CHCA Files SEC 10-Q FILING November 14, 1997 CONSOLIDATED HEALTH CARE ASSOCIATES INC
(CHCA)
Quarterly Report (SEC form 10-Q)
Item 2. Management's discussion and analysis of financial condition and results of operations
General Consolidated Health Care Associates, Inc. "the Company", provides ancillary health care
and outpatient rehabilitation services through a network of outpatient clinics principally in the
Northeast and Mid-Atlantic regions. The Company owns and operates eight clinics under the name
PTS Rehab, Inc. ("PTS") of which four are in Massachusetts, one is in Pennsