations continue
to grow, they may show a preference to deal only with those home health care
service providers who can offer a comprehensive range of services throughout
such managed care organization's area of operations. In response, what once was
a very fragmented industry is undergoing a wave of consolidation.
With the development of additional oral medications to replace
medications that are administered intravenously, there has been a decrease in
the demand for home infusion therapies. Providers of oral pharmaceuticals are
servicing an increasing number of patients who previously required infusion
therapies.
2
STRATEGY
Building on its established presence in the Northeast and Southwest,
the Company seeks to further enhance its position in these markets by providing
a full range of cost-effective home health care services. To achieve this goal,
the Company intends to more closely coordinate and monitor patient care through
its own nursing staff and in training its employees, identifying patients'
needs and cross-selling the Company's services. Complimenting its program of
internal growth, the Company intends to expand its existing branch locations,
expand the range of services offered and increase referrals from managed care
organizations.
In addition, the Company intends to heighten its regional standing and
focus by continuing its program of acquisitions within New York and New Jersey,
acquiring home health care providers which operate in existing markets and
divesting assets outside of its core regions. Management believes that by
developing a substantial market presence in its core regions, the Company will
be able to increase its referrals from managed care organizations. Currently,
management is discussing a possible combination with another provider of home
care services in the New York area. There can be no assurance, however, that
the Company will be able to successfully negotiate a deal with such company.
Nor can there be any assurance that if the Company consummates a deal, it will
achieve the goal of increasing its regional standing and referral base. The
Company has entered into a letter of intent to sell its Georgia operation for
$1.6 million, which sale is currently expected to be consummated by May, 1997.
There can be no assurance, however, that the Company will be able to
successfully negotiate a definitive agreement, or, if an agreement is
negotiated, that it will provide for $1.6 million in proceeds to the Company or
that it will be consummated by May, 1997, if ever. In addition, the Company is
actively seeking a buyer for its California operation. There can be no
assurance that the Company will find a buyer for its California operation. Even
if a buyer is found, the Company does not expect to derive significant proceeds
from such sale. If the Company is unable to find a buyer shortly, it may cease
it operations in California, which have been generating operating losses.
All of the Company's branches are accredited by the Joint Commission
on Accreditation of Healthcare Organizations ("JCAHO"), a prerequisite to
procuring contracts with many managed care organizations. The Company is also
targeting managed care organizations by stressing its disease management
programs for the treatment of HIV/AIDS, cancer, and other chronic illnesses,
and providing customized outcome and utilization reports. The Company expects
that managed care contracts will generate an increasing number of referrals as
the penetration of managed care continues to accelerate.
As a provider of oral pharmaceuticals, MOM intends to focus its
marketing efforts on managed care organizations who offer prescription drug
plans. In addition, MOM will continue to utilize its just in time inventory
program, which enables it to fill a patient's prescription without having to
invest working capital in inventory.
PRODUCTS AND SERVICES
The Company delivers its services through branches whose functions
include (i) receiving referrals from physicians, (ii) assessing a patient's
needs, (iii) determining the extent of a patient's insurance coverage and
coordinating reimbursement for services, (iv) coordinating the delivery of care
to the patient and (v) supervising the quality of the care the patient
receives.
Each branch is managed by an administrator who is responsible for
ensuring the quality of the services of the Company. Coordinators at each site
work with all the professionals servicing the patient to ensure the proper
management of the patient's care. Attached to each branch is a pharmacy which,
among other things, prepares the solutions used for home infusion therapies.
Offering a full range of home health care services and coordinating that care
through its own nursing staff allows the Company to offer cost-effective, high
quality services.
3
In addition to the clinical staff, each branch maintains its own sales
force which is responsible for increasing the Company's referral base and
marketing its services to managed care organizations. The Company believes that
its sales force is appropriately trained to cross-sell all of the Company's
services. Billing and collections are also handled by each branch.
Home Health Care
Nursing and Related Patient Services. Working closely with each
patient's physician, who develops that patient's plan of treatment, the team of
clinicians at the branch closely monitors the patient's course of treatment and
provides the physician with regular reports on the patient's status. Prior to
the delivery of home health care, a nurse from the local branch assesses the
home environment and helps determine the suitability of home care and what
services are needed. Nurses continue to visit their patients as needed to
carefully monitor their course of treatment. The Company offers a broad range
of nursing and related patient services, including:
Registered nurses who provide a broad range of nursing care,
including pain management, respiratory therapy, infusion therapy,
skilled observation and assessment and teaching procedures.
Licensed practical nurses who perform technical nursing procedures,
such as injections and dressing changes.
Physical therapists who provide needed therapies to help patients
improve activities of daily living, as well as structured therapies
to improve mobility and specialized exercise programs.
Occupational therapists who provide structured therapies for
increased independence in the patient's daily living.
Speech therapists who provide therapies to increase a patient's
communication skills and improve swallowing techniques following a
trauma.
Social workers who help patients and their families deal with the
gamut of concerns that arise from health problems.
Home health aides, companions and homemakers provide assistance,
hourly or around-the- clock, with personal care, such as bathing and
walking, as well as meal preparation and general cleaning.
Infusion Therapy Services. Infusion therapies involve the intravenous
administration of anti-infective, chemotherapy, pain management, nutrition and
other therapies. Before accepting a patient for home infusion treatment, the
nursing staff at the local branch work closely with the patient's physician to
assess the patient's suitability for home care. Once it has been determined
that the patient should receive home infusion therapy, the nursing staff trains
the patient and/or patient's family members in the proper use of home infusion
therapy equipment. Pharmacies located at the branch prepare the home infusion
therapies and the Company supplies the necessary durable medical equipment. The
Company provides the following home infusion therapy services:
Anti-infective therapy is the infusion of antibacterial, anti-viral
or anti-fungal drugs into the patient's bloodstream, to treat a
variety of infections and diseases including osteomyelities (bone
infection), lyme disease, bacterial endocarditis (infection of the
lining around the heart), septicemia (blood poisoning), wound
infections and infections of kidneys and urinary tract. In addition,
patients with suppressed immune systems, including cancer patients on
chemotherapy and patients with AIDS, may require antibiotic
therapies.
4
Total parenteral nutrition, or TPN, involves the intravenous delivery
of life sustaining nutrients to patients unable to ingest or absorb
nutrients due to a disorder of the gastrointestinal tract. Certain
conditions that require TPN include intestinal obstruction, cancer,
AIDS, inflammatory bowel disease, short bowel syndrome and many other
gastrointestinal disorders. TPN is administered through a catheter,
which is surgically implanted in a major blood vessel during
hospitalization, to permit required nutrients to be directly
delivered into the patient's blood stream. Many TPN patients require
indefinite or permanent treatment because the illness from which they
suffer are recurring in nature.
Enteral nutrition therapy administers nutrients to patients who
cannot eat as a result of an obstruction of the digestive tract or
because they are otherwise unable to feed themselves orally. Enteral
nutrition is administered by direct infusion of nutrients through a
feeding tube into the portion of the patient's digestive tract that
remains functional. Enteral nutrition therapy is administered over a
long period, generally more than six months.
Pain management therapy is the administration of analgesic drugs to
terminally or chronically ill patients suffering from acute or
chronic pain. Generally, this therapy is administered under
physicians orders in a way that permits the patient to regulate the
intravenous infusion of analgesic drugs in proportion to the severity
of the pain experienced.
Chemotherapy is the administration of cytotoxic drug to patients
suffering from various types of cancer. Continuous infusion
chemotherapy is the administration of chemotherapeutic agents through
a catheter inserted into a patient's vein or a catheter which is
surgically implanted in a major blood vessel. Generally, chemotherapy
is administered periodically for several weeks or months.
Intra-Dialytic Parenteral Nutrition or IDPN, is the provision of life
sustaining nutrients to patients suffering from end stage renal
disease during their dialysis treatment.
Other therapies provided by the Company include, but are not limited
to, dobutamine therapy, blood components, IV gamma globulin,
hydration therapy, tocolytic therapy and aerosol pentamidine.
Durable Medical Equipment. The Company provides durable medical
equipment to serve the needs of its patients, including hospital beds,
wheelchairs, ambulatory aids, bathroom aids, patient lifts and rehabilitation
equipment. In addition to servicing its home care patients, the Company markets
its durable medical equipment throughout the United States.
Respiratory Therapy Services. The Company provides home respiratory therapy
services to patients who suffer from a variety of conditions, including chronic
obstructive pulmonary diseases (for example, emphysema and bronchitis). The
Company offers the following respiratory therapy services:
Oxygen systems of which there are three types: (i) oxygen
concentrators, which are stationary units that extract oxygen from
ordinary air to provide a continuous flow of oxygen, (ii) liquid
oxygen systems, which are portable, thermally insulated containers of
liquid oxygen, and (iii) high pressure oxygen cylinders, which are
used for portability with oxygen concentrators.
Nebulizers which deliver aerosol medication to patients to treat
asthma, chronic obstructive pulmonary diseases, cystic fibrosis and
neurologically related respiratory problems.
5
Home ventilators which sustain a patient's respiratory function
mechanically when a patient can no longer breathe normally.
Continuous positive airway pressure therapy which forces air through
respiratory passage-ways during sleep.
Apnea monitors which monitor and warn parents of apnea episodes in
newborn infants as a preventive measure against sudden infant death
syndrome.
Sleep studies which are used to detect sleep disorders and the
magnitude of such disorders.
Mail Order Pharmaceuticals
In order to capitalize on the increasing number of oral medications
that are replacing drugs that were administered intravenously, the Company
established MOM in 1995. Since its establishment, MOM has become eligible to
fill prescriptions for patients on all the major prescription drug plans,
including but not limited to, PCS and PAID prescriptions.
MOM specializes in providing drugs for HIV and AIDS patients, but it
carries a full line of products to treat all major illnesses. Providing oral
medication to this patient base allows the Company to establish a relationship
with the patients at an early stage in their treatment. Approximately one-third
of MOM's revenue is derived from supplying pharmaceuticals and related products
to the Company's home health care patients.
The Company's just in time inventory system allows it to stock a wide
array of pharmaceuticals without investing in a substantial inventory.
MARKETING AND SALES
The Company generates referrals from physicians, hospitals, discharge
planners and other health care professionals. Recently, more people have
enrolled in managed care organizations and, as a result, the Company's
traditional referral base has changed. In order to compete, the Company is
continuing its program of marketing its services to managed care organizations.
The Company competes for referrals by offering a full range of cost-effective
home health care services, a focus on disease management and a strong regional
presence. The Company believes that its reputation as a cost-conscious provider
of services positions it favorably with managed care organizations.
Each branch manager spends a significant amount of time marketing the
Company's services to referral and payment sources. In addition, each branch
has one to five employees whose sole function is to market the Company's
services. The marketing techniques employed by the Company include direct
solicitation, direct mail, exhibitions at professional conferences and
seminars, submission of proposals for contractual arrangement, active
participation in community events and an on-going commitment to customer
service.
Corporate personnel work closely with each branch's sales and
marketing staff to develop their abilities to cross-sell the Company's
services. The nursing staff assist in the marketing effort by helping to
educate referral sources about the services the Company offers to its
specialized patient populations.
MAJOR CUSTOMERS
Excluding governmental payors, which accounted for approximately 15
percent of the Company's net revenues in 1996, the Company had no major
customer that accounted for 10 percent or more of its net revenues for the
years ended December 31, 1996, 1995 and 1994.
6
REIMBURSEMENT FOR SERVICES
In excess of 96 percent of the Company's revenues are received from
third-party payors (insurance companies or government agencies) with payment
from the patient comprising the balance. As with other health care providers,
the Company experiences significant delays in reimbursement due to third-party
payment procedures. Consequently, proper management of accounts receivable is
crucial to the success of the Company. In order to assure payment, the
Company's reimbursement specialists verify the patient's insurance coverage as
part of the patient intake system. At present, it is common for prices to be
negotiated during the verification process for the services to be rendered. The
Company's reimbursement specialists continue to monitor the patient's insurance
coverage until discharge. Due to the catastrophic nature of the illnesses of
the Company's patient population, the Company's reimbursement specialists
continually monitor the lifetime limits, the availability of special state
programs and other reimbursement related issues. In an effort by payors to
control costs, verification and negotiation are becoming standard procedures on
an industry-wide basis.
In addition to verification and negotiation, the Company typically
obtains an assignment of benefits from the patient that enables the Company to
file the claims for its services with the third-party payor. Once reimbursement
processing has been established with the third-party payor, claims processing
and reimbursement for a patient tend to become routine, subject to continued
patient eligibility and other coverage limitations.
During the past year, the Company has increased its provision for
doubtful accounts receivable since a number of third-party payors, typically
insurance companies, have paid the Company what they determine to be the
"customary" fee for the services provided by the Company, as opposed to the
amounts billed by the Company. Such "customary" fees are less than what the
Company typically charges. Such fees are not disclosed to the Company or the
insured at the time the services are provided. On a number of occasions, the
Company has been successful in challenging the insurance companies' claims of
what constitutes a "customary" fee. As managed care organizations constitute a
larger portion of the Company's billing base, the Company believes that it will
not continue to have problems collecting payments since the fees paid by
managed care organizations are determined by contract. In addition, Medicare
has established a national fee schedule for infusion therapy, home durable
medical equipment and respiratory therapies.
COMPETITION
The home healthcare market is highly competitive and is undergoing
both horizontal and vertical integration. As a result of such consolidation,
the Company's competitors include nationwide operators who have hundreds of
branches. Some of the competitors include hospital chains and providers of
multiple products and services for the home health care market. The established
referral networks of certain of these health care providers, combined with
their size and purchasing power, make them formidable competitors to the
Company. Managed care organizations, a referral base crucial to the Company's
success, may show a preference to deal with these larger, regional or national
providers, who may offer more services and areas of expertise.
In addition, there are few barriers to entry in the home health care
market. New competitors have entered the areas served by the Company and others
may do so in the future. There can be no assurance that such increased
competition will not have a material adverse effect on the Company's operations
and financial condition.
The Company competes on the basis of a number of factors, including
the cost-effectiveness of its services, the quality of its services, and its
reputation and regional focus. The Company's focus on disease management and
emphasis on treating certain patient populations allows it to differentiate
itself from its competitors. By increasing its regional focus and reducing its
overhead to become a low-cost provider, the Company believes that it can
compete against larger alternate health care providers.
7
REGULATORY REQUIREMENTS
The Company's business is subject to extensive federal, state and
local regulations.
Permits, Licensure and Certification. Companies providing certain home
health care services must be licensed as home health agencies in certain
states. The Company currently is licensed as a home health agency where
required by the law of the states in which it operates and certain of the
Company's branches are Medicare certified home health agencies and, as such,
may service Medicare and Medicaid patients. Certain health care practitioners
employed by the Company require state licensure and/or registration and must
comply with laws and regulations governing standards of practice. In addition,
the Company's pharmacy operations require state licensure and are also subject
to federal and other state laws and regulations governing pharmacies and the
packaging and repackaging and dispensing of drugs. Federal laws may require
registration with the Drug Enforcement Administration of the United States
Department of Justice and the satisfaction of certain requirements concerning
security, record keeping, inventory controls, prescription order forms and
labeling. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect the Company's business.
There can be no assurance that either the states or the federal government will
not impose additional regulations upon the Company's activities which might
adversely affect its business, results of operations or financial condition.
Certificates of Need. Certain states require companies providing home
health care services to obtain a certificate of need issued by a state health
planning agency. Some states require such certificates of need only for
Medicare-certified home health agencies. The Company has obtained a certificate
of need for Nassau County, New York and Atlanta, Georgia and, therefore, can
service Medicare and Medicaid patients in those areas. There can be no
assurance that the Company will be able to obtain any certificates of need
which may be required in the future if the Company expands the scope of its
services or if state laws change to impose additional certificate of need
requirements, and any attempt to obtain additional certificates of need will
cause the Company to incur certain expenses.
Fraud and Abuse Laws. The Company is also subject to federal and state
laws prohibiting direct or indirect payments for patient referrals, prohibiting
referrals to an entity in which the referring provider has a financial
interest, and regulating reimbursement procedures and practices under Medicare,
Medicaid and state programs as well as in relation to private payors. While the
Company believes that it is in material compliance with such laws, it continues
to monitor its compliance.
The anti-kickback provisions of the federal Medicare and Medicaid
Patient and Program Protection Act of 1987 (the "Anti-kickback Statute")
prohibit the offer, payment, solicitation or receipt of any remuneration in
return for the referral of items or services paid for in whole or in part under
the Medicare or Medicaid programs (or certain other state or health care
programs). To date, courts and government agencies have interpreted the
Anti-kickback Statute to apply to a broad range of financial relationships
between providers and referral sources, such as physicians and other
practitioners. The United States Department of Health and Human Services has
adopted regulations creating "safe harbors" for federal criminal and civil
penalties under the Anti-kickback Statute by exempting certain types of
ownership interests and other financial arrangements that do not appear to pose
a threat of Medicare and Medicaid program abuse.
8
Transactions covered by the Anti-kickback Statue that do not conform
to an applicable safe harbor and are not necessarily in violation of the
Anti-kickback Statute, but the practice may be subject to increased scrutiny
and possible prosecution. The criminal penalty for conviction under the
Anti-kickback Statute is a fine of up to $25,000 and/or up to 5 years
imprisonment. In addition, conviction mandates exclusion from participation in
the Medicare and Medicaid programs. Such exclusion can also result based on
conviction under other federal laws which impose civil and criminal penalties
for submitting false claims, such as claims for services not provided as
alleged. Several health care reform proposals have included an expansion of the
Anti-kickback Statute to apply to referrals of any patients regardless of payor
source.
The federal government has increased significantly the financial and
human resources allocated to enforcing the fraud and abuse laws. It is the
Company's policy to monitor its compliance with such laws and to take
appropriate actions to ensure such compliance. While the Company believes that
it is in material compliance with such laws, there can be no assurance that the
practices of the Company, if reviewed, would be found to be in full compliance
with such laws, as such laws ultimately may be interpreted.
Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"). All of the Company's branches have been accredited by JCAHO, a
nationally recognized organization that develops standards for home health care
providers and monitors compliance with those standards. Due to the expenses and
burden involved in receiving accreditation, not all home health care providers
have undergone the accreditation process. Since the Company has undergone the
extensive review necessary to receive the JCAHO accreditation, it is better
positioned to receive contracts from managed care organizations.
INSURANCE
The Company carries an error and omission policy covering certain
negligence and other acts by the Company's nurse's aides with liability
limitations of $1,000,000 for professional responsibility plus a $7,000,000
umbrella policy, for total coverage of $8,000,000 for any individual act or
$9,000,000 in aggregate. The Company carries $3,000,000 of coverage for
directors and officers, as well as additional insurance policies covering
certain property damage and employee disability.
Management believes that such policies are adequate and are
competitively priced. There can be no assurance however, that such insurance
policies will continue to be available to the Company at rates which the
Company can afford, or, that they will adequately cover the Company's losses
from malpractice, negligence and other claims.
EMPLOYEES
As of December 31, 1996, the Company had 444 employees. 177 employees
are full-time office staff or sales employees, the remaining employees are
field staff. The Company's employees are not currently represented by a labor
union or other labor organization. The Company considers its relationship with
its employees to be good.
ITEM 2. PROPERTIES
The Company's executive office is located in Lake Success, New York, a
suburb of New York City, in approximately 5,500 square feet of leased space.
9
The Company maintains an office in each city where it conducts
business (See "Item 1 - Business Company History"). Each of the Company's seven
office locations, plus the executive office, leases approximately 1,500 to
8,000 square feet of office space in its respective locations. The Company's
leased properties are suitable and adequate for the Company's current needs and
additional space is expected to be available as needed at competitive rates.
The Company paid approximately $901,000 for office rent in 1996. At the end of
January 1997, the Company's Houston facility lease expired and the Company has
not yet renewed such lease. The Company is currently renting such facility on a
month to month basis. Management is negotiating to lease new space of
approximately 14,000 square feet for a monthly rent of under $10,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary
course of its business. In addition, on March 5, 1997, the Company was served
with a lawsuit from the Asset Value Fund Limited Partnership ("Asset Value
Fund") for breach of contract. On or about June 19, 1996, Asset Value Fund
purchased 150,000 shares of the Company's common stock at a reduced price, and,
in connection with such purchase, was granted the right to have such shares
registered on demand with the Securities and Exchange Commission within six
months from June 19, 1996. In late November 1996, the Company was presented
with a demand to register the shares purchased by Asset Value Fund. Asset Value
Fund is suing the Company for, among other things, failing to register the
shares in a timely manner. Management believes that any liability that may
result upon the resolution of these claims and lawsuits will not have, in the
aggregate, a material adverse effect on the operations and financial condition
of the Company, although there can be no assurance to this effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of the Stockholders of the Registrant was held
on October 4, 1996 for the purpose of (i) electing two Class III directors of
the Registrant for a period of three years, (ii) ratifying the selection of
Deloitte & Touche LLP as independent public accountants for the Registrant for
the fiscal year ending December 31, 1996, (iii) approving the amendment to the
Registrant's Certificate of Incorporation to increase the total number of
authorized shares of Common Stock from 20,000,000 to 30,000,000 and the total
number of shares of authorized Preferred Stock from 1,000,000 to 2,000,000,
(iv) approving the private placement of 58 units of the Company's securities
for a purchase price equal to $50,000 per unit, and (v) approving the
Registrant's 1996 Stock Option Plan.
ELECTION OF DIRECTORS. With respect to the election of directors, all
of the nominees were elected according to the following votes:
For Votes Against
------ -------------
John Pappajohn 9,183,495 116,564
Pat H. Celli 9,054,685 245,374
RATIFICATION OF AUDITORS. The ratification of the selection of
Deloitte & Touche LLP as independent public accountants for the Registrant for
the fiscal year ending December 31, 1996 was ratified according to the
following vote:
For Against Abstentions
-------- --------- -----------
9,191,895 83,375 24,789
AMENDMENT TO THE CERTIFICATE OF INCORPORATION. The proposal to amend
the Registrant's Certificate of Incorporation to increase the total number of
authorized shares of Common Stock from 20,000,000 to 30,000,000 and the total
number of shares of authorized Preferred Stock from 1,000,000 to 2,000,000 was
approved with the following vote.
10
For Against Abstentions Non-Votes
----- ------- ----------- ---------
6,113,723 374,329 33,460 2,778,547
PRIVATE PLACEMENT. The proposal to approve the private placement of 58
units of the Company's securities for a purchase price equal to $50,000 per
unit was approved.
For Against Abstentions Non-Votes
------ ------- ----------- -----------
6,067,435 387,785 39,940 2,795,899
1996 STOCK OPTION PLAN. The proposal to approve the Registrant's 1996
Stock Option Plan was approved with the following vote:
For Against Abstentions
--- ------- -----------
8,350,012 892,357 57,690
PART II
ITEM 5. MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter market
and quoted on the NASDAQ National Market System under the symbol CARE. The
following table sets forth the high and low bid prices for the Company's Common
Stock for each quarter for the last two fiscal years as quoted on the NASDAQ
National Market System. The prices set forth below represent prices between
dealers, do not include retail mark-ups, markdowns or commissions and do not
necessarily represent actual transactions.
MARKET PRICES
YEAR ENDED DECEMBER 31, 1995:
HIGH LOW
---- ---
FIRST QUARTER................... $6.50 $4.38
SECOND QUARTER.................. 4.56 3.13
THIRD QUARTER................... 4.25 3.50
FOURTH QUARTER.................. 3.62 1.68
YEAR ENDED DECEMBER 31, 1996:
HIGH LOW
---- ---
FIRST QUARTER................... $2.68 $1.68
SECOND QUARTER.................. 2.13 1.50
THIRD QUARTER................... 2.31 1.75
FOURTH QUARTER.................. 2.75 1.56
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock. The
Company intends to retain all earnings for the operation and expansion of its
business, and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of cash dividends will
depend upon the Company's results of operations, financial condition and
capital requirements, as well as such other factors as the Company's Board of
Directors may consider.
11
NUMBER OF STOCKHOLDERS
As of March 26, 1997, there were 321 holders of record of the
outstanding shares of Common Stock (according to the records of the Company's
transfer agent, American Stock Transfer & Trust Company). Since most holders of
the Company's stock have placed their shares in street name, this figure is
much lower than the actual number of beneficial holders of common stock, which
is estimated to be over 3,000 stockholders.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share
data)
The consolidated financial data included in this table with respect to each
year in the five-year period ended December 31, 1996, and at each year-end date
in such period, have been selected by the Company and have been derived from
the Company's audited consolidated financial statements for those years. The
data should be read in conjunction with the consolidated financial statements,
related notes and other financial information included elsewhere in this Form
10-K, or filed in a previous Form 10-K.
YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS -------------------------------------------------------
OF OPERATIONS DATA 1996 1995 1994 1993 1992
- ------------------------------- ---- ---- ---- ----- -----
Net Revenues $ 35,274 $39,718 $36,381 $ 29,537 $ 28,266
Cost of Revenues and Operating Expenses 45,977 37,586 33,777 28,502 27,165
(Loss) Income Before Provision for Income
Taxes and Extraordinary Item (11,475) 1,444 2,146 870 1,206
Extraordinary Item Net of Tax Benefit -- -- -- --
(1,145)
Net (Loss) Income (9,952) 746 1,214 460 (521)
(Loss) Income Per Share Before Extraordinary Item (1.03) .09 .16 .08 .10
Extraordinary item net of tax benefit -- -- -- --
(.19)
Net (Loss) Income Per Share (1.03) .09 .16 .08 (.09)
Cash Dividends Declared -- -- -- -- --
CONSOLIDATED BALANCE SHEET DATA DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Total Assets $30,808 $37,010 $35,408 $24,457 $20,527
Long-term Obligations 1,974 8,522 9,014 133 480
Total Liabilities 12,379 12,619 12,071 5,806 3,553
Redeemable Common Stock -- 1,000 -- -- --
Stockholders' Equity 18,429 23,391 23,337 18,651 16,974
See Item 8, Note 3 - "Business Combinations" and Item 7 - "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations", for information that affects comparability of the foregoing data.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results of Operations - 1996 verses 1995
- ----------------------------------------
Net revenues decreased to $35,274,000 for the twelve months ended
December 31,1996 as compared to $39,718,000 for the same period last year. The
decrease of $4,444,000 or 11.2 percent was isolated to New York and Dallas.
First, the Company's referral sources in both of these markets are primarily
physicians and they reported less patient volume for the same period. Second,
with the growth of managed care organizations, some of the Company's physicians
are not able to refer patients to the Company because of restrictions on their
patient's health plans. Managed care has not only had the effect of reducing
the Company's rates on a per therapy basis, but, more importantly, it has
changed referral patterns and has made it more difficult to obtain qualified
referrals from our physician base. The Company is aggressively pursuing
contracts with health maintenance organizations, preferred provider
organizations, hospital discharge planners and other case management entities.
These contracts, to the extent obtained, will enable the Company to receive
referrals directly from these entities as well as receive all referrals from
its physician base.
Cost of revenues for the year ended December 31,1996 was $19,255,000,
or 55 percent of net revenue as compared to $20,165,00, or 51 percent of net
revenues in the prior year. The increase in cost of revenues as a percentage of
net revenues is due primarily to non-cash inventory adjustments of
approximately $865,000 in 1996 or 2.5 percent of net revenues.
The Company's selling, general and administrative expenses as a
percentage of net revenues was 67% for 1996 as compared to 44% for 1995. The
increase is primarily attributable to an increase in the provision for doubtful
accounts receivable and bad debt write-offs of $8,720,000 from $2,400,000 in
the prior year and a decrease in net revenues. The Company also wrote-off
$2,975,000 of intangible and certain other assets in June 1996.
Net (loss) income was $(9,952,000) or $(1.03) per share in 1996 as
compared to $746,000 or $.09 per share for the prior year. The net loss was
primarily attributable to several factors: write-off of doubtful accounts
receivable and the increase in the allowance for doubtful accounts receivable
of $8,720,000 and the write-off of intangible and certain other assets of
$2,975,000. The remaining operating loss was caused by the reduction in
business volume.
Results of Operations - 1995 verses 1994
Net revenues of the twelve months ended December 31, 1995 increased to
$39,718,000 compared to $36,381,000 for the same period last year. The 9
percent increase was primarily due to internal growth in most existing offices
and the establishment of the Company's Mail Order Meds ("MOM") operation.
Cost of revenues for the year ended December 31, 1995 were $20,165,000
or 51 percent of net revenues as compared to $20,031,000 or 55 percent of net
revenues in the prior year. The 4 percent decrease is primarily attributable to
the growth of revenue from the durable medical equipment business, as compared
to nursing revenues. The infusion and durable medical equipment businesses
typically have higher gross profit margins than traditional nursing and home
health aide services.
The Company's selling, general and administrative expenses as a
percentage of net revenues was 44 percent for 1995 as compared to 38 percent
for 1994. This increase is due to an increase in the provision for doubtful
accounts receivable due to additional write-offs of accounts receivable during
1995. The provision for doubtful accounts receivable was $2,400,000 for 1995,
or 6 percent of net revenues, versus $180,000, or .05 percent of net revenues,
in 1994.
14
Net income was $746,000 or $.09 per share in 1995 as compared to
$1,214,000 or $.16 per share for the prior year. The difference in net income
is primarily attributable to the Company's MOM operation, which in its first
full year of operation produced revenue of $1,200,000 and a pretax operating
loss of $500,000.
LIQUIDITY AND CAPITAL RESOURCES
Current assets decreased to $15,336,000 at December 31, 1996 from
$18,552,000 at December 31, 1995. The decrease of $3,216,000 in current assets
was due to a decrease of (i) $2,764,000 in accounts receivable, (ii) $1,024,000
in cash and cash equivalents and marketable securities, (iii) $875,000 in
inventories, and (iv) $315,000 in prepaid expenses and other current assets,
and was partially offset by an increase of $1,875,000 in recoverable income
taxes receivable. The decrease in accounts receivable is primarily attributable
to the increase in allowances for doubtful accounts receivable and lower
revenue volumes. The decrease in accounts receivable was also impacted by the
increase in referrals from managed care organizations who pay negotiated
amounts, thereby allowing the Company to collect receivables on a more timely
basis. These negotiated amounts, however, are generally lower than the fees
usually charged by the Company. The decrease in cash and cash equivalents,
marketable securities, prepaid expenses and other current assets was primarily
attributable to the Company's reduction in bank debt from $6,800,000 in 1995 to
$5,192,000 in 1996. The decrease in inventories was primarily attributable to
the write-off of obsolete inventory. The increase in recoverable income taxes
was attributable to the Company's net loss for the year.
At December 31, 1996, working capital was $4,931,000 as compared to
$14,455,000 at December 31, 1995. The decrease of $9,524,000 is primarily
attributable to the decrease in accounts receivable, cash and cash equivalents
and marketable securities discussed above as well as the reclass of bank debt
of $5,192,000 as a current liability (see Note 6 to the consolidated financial
statements). The decrease is also attributable to a $891,000 increase in other
short-term debt as well as a $371,000 increase in accounts payable, offset by a
$299,000 reduction in the current portion of long-term debt.
Other short-term debt increased as a result of a note from the
Company's major supplier, and loans from potential investors. The current
portion of long-term debt relates primarily to the settlement agreement ("the
"Settlement") with the United States Government of claims relating to alleged
improper Medicare billing and reimbursement practices at Advanced Care during
the period prior to the acquisition of Advanced Care by the Company. In
connection with the Settlement, Advanced Care, among other things, issued the
United States Government a $2,780,000 note, bearing interest at 9 percent per
annum, which is payable quarterly over four and one-half years. In addition to
the amounts payble on the Advanced Care note, during 1997, the Company will pay
approximately $931,00 of principal payments on notes issued in connection with
acquisitions made in 1994, 1995 and 1996.
On December 31, 1996, the Company entered into a three-year revolving
term credit agreement (the "Credit Agreement") with Key Bank of New York (the
"Lender") which provides for borrowing up to $9,000,000, with interest payable
at prime plus one-quarter percent. Pursuant to the Credit Agreement, the amount
the Company may borrow is determined with reference to the following formula
(the "Formula"): up to 65 percent of eligible receivables under 120 days old,
plus the lesser of $600,000 or 40 percent of all eligible receivables more than
120 days and less then 240 days old, plus the lesser of $200,000 or 30 percent
of eligible inventory, as defined in the Credit Agreement. As of December 31,
1996, the Formula equaled approximately $5,250,000 and the outstanding balance
of the funds advanced to the Company pursuant to the Credit Agreement was
$5,192,344. Accordingly, the Company's borrowing availability, as determined
pursuant to the Formula, was approximately $58,000.
15
As of December 31, 1996, the Company was in violation of certain
financial covenants (the "Financial Covenants") contained in the Credit
Agreement. The Lender has waived the violation, but such waiver does not
currently permit the Company to continue to borrow additional amounts under the
Credit Agreement. As noted above, even if such waiver permitted the Company to
borrow under the Credit Agreement, pursuant to the Formula, the Company would
have been able to borrow only a nominal amount.
In addition, management currently anticipates that the Company may
report an operating loss for the first quarter of 1997, and, as of March 31,
1997, again will be in violation of the Financial Covenants. Accordingly, the
Company anticipates that it will have to seek an additional waiver from the
Lender. There can be no assurance, however, that the Lender will grant such
waiver, or on what conditions such waiver will be granted. If the Lender does
not grant a waiver, the Lender could accelerate payment of the indebtedness
under the Credit Agreement. The Company is currently working closely to
restructure its bank financing or replace it if necessary. The Company has
received a non-binding letter of intent from an alternative financing source to
replace the bank debt, if necessary. The Company has reclassified the bank debt
as a current liability because of the March 31,1997 violation of the financial
covenants.
On each of January 30, 1997 and February 28, 1997, Equity Dynamics
advanced the Company $250,000, for a total of $500,000, in exchange for the
Company's notes. The notes issued in January and February, 1997 will be
exchanged in April, 1997 for 10 units (the "Units") of the Company's securities
(the "Exchange"). Each Unit consists of 40,000 shares of common stock and
warrants to purchase 40,000 shares of common stock at $2.50 per share. On March
18, 1997, the Company consummated a private placement of an additional 10 Units
and received net proceeds of $500,000. On April 3, 1997, the Company
consummated a private placement of an additional 18.75 units and received
$750,000. The Company anticipates consummating the private placement for up to
an additional 6.25 Units in April, 1997 (in addition to the Exchange) and
expects to receive net proceeds of up to $250,000.
In order to reduce its overhead and create a more focused entity and
improve its liquidity and financial condition, the Company plans to dispose of
operations in Georgia and California, which are outside of its core base of
operations of New York and Texas. The Georgia and California branches of the
Company have negatively impacted the Company's operations and have not produced
the revenue anticipated by the Company, primarily because of the loss of
referral sources in those markets. In addition, the Company is seeking a
strategic merger partner in order to spread its overhead over a larger patient
base and increase its market presence. Finally, the Company intends to improve
its revenues by aggressively marketing itself and training its employees to
more effectively cross-sell the Company's services. The Company has deployed
six (6) sales representatives in the New York Metropolitan area alone to
achieve this goal.
The Company has entered into a letter of intent to sell its Georgia
branch for $1.6 million, which sale is currently expected to be consummated by
May, 1997. There can be no assurance, however, that the Company will be able to
successfully negotiate a definitive agreement, or, if an agreement is
negotiated, that it will provide for $1.6 million in proceeds to the Company or
that it will be consummated by May 1997, if ever. In addition, the Company is
actively seeking a buyer for it California branch. Even if a buyer is found,
the Company does not expect to derive significant proceeds from such sale. If
the Company is unable to find a buyer shortly, it may cease its operations in
California, which have been generating operating losses. The Company expects
that the disposition of these two facilities will enhance the net operating
results of the Company.
In addition, the Company is discussing a possible business
combination with another provider of home infusion therapies in the New York
area. There can be no assurance, however, that the Company will be able to
successfully negotiate a deal with such company, what terms will ultimately be
negotiated, or, if the Company consummates a deal, that it will achieve the
goal of improving the Company's gross margins and increasing the Company's
regional presence and referral base.
16
The Company currently anticipates that any acquisitions it
undertakes in 1997 will be financed principally through the issuance of equity
securities. There can be no assurance, however, that the Company will be able
to consummate any acquisitions. Although the Company may be able to pursue its
acquisition program with equity financing, it will need additional funds in
order to make the necessary investments in inventories and operations required
to support the Company's growth.
The Company currently expects to receive a tax refund with respect
to its 1996 loss, which will be carried back to the 1995, 1994 and 1993 fiscal
years, in the approximate amount of $1.9 million. While it is difficult to
predict the exact timing, management expects to receive the refund by July
1997. There can be no assurance, however, that the Company will receive a tax
refund by that time.
Based on the historic rate of introduction of oral medications, as
well as the number of such products awaiting final approval from the Food and
Drug Administration, the Company expects that additional oral medications will
be brought to the market. The introduction of such medications may replace a
number of medications that are currently administered intravenously. If this
happens, the Company may see a decrease in net revenues from home infusion
therapies, which management believes may be offset by an increase in its mail
order medication operations.
The Company believes that the combination of the following items
will enable it to satisfy its debt and cash flow requirements in the future:
The Company believes there are alternative sources for financing its
working capital if it is unable to obtain additional waivers and
amendments to its financial covenants as necessary during 1997
from its bank, but the Company believes that it will receive the
necessary waivers and amendments to its financial covenants from
its bank in 1997.
The Company has raised an additional $1,000,000 since December 31
and has a commitment for an additional $1,000,000 to close by
April 30, 1997.
The Company's plan to sell its Atlanta and Los Angeles branches will
help improve operating results and positively contribute to cash
flow.
The Company expects a tax refund of approximately $1,900,000
attributable to the carryback of its 1996 loss to the tax years
1995, 1994 and 1993.
The results of operations anticipated for 1997 should provide excess
cash flow.
CERTAIN FACTORS AFFECTING OPERATIONS AND MARKET PRICE OF SECURITIES.
The Company's future business, financial condition and results of
operations, and the market price for its securities are dependent on the
Company's ability to successfully manage, among other things, the following
business considerations. No assurance can be given that the Company will be
able to manage such considerations successfully. The failure to manage such
considerations successfully could have a material adverse effect on the
Company's business, financial condition, and results of operations, and on the
market price of its securities.
Security Interest in Assets; History of Noncompliance With Financial
Covenants under the Company's Credit Facility. On December 31, 1996, the
Company entered into a three year revolving credit agreement with Key Bank of
New York which provides for borrowing of up to $9,000,000. As of December 31,
1996, the Company was in violation of certain Financial Covenants contained in
the Credit Agreement. The Lender has waived such violation. In addition,
management currently anticipates that, as of March 31, 1997, the Company again
will be in violation of the Financial Covenants. The failure to comply with the
Financial Covenants entitles the Lender to declare the aggregate amount under
the Credit Facility to be immediately due and payable. Accordingly, the Company
anticipates that it will have to seek an additional waiver form the Lender.
There can be no assurance, however, that the Lender will grant such waiver, or
on what conditions such waiver will be granted. If the Lender does not grant a
waiver, the Lender could accelerate payment of the indebtedness under the
Credit Agreement. While the Company believes that it would be able to repay
such indebtedness under such circumstances from the proceeds of asset sales and
other sources of financing, there can be no assurance that it would be
successful in accumulating sufficient liquid assets to pay such indebtedness.
17
In connection with the Credit Facility, all of the personal property
of the Company and its subsidiaries was pledged to the Lender. In connection
with the Settlement, the United States Government received a second lien on all
of the personal property of the Company and its subsidiaries. If the Company
were to default on any of its obligations under the Credit Facility or the
Settlement, the Lender and the United States Government could foreclose on the
pledged assets. Such a foreclosure would materially and adversely affect the
Company. The Credit Facility also places certain restrictions on the Company's
ability to incur indebtedness, dispose of significant assets and other matters.
Inability to Consummate Asset Sales. In order to concentrate on its
core regions of operations, dispose of branches whose performance have
negatively impacted the Company's operations, and gain much needed liquidity,
the Company intends to sell its Georgia and California branches. The Company
has entered into a letter of intent to sell its Georgia branch for $1.6
million, which sale is currently expected to be consummated by May 1997. There
can be no assurance, however, that the Company will be able to successfully
negotiate a definitive agreement, or, if an agreement is negotiated, that it
will provide for $1.6 million in proceeds to the Company or that it will be
consummated by May, 1997, if ever. With respect to its California operations,
there can be no assurance that the Company will find a buyer. Even if a buyer
is found, the Company does not expect to derive significant proceeds from such
sale. If the Company is unable to find a buyer shortly, it may cease its
operations in California, which have been generating operating losses.
Inability to Obtain Additional Financing. As noted in Item 7,
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations," the Company can not borrow additional amounts under the
Credit Facility. In order to fund its continuing operations and to repay
indebtedness under the Credit Agreement if it is ultimately accelerated, the
Company may need additional financing. The Company has received a non-binding
letter of intent from an alternative source to replace the bank, if necessary.
There can be no assurance, however, that the Company will be able to obtain
additional financing on terms acceptable to it or at all.
Government Regulations and Lawsuit Settlement. The Company and the
health care industry generally are subject to extensive and frequently changing
state and federal regulation governing the dispensing, distributing and
compounding of prescription products, the provision of home health care
services and home infusion services, the licensing of branch offices, the
certification of home health agencies and the licensing of professionals. In
addition, state and federal fraud and abuse laws prohibit, among other things,
the payment for remuneration for patient or business referrals. Laws and
regulations are continuously enacted and amended for the regulating of the
health care industry, and any changes in the laws or regulations or new
interpretations of existing laws or regulations could have an adverse effect on
the Company's methods and cost of doing business. Further, failure by the
Company to comply with applicable laws could adversely affect the Company's
ability to continue to provide, or receive reimbursement for, its services from
Medicare, Medicaid and other third-party payors and also could subject the
Company and its officers to civil and criminal penalties. There can be no
assurance that the Company will not encounter regulatory impediments that could
adversely affect its ability to open new branch offices and to expand the
services currently provided at its existing branch offices.
In September 1994, Advanced Care and its former owners were served
with a civil lawsuit by the United States Government alleging improper Medicare
billing and reimbursement practices during the period prior to the acquisition
of Advanced Care by the Company. Effective June 5, 1996, Advanced Care entered
into an agreement with the United States Government in settlement of the
lawsuit (the "Settlement"). The Settlement required Advanced Care to make a
$550,000 payment to the United States Government no later than June 15, 1996,
which payment was made. In addition, Advanced Care issued to the United States
Government a $2,780,000 note, at 9 percent interest, payable quarterly over
four and one-half years (the "Government Note").
18
As security for payment of Advanced Care's obligations to the United
States Government, the Company agreed to grant the United States Government a
second lien on all personal property of the Company and its subsidiaries. The
terms of the Settlement also required Advanced Care and the Company to
implement a program to assure compliance with all Medicare and Medicaid
regulations. There can be no assurance that the Company will be able to comply
with the terms of the Government Note in the future. In the event that the
Company defaults under the Government Note, the United States Government may,
among other things, offset all of the Company's Medicare/Medicaid receivables,
which historically have equaled approximately $2,000,000 per year and may
exclude Advanced Care from participation in the Medicare program or state
healthcare programs. Such offsets and exclusion could have a material adverse
effect on the Company.
Charge Against Earnings; Anticipated Losses. The Company recorded
non-cash charges to earnings relating to write-offs of intangibles, certain
other assets and accounts receivable during the second quarter ended June 30,
1996 aggregating approximately $8,900,000. The result of such charges
contribute to a net loss for the year ended December 31, 1996 of approximately
$9,952,000 or $1.03 per share. There can be no assurance that the Company will
not continue to experience losses in the future.
Competition. The home health care and infusion businesses are highly
competitive. Some of the Company's competitors are national service providers,
and many others are regional or local in scope. Many of the Company's
competitors and potential competitors are larger in size and possess
significantly greater financial resources than the Company. There can be no
assurance that the Company will be able to compete successfully with its
competitors. (See "Certain Factors - Reimbursement by Third-Party Payors;
Possible Effects of Managed Care")
Ability to Consummate Mergers. A key part of the Company's business
strategy involves finding suitable strategic merger partners in order to spread
its overhead over a larger patient base and increase its regional focus and
standing. The Company is discussing a possible business combination with
another provider of home infusion therapies in the New York area. There can be
no assurance, however, that the Company will be able to successfully negotiate
a deal with such company, or what terms will ultimately be negotiated. In
addition, there can be no assurance that the Company will be able to identify
additional merger partners, or if identified, that it will be able to
consummate a deal with such merger partners. There can be no assurance that any
such mergers will help the Company achieve its goals of improving its margins
by increasing the size of its patient base and increasing the Company's
regional standing.
Reimbursement by Third-Party Payors; Possible Effects of Managed Care.
The Company is primarily reimbursed for its services by insurance companies,
managed care companies, Medicare/Medicaid programs or other third-party payors.
The Company typically receives payment between ninety (90) and one hundred
fifty (150) days after rendering an invoice, although such period can be
longer.
The size and nature of claims related to services provided by the
Company result in a large number of such claims being reviewed by third-party
payors prior to payment, and the third-party payors may attempt to deny
reimbursement of such claims.
Accordingly, because these factors may delay or deny payments to the
Company for its services, the Company's cash flow historically has been
insufficient to meet its accounts payable. The Company has in the past been
required to borrow funds to meet its ongoing obligations and may be required to
do so in the future. The waiver of the violation of the Financial Covenants as
of December 31,1996 contained in the Credit Facility eliminates the Company's
ability to borrow additional funds. Unless the Company can renegotiate the
Credit Facility or obtain other funds, the Company will be unable to fund
future growth. See "Certain Factors-Security Interests in Assets; History of
Noncompliance with Financial Covenants Under the Company's Credit Facility."
19
In addition, the Company's business, including but not limited to, the
size of the Company's client/patient population, revenues and profit margins
will be adversely affected by the cost containment measures and review
procedures imposed by managed care organizations. Certain managed care
companies have also awarded contracts to providers on a national basis. Often
the Company has not been large enough to compete for these contracts. This
factor has contributed to the decline in the Company's revenues over the past
year. There can be no assurance that the trend of declining revenues will not
continue. See "Certain Factors-Competition."
Health Care Reform. Political, economic and regulatory influences are
likely to lead to fundamental change in the health care industry in the United
States. Numerous proposals for comprehensive reform of the nation's health care
system have been introduced in Congress. Many approaches have been considered,
including mandated basic health care benefits, controls on health care spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to health care delivery systems. In addition,
some of the states in which the Company operates are considering various health
care reform proposals. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care
delivery systems and payment methodologies, and that public debate of these
issues will continue in the future.
Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, reforms will be adopted, when they may be adopted, or what
impact they may have on the Company. In addition, the cost and service
considerations which have generated proposals for health care reform have also
resulted in, and are expected to continue to result in, strategic realignments
and combinations in the health care industry which may, over time, have a
significant impact on the Company's strategic direction and results of
operations. The actual announcement of reform proposals and the investment
community's reaction to such proposals, announcements by competitors and payors
of their strategies to respond to reform initiatives and general industry
conditions have produced and may continue to produce volatility in the trading
and market price of the Company's Common Stock and for securities of health
care companies in general.
Ability to Attract Key Management and Dependence on Health Care
Professionals. The Company's future success will depend in large part on its
ability to attract and retain senior management personnel and branch-level
management personnel. In addition, the Company is highly dependent on its staff
of professional nurses and its other health care professionals and
paraprofessionals. Competition for qualified management personnel and health
care professionals and paraprofessionals is strong.
The inability to attract, retain or motivate management and sufficient
numbers of qualified health care professionals and paraprofessionals could
adversely affect the Company's business and prospects.
Although the Company has been generally able to meet its staffing
requirements for professional nurses and other health care staff, the Company
has experienced occasional staffing shortages at certain of its offices and an
increase in competition, or a decline in its ability to meet its staffing
needs, in the future could have a material adverse effect on the Company's
profitability and on the Company's ability to maintain or increase its patient
base at certain or all of its branch offices.
Liability and Insurance. The Company's services subject it to
liability risk. Malpractice claims may be asserted against the Company if its
services are alleged to have resulted in patient injury or other adverse
effects. The Company has from time to time been subject to such suits in the
ordinary course of its business. There can be no assurance that future claims
will not be made or that such claims, if made, will not materially and
adversely affect the Company's business or financial condition. The Company
currently maintains liability insurance in the amount of $8 million per
occurrence and $9 million in the aggregate. There can be no
20
assurance that the coverage limits of the Company's insurance policies will be
adequate. In addition, 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. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect upon the Company's business.
Claims against the Company, regardless of their merits or eventual outcome,
also may have a material adverse effect upon the Company's reputation and
business.
Volatility of Stock Price. There has been significant volatility in
the market price of the common stock of the Company and in the market prices of
health care company securities in general. The Company believes factors such as
legislative and regulatory developments and quarterly variations in financial
results have caused the market price of its common stock to fluctuate
substantially. In addition, the stock market has experienced volatility that
has affected the market prices of many health care service companies that often
has been unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the price of the common stock.
No Dividends. The Company has not paid any dividends since inception
and does not anticipate the payment of dividends in the foreseeable future.
Possible Issuances of Preferred Stock; Restrictions on Changes in
Control. The Company is authorized to issue up to 2,000,000 shares of preferred
stock, $.001 par value per share (the "Preferred Stock"). The Preferred Stock
may be issued in one or more series, the terms of which may be determined at
the time of issuance by the Board of Directors, without further action by the
stockholders and may include voting rights, preferences as to dividends and
liquidation, conversion and redemption rights. The future issuance of any
shares of Preferred Stock could adversely affect the rights of the holders of
the Common Stock, and therefore reduce the value of the Common Stock.
The Company's Certificate of Incorporation provides that no person or
group may, after May 15, 1989, acquire beneficial ownership of 10% or more of
any class of equity securities of the Company without the prior written consent
of all state health regulatory agencies or state health commissions governing
the Company's activities that require such consent. The provision does not
apply to (i) persons who beneficially owned more than 10% of any class of the
Company's equity securities prior to May 15, 1989, or (ii) securities held by
registered broker-dealers solely for bona fide market making purposes.
The Certificate of Incorporation also provides for a staggered board
such that the Board of Directors is divided into three classes. The term of
office for the Class II directors will expire at the 1997 Annual Meeting of
Stockholders. At each such election, directors will be chosen for a three year
term. Each of the foregoing requirements and provisions may have the effect of
making takeover of the Company more difficult and may help to insure continued
control by present management.
Shares Eligible for Future Sale. Sales of substantial amounts of
Common Stock in the public market in the future could adversely affect the
prevailing market price of the Company's Common Stock and may have a material
and adverse effect on the Company's ability to raise the capital necessary to
fund its future operations. Additional shares of Common Stock, including shares
issuable upon exercise of options and warrants, will also become eligible for
sale in the public market from time to time in the future. Furthermore, certain
holders of Common Stock have the right to cause the Company to register their
shares under the Securities Act for sale in the public markets.
21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and
supplementary data are included in this Annual Report on Form 10-K at the pages
set forth below.
PAGE
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 1996 and 1995 24
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 25
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 27
Notes to Consolidated Financial Statements for the years ended
December 31, 1996, 1995 and 1994 28-41
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Care Group, Inc.
Lake Success, New York
We have audited the accompanying consolidated balance sheets of The Care Group,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedules listed in the Index at Item 14
for the three years in the period ended December 31, 1996. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1996 and 1995 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules for each of the three years in the period ended
December 31, 1996, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Jericho, New York
March 28, 1997
23
THE CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except per share data) 1996 1995
- ------------------------------------- ---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24 $ 561
Marketable securities 21 508
Accounts receivable, net of allowances of
$5,637 in 1996 and $3,564 in 1995 12,163 14,927
Inventories 887 1,763
Recoverable Income Taxes 1,875 --
Prepaid expenses and other current assets 366 793
-------- --------
TOTAL CURRENT ASSETS 15,336 18,552
-------- --------
PROPERTY AND EQUIPMENT, at cost 5,457 5,416
LESS - Accumulated depreciation 2,424 1,873
-------- --------
Net Property and Equipment 3,033 3,543
-------- --------
INTANGIBLES - Net 12,249 14,185
-------- --------
OTHER ASSETS 190 730
-------- --------
TOTAL $ 30,808 $ 37,010
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,546 $ 1,845
Accounts payable 1,673 1,302
Accrued expenses 1,103 950
Note payable - bank 5,192 --
Other short - term debt 891 --
-------- --------
TOTAL CURRENT LIABILITIES 10,405 4,097
NOTE PAYABLE - BANK -- 6,800
DEFERRED INCOME TAXES -- 322
LONG-TERM DEBT, excluding current portion 1,974 1,400
-------- --------
TOTAL LIABILITIES 12,379 12,619
-------- --------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK, 333,332 shares at $3 per share -- 1,000
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value per share; 2,000 shares authorized in 1996
and 1,000 shares authorized in 1995; no
shares issued and outstanding -- --
Common Stock, $.001 par value per share; 30,000 shares authorized
in 1996 and 20,000 shares authorized in 1995; 12,638 and 8,638 shares issued
and 12,598 and 8,391 shares outstanding in 1996
and 1995, respectively 13 9
Additional paid-in capital 23,905 19,886
(Accumulated deficit) retained earnings (5,348) 4,604
-------- --------
18,570 24,499
Common Stock held in treasury, at cost - 40 and 247 shares in
1996 and 1995, respectively (141) (1,108)
-------- --------
Total Stockholders' Equity 18,429 23,391
-------- --------
TOTAL $30,808 $ 37,010
======== ========
See notes to consolidated financial statements
24
THE CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share data) 1996 1995 1994
- ------------------------------------- ---- ---- ----
NET REVENUES $ 35,274 $ 39,718 $ 36,381
COST OF REVENUES 19,255 20,165 20,031
-------- -------- --------
GROSS PROFIT 16,019 19,553 16,350
OPERATING EXPENSES:
Selling, general and administrative expenses 23,747 17,421 13,746
Write-off of intangible and certain other assets 2,975 -- --
-------- -------- --------
Total Operating Expenses 26,722 17,421 13,746
OPERATING (LOSS) INCOME (10,703) 2,132 2,604
-------- -------- --------
INTEREST:
Interest income 8 32 21
Interest expense (780) (720) (479)
-------- -------- --------
Net Interest Expense (772) (688) (458)
-------- -------- --------
(LOSS) INCOME BEFORE (BENEFIT FROM)
PROVISION FOR INCOME TAXES (11,475) 1,444 2,146
(BENEFIT FROM) PROVISION FOR INCOME TAXES (1,523) 698 932
-------- -------- --------
NET (LOSS) INCOME $ (9,952) $ 746 $ 1,214
======== ======== ========
NET (LOSS) INCOME PER SHARE $ (1.03) $ .09 $ .16
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES IN 1996,
AND COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING IN 1995 AND 1994 9,650 8,425 7,746
======== ======== ========
See notes to consolidated financial statements.
25
THE CARE GROUP, INC.
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONAL
(In thousands) PAID-IN RETAINED EARNINGS
- ------------- COMMON STOCK CAPITAL (ACCUMULATED DEFICIT) TREASURY STOCK
-------------------- ---------- --------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
BALANCE, JANUARY 1, 1994 7,295 $ 7 $ 16,919 $ 2,644 207 $ (919)
Proceeds from exercise of stock options 272 -- 654 -- -- --
Stock distributed to employees pursuant
to employment agreements 30 -- 200 -- -- --
Stock issued for acquisitions 762 1 2,708 -- -- --
Adjustment for stock distributed to employees
pursuant to employment agreements (Note 10) -- -- (91) -- -- --
Net income -- -- -- 1,214 -- --
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1994 8,359 8 20,390 3,858 207 (919)
-------- -------- -------- -------- --------
Proceeds from exercise of stock options 219 1 552 -- --
Stock distributed to employee pursuant
to employment agreement 60 -- -- -- -- --
Treasury stock sold -- -- (56) -- (204) 734
Treasury stock acquired -- -- -- -- 244 (923)
Transfer to redeemable common stock -- -- (1,000) -- -- --
Net income -- -- --
-------- -------- --------- -------- -------- --------
746 -- --
-------- -------- --------
BALANCE, DECEMBER 31, 1995 8,638 9 19,886 4,604 247 (1,108)
Treasury stock sold -- -- (1,486) -- (600) 2,086
Treasury stock acquired -- -- -- -- 393 (1,119)
Transfer from redeemable common stock -- -- 1,000 -- -- --
Stock issued in private placement 4,000 4 4,505 -- -- --
Net loss -- -- -- (9,952) -- --
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 12,638 $ 13 $ 23,905 $ (5,348) 40 $ (141)
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements
26
THE CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands) 1996 1995 1994
- -------------- ---- ---- ----
OPERATING ACTIVITIES:
Net (loss) income $(9,952) $ 746 $ 1,214
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Write-off of intangibles and certain other assets 2,975 -- --
Depreciation and amortization 1,448 1,328 908
Provision for contractual allowances and bad debts 8,720 2,400 1,402
Provision for net deferred tax asset valuation allowance 1,018 -- --
Deferred tax (benefit) expense (334) 156 (622)
Unrealized (gain) loss on marketable securities (22) (22) 73
(Gain) loss on sale of marketable securities 38 (84) 138
Loss on sale of branch office -- -- 34
Changes in assets and liabilities, net of effect of acquisitions:
Marketable securities 471 309 (67)
Accounts receivable (5,956) (1,926) (3,014)
Inventories 476 (600) (460)
Prepaid expenses and other current assets 190 (328) 410
Other assets 7 56 (56)
Accounts payable 371 (72) 225
Accrued expenses 153 99 106
Deferred income taxes (894) -- --
Recoverable income taxes (1,925) -- --
Income taxes payable 50 (264) 197
------- ------- -------
Net cash (used in) provided by operating activities (3,166) 1,798 488
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment (534) (1,554) (1,013)
Sales of property and equipment 208 45 102
Additional costs for Care Line acquisition -- -- (150)
Acquisition of Advanced Care, net of cash acquired -- -- (223)
Additional costs for Advanced Care acquisition -- (18) --
Acquisition of Clinical Care, net of cash acquired -- -- (102)
Organization costs (14) (107) --
Investment in certified home health agency (579) (471) (63)
Restrictive covenant -- (271) (460)
Proceeds from sale of assets of branch office -- -- 65
------- ------- -------
Net cash used in investing activities (919) (2,376) (1,844)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from note payable - bank 192 1,200 7,214
Repayments of note payable - bank (1,800) (400) --
Proceeds from long-term debt 210 -- --
Repayment of long-term debt (935) (546) (7,186)
Proceeds from other short-term debt 1,625 -- --
Repayment of other short-term debt (734) -- --
Adjustment for stock distributed to employees -- -- (91)
Proceeds from issuance of common stock 4,509 -- --
Proceeds from exercise of stock options -- 553 654
Purchases of treasury stock (119) (923) --
Sales of treasury stock 600 678 --
------- ------- -------
Net cash provided by financing activities 3,548 562 591
------- ------- -------
DECREASE IN CASH AND CASH
EQUIVALENTS (537) (16) (765)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 561 577 1,342
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24 $ 561 $ 577
======= ======= =======
See notes to consolidated financial statements.
27
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF BUSINESS
- ---------------------------
The principal business of The Care Group, Inc. and its wholly-owned
subsidiaries (the "Company") is providing home health care, including therapy,
to patients with HIV (Human Immunodeficiency Virus) Disease, AIDS (Acquired
Immune Deficiency Syndrome), cancer, and other diseases requiring high
technology intermittent therapies. In 1994, the Company began selling and
renting durable medical equipment through its newly acquired subsidiary,
Advanced Care Associates, Inc. and affiliates ("Advanced Care") (see Note 3).
In 1995, the Company began mail order distribution of pharmaceuticals through
Mail Order Meds, Inc., a newly formed subsidiary.
As discussed in Note 6, as a result of a default of certain financial
covenants in the Company's revolving term credit agreement with a bank, all of
the outstanding balance of such loan ($5,192,000) has been reclassified as a
current liability at December 31, 1996. The Company is currently negotiating
with its bank to alleviate this default. Management believes that the following
potential sources of additional or supplemental cash flow will provide the
Company with adequate resources to meet its cash flow requirements through at
least January 1, 1998:
i. The Company has identified an alternative lending source that
could provide the Company with financing to replace the revolving
term credit agreement with its current bank, if necessary.
ii. Subsequent to December 31, 1996, the Company has received an
advance of $500,000 from a significant stockholder, which will be
exchanged for common stock and warrants during the second quarter
of 1997.
iii. In March 1997, the Company received proceeds of $500,000 from the
sale of the Company's common stock and warrants and anticipates
an additional $1,000,000 of proceeds from additional sales of the
Company's common stock and warrants by the second quarter of
1997.
iv. The Company anticipates selling its Georgia operation, which could
result in proceeds to the Company of approximately $1.6 million.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Care
Group, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(B) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(C) NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), which
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of expected future cash flows (undiscounted
28
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CON'T)
- ----------------------------------------------------------
and without interest charges) is less then the carrying value of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
SFAS No. 121 applies prospectively in fiscal years beginning after December 15,
1995. The adoption of SFAS No. 121 did not have a material effect on the
financial statements of the Company.
(D) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term highly liquid investments which
are readily convertible into cash, and have maturities of three months or less.
At December 31, 1995, the Company maintained cash balances of approximately
$330,000, in excess of Federal Deposit Insurance Corporation insured limits.
(E) MARKETABLE SECURITIES
At December 31, 1996, marketable securities consisted of only two
equity securities. Prior to December 31, 1996, marketable securities consisted
of widely diversified investments in stocks and bonds. During 1994, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 requires a positive intent and ability to hold debt securities
to maturity as a precondition for reporting those securities at amortized cost.
Securities not meeting the condition are considered either available-for-sale
or trading, as defined, and are reported at fair value. Trading securities are
reported at fair value with adjustments recorded through the consolidated
statements of income. The investments owned by the Company are considered
trading securities as they are bought and held principally for the purpose of
selling them in the near term to generate a profit on short-term differences in
price. Gross unrealized gains and gross unrealized losses related to trading
securities are included in earnings for the years ended December 31, 1996, 1995
and 1994. Gross unrealized gains approximated $0 and $14,000, and gross
unrealized losses approximated $29,000 and $65,000 as of December 31, 1996 and
1995, respectively.
(F) ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, is comprised principally of amounts expected
to be collected from insurance companies for services provided.
(G) INVENTORIES
Inventories, consisting of supplies, durable medical equipment and
pharmaceuticals are stated at the lower of cost (first-in, first-out) or
market.
(H) PROPERTY AND EQUIPMENT
Leasehold improvements, furniture, equipment and equipment acquired
under capitalized leases are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the furniture and
equipment. Leasehold improvements are amortized over the period of the
respective leases or the estimated useful lives of the assets, whichever is
shorter. Equipment acquired under capitalized leases are depreciated on a
straight-line basis over the estimated useful lives or the lease term,
whichever is shorter.
(I) INTANGIBLES
Intangible assets resulting from acquisitions primarily consist of the
excess of the acquisition cost over the fair value of the net assets acquired
(goodwill). Goodwill is amortized on a straight-line basis over twenty or forty
years. Other intangible assets are amortized over the estimated life of the
related asset. Accumulated amortization was approximately $1,564,000 and
$1,063,000 at December 31, 1996 and 1995, respectively. Amortization expense
was approximately $3,187,000, $665,000, and $506,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
29
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CON'T)
- ----------------------------------------------------------
In June 1996, the Company examined its goodwill, other intangibles and
certain other assets and wrote-off approximately $2,975,000 of such assets. The
Company believes the patient base related to its acquisition of businesses in
1992 and 1994 in Los Angeles, California and Atlanta, Georgia, respectively,
are no longer contributing to these offices' operations and since neither
office is currently profitable, the related goodwill ($2,329,000) has been
written-off.
(J) REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the
patient. A substantial majority of the Company's revenues are billed to
third-party payors. These revenues are recognized net of known contractual
adjustments. Payment from third-party payors is dependent upon the specific
benefits included in the patient's policy. The Company provides an allowance to
cover the difference between the Company's billable charges and expected
collections from third-party payors and patients.
(K) INCOME TAXES
The Company's deferred tax provision is determined under the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets or liabilities.
(L) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES
Net income per common and common equivalent shares is computed by
dividing net income by the weighted average number of common and common stock
equivalents outstanding. Common stock equivalents result from dilutive stock
options and warrants.
(M) RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the 1996 presentation.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist primarily of investments in cash and
cash equivalents, short-term investments, trade accounts receivable, accounts
payable and debt obligations. At December 31, 1996 and 1995, the fair value of
the Company's financial instruments approximated the carrying value.
NOTE 3 - BUSINESS COMBINATIONS
- ------------------------------
On May 18, 1994, the Company acquired all the stock of Advanced Care
Associates, Inc., Millwo Management, Inc. and Advanced Care CPM, Inc.
("Advanced Care") in a transaction accounted for under the purchase method of
accounting. Accordingly, assets and liabilities have been recorded at their
fair value as of May 1, 1994, the effective date of acquisition, and the
operations of Advanced Care have been included in the consolidated operations
of the Company since that date.
The purchase price approximated $5,268,000 with the payment terms as
follows:
(a) 333,332 shares of the Company's common stock valued at closing
at $1,208,000;
(b) $1,060,000 in cash; and
(c) subordinated notes for $3,000,000 with interest at 7 percent,
due in twenty-four equal monthly installments beginning July 10,
1995.
30
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 - BUSINESS COMBINATIONS (CON'T)
- -------------------------------------
The excess of cost over the fair value of net assets acquired, which
approximated $4,989,000, is being amortized over forty years. In connection
with the purchase agreement, a put option was issued for the 333,332 shares of
common stock at $3 per share, or $1 million, exercisable beginning after May
18, 1996.
On September 30, 1994, Advanced Care and its former owners were served
with a civil lawsuit by the Department of Justice (United States District Court
of Pennsylvania, Eastern District) alleging improper Medicare billing and
reimbursement practices during some or all of the period from January 1989
through May 1994. All allegations in the complaint involve the time prior to
the Company's purchase of Advanced Care in 1994. The final settlement with the
Department of Justice and former owners of Advanced Care is discussed in Note
17.
On July 18, 1994, the Company acquired certain assets of Clinical Care
Services, Inc. ("Clinical Care"), an infusion therapy provider in Atlanta,
Georgia. The purchase price is the sum of:
(a) 428,750 shares of common stock of the Company; and
(b) a promissory note for $600,000 due in one lump sum in July 1997,
with interest payable quarterly at the rate of 6 percent per annum.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, assets and liabilities have been recorded at their
fair values as of July 1, 1994, the effective date of acquisition, and the
operations of Clinical Care have been included in the consolidated operations
of the Company since that date. The excess of cost over the fair value of net
assets acquired, which approximated $1,944,000, was being amortized over forty
years. During 1996, the Company evaluated the future benefit to be derived from
the unamoritized portion of the excess of cost over the fair value of net
assets acquired and wrote-off the remaining balance ($1,848,000), as discussed
in Note 2(i).
On September 12, 1995, the Company acquired certain assets of
Therapeutic Innovations, Inc. ("Therapeutic Innovations"), a physical therapy
provider in Houston, Texas. The purchase price is the sum of:
(a) $62,500 in cash; and
(b) a promissory note for $200,000 due in equal monthly payments
over twenty months beginning October 12, 1995, with interest
payable monthly at the rate of 5 percent per annum.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, assets and liabilities have been recorded at their
fair values as of September 12, 1995, the effective date of acquisition, and
the operations of Therapeutic Innovations have been included in the
consolidated operations of the Company since that date. The excess of cost over
the fair value of net assets acquired, which approximated $250,000, is being
amortized over forty years.
The following represents the unaudited proforma consolidated results
of operations for the year ended December 31, 1994, assuming the acquisition of
Advanced Care had been consummated as of January 1, 1994. Financial
information, relating to the operations of Clinical Care Services, Inc. and
Therapeutic Innovations, Inc., prior to the respective acquisition dates was
not available to the Company. As such, the proforma results do not reflect the
operations of these entities prior to the effective dates of acquisition.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994
------------------------------------- ------
1994
------
Net revenues $37,661
Net income $ 941
Net income per share $ .12
Upon the approval of the Public Health Council of the New York State
Department of Health, the Company acquired all the outstanding common stock of
Commonwealth Certified Home Care, Inc. ("Commonwealth") on November 19, 1996.
31
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 - BUSINESS COMBINATIONS (CON'T)
- -------------------------------------
The purchase price was $700,000 plus operating loans previously made
of approximately $397,000.
(a) The Company had made deposit payments of $75,000 and $62,500 in
1995 and 1994, respectively, to Commonwealth and $137,500 was
included in other assets as of December 31, 1995;
(b) On November 19, 1996, the Company paid Commonwealth $281,250,
plus interest of $25,335;
(c) A promissory note for the balance of $329,050 is due on November
19, 1998 ($281,250 in principal and $47,800 in interest).
Interest is computed at eight percent per annum from October 5, 1995.
The acquisition has been accounted for under the purchase method of accounting.
Accordingly, assets or liabilities have been recorded at their fair values as
of November 19, 1996, the effective date of acquisition, and the operations of
Commonwealth have been included in the consolidated operations on the Company
since that date. The cost of the certified home care license ($860,000) is
being amortized over twenty years. The effects on consolidated results of
operations for 1996, 1995 and 1994 are immaterial and, therefore, proforma
information is not presented.
NOTE 4 - NON-COMPETE AGREEMENTS
- ------------------------------
On June 24, 1994, the Company entered into a four-year employment
agreement with a key employee, which provides, among other things, a
non-compete restriction for a one-year period beyond the term of the employment
agreement. Pursuant to the terms of the employment agreement, as clarified on
March 17, 1995, the Company was required to pay approximately $525,000 (through
January 1995) in connection with the restrictive covenant, of which
approximately $459,000 and $66,000 were paid in 1995 and 1994 and $525,000 is
included in other assets as of December 31, 1995, net of accumulated
amortization of approximately $143,000, calculated using the straight-line
method over five years . During 1996, the employee was terminated and $317,000
relating to the employment agreement was expensed. At December 31, 1996, the
remaining portion is for a non-compete agreement which expires in June 1997.
On June 21, 1995, the Company entered into a non-compete agreement
with two key employees, commencing July 1, 1995, for a period of four years.
Pursuant to the terms of the non-compete agreements, the Company was required
to pay approximately $200,000 in connection with the restrictive covenant,
which is included in other assets as of December 31, 1996 and 1995, net of
accumulated amortization of approximately $75,000 and $25,000, calculated using
the straight-line method over four years.
NOTE 5 - PROPERTY AND EQUIPMENT
- ------------------------------
Property and equipment (at cost) consists of the following at December 31, 1996
and 1995:
(IN THOUSANDS) 1996 1995
-------------- -------- ------
Equipment and furniture $ 4,970 $ 4,939
Leasehold improvements 487 477
--------- ---------
Total $ 5,457 $ 5,416
======= =======
Depreciation expense for the years ended December 31, 1996, 1995, and
1994 was approximately $836,000, $613,000, and $412,000, respectively.
32
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 6 - NOTE PAYABLE - BANK
- ----------------------------
At December 31, 1995, the Company had a three year revolving term
credit agreement with a bank, which provided for borrowings up to $12 million.
The borrowing base was equal to the lesser of $12 million or 70 percent of
eligible accounts receivable and the higher of $500,000 or 30 percent of
eligible inventory, as defined in the loan agreement. Interest was computed at
the prime rate (8.5 percent at December 31, 1995) plus 1/4 percent. The note
was secured by virtually all assets of the Company. The borrowing arrangement
includes certain restrictions on working capital, current ratio, tangible net
worth and maximum leverage and interest coverage ratios. In 1996, the bank
reduced the Company's maximum borrowing ability to $5.15 million.
On December 31, 1996, the Company entered into a new three year
revolving term credit agreement with a bank, which provides for borrowings up
to $9 million. The borrowing base is equal to the lessor of $9 million or 65
percent of accounts receivable up to 120 days old plus; the lesser of $600,000
or 40 percent of accounts receivable from 121 to 240 days old; plus the lesser
of $200,000 or 30 percent of eligible inventory, as defined in the loan
agreement. Interest is computed at the prime rate (8.25 percent at December 31,
1996) plus 1/4 percent. This loan is secured by virtually all assets of the
Company. The borrowing arrangement includes certain restrictions on interest
from bearing indebtedness, senior debt, fixed charges, and maximum leverage and
interest coverage ratios.
The average interest rate for the years ended December 31, 1996 and
1995 was 8.6 percent and 9.3 percent, respectively, with average borrowings of
approximately $6,100,000 and $6,700,000, respectively. The maximum amount
borrowed during 1996 and 1995 was $6,800,000 and $7,200,000, respectively.
At December 31, 1996, the Company was in default of certain financial
convenants specified in the revolving term credit agreement with the bank. On
March 28, 1997, the Company received a waiver from the bank for the defaulted
covenants at December 31, 1996. The Company anticipates not being able to meet
certain financial covenants at March 31, 1997 and beyond. There can be no
assurance that the Bank will grant the Company a waiver for the first quarter
of 1997, so the note payable - bank has been reclassified as a current
liability as of December 31, 1996.
In January 1997, the Company swapped $3 million of variable rate debt
with a ninety day fixed rate debt instrument that is three percent above the
ninety day LIBOR rate.
NOTE 7 - OTHER SHORT AND LONG-TERM DEBT
- ---------------------------------------
Other short-term debt at December 31, 1996 and 1995 consists of the
following (in thousands):
1996 1995
---- ----
Royce Investment and Equity Dynamics notes (a) $500 $ --
Bindley Western note (b) 391 --
---- --------
Total $891 $ --
==== ========
(a) In December 1996, $250,000 was loaned to the Company by Royce
Investments and Equity Dynamics each with interest at 8 percent
per annum, payable on demand.
(b) On September 15, 1996, the Company entered into a short-term
note with its major supplier for $624,589 with interest at 10
1/2 percent per annum due in six equal monthly payments with the
final payment due and paid on March 17, 1997.
33
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 7 - SHORT AND LONG-TERM DEBT (CON'T)
- -----------------------------------------
Long-term debt at December 31, 1996 and 1995 consists of the following
(in thousands):
1996 1995
---- ----
The United States Government note (Note 17) $2,523 $ --
Clinical Care note (Note 3) 600 600
Commonwealth note (Note 3) 308 --
Therapeutic Innovations note (Note 3) 50 170
Advanced Care note (Notes 3 and 17) -- 2,421
Obligations under capitalized leases, with interest
rates ranging from 9 to 13 percent, due
through 1997 and 1996, respectively 39 54
------ ------
Total 3,520 3,245
Less-Debt maturing within one year 1,546 1,845
------ ------
$1,974 $1,400
====== ======
Scheduled repayments of long-term debt in each of the years subsequent
to December 31, 1996 are as follows (in thousands):
TOTAL
1997 $ 1,551
1998 600
1999 656
2000 718
---------
TOTAL PAYMENTS 3,525
Less - Amounts representing interest 5
---------
3,520
Less - Current maturities 1,546
---------
$ 1,974
Assets recorded under capital leases are included in property and
equipment at a cost of approximately $39,000 and $69,000 at December 31, 1996
and 1995, respectively. Accumulated depreciation relating to assets recorded
under capital leases approximates $2,000 and $37,000 at December 31, 1996 and
1995, respectively.
NOTE 8 - ACCRUED EXPENSES
- -------------------------
Accrued expenses as of December 31, 1996 and 1995 consisted of the
following (in thousands):
1996 1995
---------- ------
Payroll and payroll related expenses $ 505 $ 448
Other 598 502
-------- ------
$ 1,103 $ 950
========= =======
34
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 - COMMITMENTS
- --------------------
A) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with executive
officers and certain key employees, including agreements pursuant to
acquisitions, which provide, among other things, specified compensation levels.
Total minimum future commitments at December 31, 1996, under these agreements,
are as follows (in thousands):
Amount
1997 $ 1,030
1998 721
1999 647
2000 570
--------
$2,968
========
B) SELF-INSURANCE
The Company provided health insurance benefits to its employees
through an insurance policy which is partially self-funded. The policy, which
was replaced on February 1, 1997 with a fully insured plan, required the
Company to reimburse medical expenses of up to $40,000 per employee, up to a
maximum stop-loss amount of approximately $700,000 for 1996 and $460,000 prior
to 1996. The Company paid claims of approximately $671,000, $436,000 and
$373,000 for the years ended December 31, 1996, 1995 and 1994, respectively,
relating to its health insurance benefits.
NOTE 10 - CAPITAL TRANSACTIONS
- ------------------------------
STOCK OPTION PLANS
The Company has adopted stock option plans to provide for the granting
of options to purchase up to a maximum of 2,525,000 shares of common stock. The
options are granted at exercise prices equal to the fair market value of the
common stock at the date of grant. The following is a summary of stock option
activity for the years ended December 31, 1996, 1995 and 1994:
NUMBER OF SHARES
----------------------------
AVAILABLE EXERCISE
FOR GRANT OUTSTANDING PRICE
--------- ----------- ---------------
BALANCE - JANUARY 1, 1994 376,250 648,750 $2.25 - $5.50
Options exercised -- (272,000) 2.25 - 2.88
Options granted (69,500) 69,500 3.50 - 4.13
Options canceled 50,000 (50,000) 2.38 - 3.63
------- -------
BALANCE - DECEMBER 31, 1994 356,750 396,250 2.38 - 5.50
Additional options authorized 1,000,000 -- --
Options exercised -- (229,000) 2.38 - 3.63
Options granted (524,750) 524,750 2.75 - 6.00
Options canceled 1,000 (1,000) 5.50 - 6.00
------- -------
BALANCE - DECEMBER 31, 1995 833,000 691,000 2.38 - 5.50
Additional options authorized 500,000 -- --
Options granted (1,456,350) 1,456,350 2.00 - 2.13
Options canceled 554,750 (554,750) 2.75 - 5.50
---------- --------
BALANCE - DECEMBER 31, 1996 431,400 1,592,600 $1.75 - $5.13
========== =========
At December 31, 1996, options for the purchase of 733,250 shares of
common stock were exercisable at prices ranging from $1.75 to $5.13 per share.
The remaining options vest over five years.
35
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 - CAPITAL TRANSACTIONS (CON'T)
- --------------------------------------
During 1996, the Company repriced 507,000 outstanding options for
employees from $2.75 per share to $1.75 per share. Such options were repriced
at the market price of the Company's stock on the date of the repricing.
If compensation costs for the Company's fixed stock options had been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock - Based Compensation to Employees" ("SFAS No. 123"), the
Company's net (loss) income and net (loss) income per share would have been the
proforma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------------
Net (loss) income: 1996 1995
---- ----
As reported $ (9,952) $ 746
Proforma $(10,345) $ 520
Net (loss) income per share:
As reported $ (1.03) $ .09
Proforma $ (1.13) $ .06
The weighted average fair value of options granted during 1996 and
1995 was $1.38 and $1.56 per option, respectively. In determining the fair
value of options granted in 1996 and 1995 for proforma purposes, the Company
used the Black-Scholes option pricing model and assumed the following: A risk
free interest rate of 6.0 percent; an expected option life of 10 years; an
expected liability of 68 percent.
1991 STOCK INCENTIVE PLAN
Effective July 1, 1991, the Company established a 1991 Stock
Incentive Plan (the "Stock Plan"), pursuant to which the Board of Directors may
from time to time award shares of common stock to employees, officers and
directors of the Company. The Board of Directors may award up to a total of
50,000 shares of common stock under the Stock Plan.
WARRANTS
In February 1993, the Company granted warrants entitling the holders
to purchase up to 60,000 shares of its common stock at $5.75 per share. The
warrants, currently exercisable, are scheduled to expire in June 1997.
In August 1996 and October 1996, the Company sold 1,680,000 and
2,320,000 units, respectively, for $1.25 per unit, which entitles the holder of
each unit to one share of the Company's common stock and one warrant to
purchase an additional share of the Company's common stock for $2.50. These
4,000,000 warrants are scheduled to expire five years from the date of grant,
and are currently exercisable.
TREASURY STOCK
The Company, in connection with the acquisition of Care Line, Inc. of
Dallas, Texas in 1991, agreed to repurchase certain shares of common stock
issued in connection with related employment agreements at $6.75 per share. On
March 1, 1994, 29,630 shares were sold on the open market and the Company paid
the difference (approximately $91,000) between the market price and the agreed
upon repurchase price. The Company purchased the remaining 29,630 shares in
1995 pursuant to this agreement for $200,000.
The Company, in connection with a private placement in June 1996, sold
600,000 shares of treasury stock for $600,000. The Company acquired 393,000
shares from time to time during the year pursuant to a repurchase plan for an
aggregate amount of $1,119,000.
36
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 - INCOME TAXES
- ----------------------
The income tax provision (benefit) for the years ended December 31,
1996, 1995 and 1994 consisted of the following:
(IN THOUSANDS) FEDERAL STATE TOTAL
- -------------- ------- ----- -----
1996
- ----
Current $(2,362) $ 155 $(2,207)
Deferred (152) (182) (334)
Valuation Allowance 749 269 1,018
------- -------
TOTAL $(1,765) $ 242 $(1,523)
======= ======= =======
1995
- ----
Current $ 377 $ 165 $ 542
Deferred 137 19 156
------- ------- -------
TOTAL $ 514 $ 184 $ 698
======= ======= =======
1994
- ----
Current $ 1,166 $ 388 $ 1,554
Deferred (461) (161) (622)
------- ------- -------
TOTAL $ 705 $ 227 $ 932
======= ======= =======
The Company's 1992 Federal income tax return is currently being
examined by the Internal Revenue Service. Management anticipates that
adjustments, if any, resulting from the conclusion of this examination will not
have a material adverse effect on the Company's consolidated financial
statements.
The (benefit from) provision for income taxes differs from the amount
computed by applying the Federal statutory rate to the (loss) income before
(benefit from) provision for income taxes, for each of the years ended December
31, 1996, 1995, and 1994, as follows:
(IN THOUSANDS) 1996 1995 1994
- --------------- ---- ---- ----
(Benefit from) provision
for income taxes at Federal statutory rate $(3,902) $ 491 $ 730
State income taxes, net of
Federal income tax benefit 50 184 149
Valuation allowance 1,018 -- --
Net operating loss
carryforwards, no tax benefit recognized 1,058 -- --
Non-deductible amortization of goodwill and
meals and entertainment expenses 166 -- --
Other differences 87 23 53
------- ------- -------
(BENEFIT FROM) PROVISION
FOR INCOME TAX $(1,523) $ 698 $ 932
======= ======= =======
37
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 - INCOME TAXES (CON'T)
- -----------------------------
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets (liabilities) at December 31, 1996 are as follows
(in thousands):
CURRENT
- --------
FEDERAL STATE TOTAL
------ ----- -----
Bad debt allowance $ 341 $111 $ 452
Net operating losses -- 24 24
Other 10 3 13
----- ----- -----
Sub-total 351 138 489
Valuation allowance (351) (138) (489)
----- ----- -----
Total $-- $-- $--
===== ===== =====
LONG-TERM
- -----------
FEDERAL STATE TOTAL
------- ----- -----
Depreciation and amortization $ 349 $ 114 $ 463
Cash to accrual conversion (17) (5) (22)
Capital losses 37 12 49
Other 29 10 39
----- ----- -----
Sub-total 398 131 529
Valuation allowance (398) (131) (529)
----- ----- -----
Total $-- $-- $--
===== ===== =====
The need for a valuation allowance is subject to periodic review, and
if the valuation allowance is decreased based on the future realizability of
deferred tax assets, the tax benefit will be recorded in future operations as a
reduction of the Company's future income tax expense.
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets (liabilities) at December 31, 1995 are as follows
(in thousands):
FEDERAL STATE TOTAL
--------- --------- ---------
CURRENT
- -------
Bad debt allowance $ 55 $ 19 $ 74
Net operating losses - 24 24
Other 7 3 10
------- --------- --------
Total $ 62 $ 46 $ 108
======= ========= ========
LONG-TERM
- ---------
Depreciation and amortization $ (340) $ (121) $ (461)
Capital losses 56 22 78
Net operating losses - 42 42
Other 14 5 19
-------- --------- --------
Total $ (270) $ (52) $ (322)
======== ========== ========
38
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 12 - CASH FLOW INFORMATION
- -------------------------------
Net cash flows from operating activities reflect cash payments for
interest and income taxes as follows (in thousands):
1996 1995 1994
---- ---- ----
Interest paid $ 780 $ 720 $ 473
Income taxes paid $ 162 $ 907 $1,346
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock in connection with acquisitions $ -- $ -- $2,709
Stock distributed to employees pursuant to
employment agreements $ -- $ -- $ 200
Issuance of promissory notes and other
consideration in connection with acquisitions $ 281 $ 263 $3,600
Increase in allowance for doubtful accounts
receivable and goodwill related to a prior acquisition $ -- $ 24 $ --
Issuance of debt to finance purchase of equipment $ 44 $ 104 $ --
Issuance of debt for the purchase of the Company's
common stock in connection with the Advanced
Care settlement $1,000 -- --
NOTE 13 - LEASES
- ----------------
The Company leases office facilities and equipment under various noncancelable
operating lease agreements which provide for minimum rentals plus, in certain
instances, real estate taxes, maintenance and other expenses.
Future minimum lease payments, net of sublease rental income, at December 31,
1996 are as follows (in thousands):
YEARS ENDING DECEMBER 31,
- -------------------------
1997 $ 760
1998 604
1999 473
2000 465
2001 371
Thereafter 760
-------
$ 3,433
Total rent expense relating to operating leases, net of sublease
rental income in 1996,1995 and 1994 of approximately $19,000, $90,000 and
$86,000, respectively, for the years ended December 31, 1996, 1995 and 1994 was
approximately $901,000, $1,276,000 and $1,298,000, respectively.
NOTE 14 - EMPLOYEE BENEFIT PROGRAM
- ----------------------------------
In 1993, the Company established a contributory savings plan under
Section 401(k) of the Internal Revenue code. Employees may elect to contribute
up to 15 percent of their annual compensation to the plan. The Company provides
a guaranteed matching contribution to the plan equal to 10 percent of the first
6 percent of the employee's contribution with a discretionary additional match
up to another 40 percent of the first 6 percent based upon the Company's
year-end pre-tax earnings. The Company's matching contribution was 10 percent,
20 percent and 20 percent for 1996, 1995 and 1994, respectively. Total
contributions by the Company under this plan were $22,000, $35,000 and $27,000
in 1996, 1995 and 1994, respectively.
39
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE - 15 MAJOR CUSTOMERS
- -------------------------
Excluding governmental payors, which accounted for approximately 15
percent of the Company's net revenues in 1996, the Company had no major
customers that accounted for 10 percent or more of its net revenues for the
years ended December 31, 1996, 1995 and 1994.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------
QUARTERLY FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS,
- ---------------------------------------------------------------------------
EXCEPT PER SHARE DATA):
- -----------------------
The net revenues and gross profit for the second and third quarters of 1996
have been restated from previously reported amounts to conform with the
fourth quarter presentation.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net revenues $ 9,235 $ 8,694 $ 9,549 $ 7,796
Gross profit $ 4,934 $ 3,213 $ 4,960 $ 2,912
Operating income (loss) $ 325 $ (8,551) $ (62) $ (3,187)
Net income (loss) $ 61 $ (5,815) $ (262) $ (3,936)
Net income (loss) per share $ 0.02 $ (0.70) $ (0.03) $ (0.32)
Weighted average number of
common and common equivalent
shares outstanding, as applicable 8,462 8,311 9,446 12,446
QUARTERLY FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS,
- ---------------------------------------------------------------------------
EXCEPT PER SHARE DATA):
- ----------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues $10,037 $11,019 $ 9,592 $ 9,070
Gross profit $ 4,726 $ 5,940 $ 4,317 $ 4,570
Operating income $ 457 $ 744 $ 437 $ 494
Net income $ 141 $ 328 $ 147 $ 130
Net income per common
and common equivalent shares $ 0.02 $ 0.04 $ 0.02 $ 0.02
Weighted average number of
common and common equivalent
shares outstanding 8,293 8,414 8,450 8,426
NOTE 17- LITIGATION
- -------------------
On June 5, 1996, the Company signed a final settlement agreement in
connection with the acquisition of Advanced Care (see Note 3). The settlement
involved the substitution of the $3,000,000 in notes payable to the previous
owners of Advanced Care with a cash payment to the United States Government of
$550,000 at the signing of the agreement and a new note payable to the United
States Government for $2,780,000 payable in eighteen equal quarterly payments,
commencing September 5, 1996, at an annual interest rate of 9 percent.
Additionally, each of the former owners were, among other things, required to
transfer their shares of common stock of the Company to the United States
Government along with their put option. The United States Government exercised
the put option in June 1996. The amount owed to the United States Government by
the Company in connection with the United States Government's exercise of the
put option is included in the above- mentioned $2,780,000 note payable. The
United States Government has a second lien on all assets of the Company, in
connection with the Company's note payable to the United States Goverment.
40
THE CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONT. NOTE 17 - LITIGATION
- --------------------------
The Company is a party to litigation arising in the normal course of
its operations. It is the opinion of management of the Company that it has
meritorious defenses against all outstanding claims and that the outcome of
such litigation will not have a significant adverse effect on the Company's
consolidated financial position or results of operations. Further, management
intends to vigorously defend all such litigation.
NOTE 18 - SUBSEQUENT EVENTS
- ---------------------------
On January 30, 1997 and February 28, 1997, Equity Dynamics advanced
the Company $250,000 on each date for a total of $500,000 towards the sale of
common stock and warrants.
The Company is currently in the process of selling common stock and
warrants consisting of 40 units at $50,000 per unit. Each unit will consist of
40,000 shares of common stock and warrants to purchase another 40,000 shares of
the Company's common stock at a conversion price of $2.50 per share. In March
1997, the Company received a total of $1,000,000 toward this $2,000,000 sale.
On March 5, 1997, the Company was served with a lawsuit from an
investor. The investor is suing the Company for breach of contract. On or about
June 19, 1996, the investor purchased 150,000 shares of the Company's common
stock at a reduced price and had a right to a demand registration in six months
from the June 19, 1996 date. The Company received a demand registration request
in late November 1996. The investor, among other things, is suing the Company
for not registering the shares in a timely manner. Management intends to
vigorously defend such litigation and believes that the outcome of such
litigation will not have a material adverse effect on the Company's financial
position or results of operations.
The Company entered into a letter of intent to sell its Atlanta,
Georgia branch for $1.6 million. Such sale is currently expected to be
consummated by May 1997.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the directors and executive officers
of the Company is incorporated by reference to the Company's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
no later than 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to the directors and executive officers
of the Company is incorporated by reference to the Company's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
no later than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information with respect to the directors and executive officers
of the Company is incorporated by reference to the Company's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
no later than 120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is not involved with any related transactions.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements - included in Item 8.
An index to financial statements for the years ended
December 31, 1996, 1995 and 1994 appears on page 22
42
(2) Financial Statement Schedules.
Financial Statement Schedule II for the years ended December
31, 1996, 1995 and 1994 is submitted herewith.
Other schedules are omitted because of the absence of conditions
under which they are required.
(b) No reports on Form 8-K have been filed by the Company during the fourth
quarter of 1995.
(c) Exhibits
(3) (i) Certificate of Incorporation of Registrant, as amended (m)
(ii) Bylaws of Registrant (a)
(4) (i) Form of Specimen Stock Certificate (a)
(ii) Form of Underwriter's Warrant Certificate (b)
(iii) Form of Stock Purchase Warrant Certificate (o)
(iv) Subscription Agreement dated as of August 14, 1996
between the company and the sucriber(o)
(v) Subcription agreement, dated as of June 19, 1996 between
the compnay and the subcriber
(vi) Form of Unit Purchase Options (m)
(9) Form of Voting Trust Agreement (a)
(10) (i) Form of Employment Agreement between Registrant and
Ann T. Mittasch dated as of January 1, 1992 (c)
(ii) Form of 1990 Stock Option Plan (a)
(iii) Form of 1991 Stock Option Plan (e)
(iv) Form of 1993 Stock Option Plan (d)
(v) Form of 1995 Stock Option Plan (l)
(vi) Standard industrial commercial single tenant net lease
dated July 6, 1991 by and between the Boone Family Trust
and Preferred Healthcare Services (c)
(vii) Lease Agreement dated November 27, 1991 by and between
California State Teachers' Retirement System and The Care
Group of Georgia, Inc.; and Addendum Letter to said Lease
Agreement dated February 14, 1991 (f)
43
(viii) Form of Amendment to Lease Agreement dated June 27, 1988
by and between California State Teacher's Retirement
System and Windsor Homecare of Georgia, Inc. (g)
(ix) Lease dated July 3, 1997 by and between Registrant and
Brown Realty Company. (r)
(x) Leasehold Agreement dated December 17, 1990 by and between
M. Parisi & Son Construction Co., Inc. and Windsor
Placement, Inc. (g)
(xi) Sublease dated January 6, 1990 Between Windsor Home Care,
Inc. and Superior Medical Equipment and Supply Corp. (a)
(xii) Temporary Help Service Errors and Omissions Policy by and
between National Union Fire Insurance Company of
Pittsburgh, PA and Windsor International Agencies, Inc.
(a)
(xiii) Form of Transfer Agent Agreement with American Stock
Transfer and Trust Company (a)
(xiv) Directors' and Officers' liability Insurance (temporary
rider) (h)
(xv) Lease Agreement dated December, 1991 between Philip C.
Richardson and The Care Group of Texas, Inc. (c)
(xvi) Lease Agreement by and between Texas Commerce Bank and The
Care Group of Texas, Inc. (c)
(xvii) Lease Agreement between The Western - Southern Life
Assurance Company and The Care Group, Inc. (c)
(xviii) Amendment to Employment Agreement with Robert S. Miller
dated July 21, 1994 (the Company has deemed this Agreement
rescinded) (k)
(xix) Employment Agreement dated May 18, 1994 by and among
Advanced Care Associates, Inc., Robert P. Wolk and the
Company (the Company has deemed this
Agreement rescinded) (j)
(xx) Amendment to Employment Agreement with Robert P. Wolk
dated July 21, 1994 (the Company has deemed this Agreement
rescinded) (k)
(xxi) Asset Purchase Agreement dated July 18, 1994 by and among
Jack J. Gutkin, Care Line of Georgia, Inc. and the Company
(k)
44
(xxii) Lease dated August 5, 1994 between 257 Park Avenue
Associates and The Care Group of New York, Inc. (k)
(xxiii) Lease dated November 25, 1995 by and between Newark
Partners II and The Care Group of Georgia, Inc. (m)
(xxiv) Employment Agreement, dated January 1, 1996, between the
Company and Pat H. Celli (m)
(xxv) Employment Agreement, dated January 1, 1996, between the
Company and Randolph J. Mittasch (m)
(xxvi) Employment Agreement, dated August 14, 1996, between the
Company and Rick Jung (r)
(xxvii) Settlement agreement dated as of June 5, 1996, between
the company and Advance care associates, Inc. Robert Walk
and Hamet Walk Robert Miller and Ame Miller, and the
United States of America (m).
(xxviii) Security agreement, dated as of June 5, 1996, between
the company and the Unted States of America (
(xxix) Guaranty made by the Care Group. Inc. relating to the
settlement agrement ( r)
(xxx) Agency Agreement, dated as of August 14 1996,between the
Company and Royce Investment Group, Inc. (o)
(xxxi) 1996 Stock Option Plan (p)
(xxxii) Loan Agreement, dated December 31, 1996, by and between
Key Bank of New York and The Company (q)
(xxxiii) Form of Borrower Pledge Agreement, dated December 31,
1996, by and between Key Bank of New York and the Company
(q)
(xxxiv) Form of Borrower Security Agreement, dated December 31,
1996, by and between Key Bank of New York and the Company
(q)
(xxxv) Form of Guarantor Security Agreement, dated December 31,
1996, by and between Key Bank of New York and each of the
Company's subsidiaries (q)
(xxxvi) Form of Guaranty, dated December 31, 1996, by and between
Key Bank of New York and each of the Company's
subsidiaries (q)
21. Subsidiaries of the Registrant (m)
23. (i) Consent of Deloitte & Touche LLP, independent auditors (m)
- ---------------------------
a) Filed in Registrant's Registration Statement on Form S-18 or
post-effective amendments thereto, which exhibit is incorporated herein
by reference (Registration No. 33-27840-NY).
b) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(Registration No. 33-42528), or post effective amendments thereto, which
was declared effective by the Securities and Exchange Commission on
October 18, 1991, which exhibit is incorporated herein by reference.
45
c) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, which exhibit is incorporated
herein by reference.
d) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, which exhibit is incorporated
herein by reference.
e) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (33-41578) filed with Securities and Exchange Commission on July 11,
1991, which exhibit is incorporated herein by reference.
f) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, which exhibit is incorporated
herein by reference.
g) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990, which exhibit is incorporated
herein by reference.
h) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(33-43196), which exhibit is incorporated herein by reference.
k) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, which exhibit is incorporated
herein by reference.
l) Filed as an exhibit to Registrant's Registration Statement on Form S-8
(333-00849) filed with the Securities and Exchange Commission on
February 12, 1996, which exhibit is incorporated herein by reference.
m) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, which exhibit is incorporated
herein by reference.
o) Filed as an exhibit to the Registrant's report on Form 8-K, dated August
14, 1996, which exhibit is incorporated herein by reference.
p) Filed as Appendix A to the Company's Proxy Statement on Schedule 14A for
the 1996 Annual Meeting of Stockholders held on October 4, 1996, which
appendix is incorporated by reference.
q) Filed as an exhibit to the Registrant's report on Form 8-K, dated
December 31, 1996, which exhibit is incorporated by reference.
r) Filed as an exhibit to this Annual Report on Form 10-K.
46
THE CARE GROUP, INC.
SCHEDULE II
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------
ADDITIONS BALANCE AT
BALANCE AT CHARGED TO END OF PERIOD
DESCRIPTION BEGINNING OF OPERATING EXPENSES DEDUCTIONS (DECEMBER 31ST)
- ----------- ------------ ------------------ ---------- ---------------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS RECEIVABLE
December 31, 1996 $ 3,564,000 $ 5,379,000 $ (3,306,000) $5,637,000
December 31, 1995 $ 4,186,000 $ 5,178,000 $ (5,800,000) $3,564,000
December 31, 1994 $ 2,784,000 $ 5,101,000 $ (3,699,000) $4,186,000
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE CARE GROUP, INC.
Date: March 26, 1996 By:/S/ PAT CELLI
---------------
Pat Celli
Chief Financial Officer, Treasurer &
Director
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Date: March 26, 1997 /S/ANN T. MITTASCH
----------------------
Ann T. Mittasch,
Chairman
Date: March 26, 1997 /S/ RANDOLPH J. MITTASCH
------------------------
Randolph J. Mittasch,
Secretary and Director
Date: March 26, 1997 /S/ JOHN PAPPAJOHN
John Pappajohn, Director
Date: March 26, 1997 /S/ PAT H. CELLI
---------------------
Pat H. Celli, Chief Financial Officer,
Treasurer & Director
(Principal Financial and Accounting Officer)
Date: March 26, 1997 /S/ DR. DERACE SCHAFFER
-------------------------
Dr. Derace Schaffer
Director
48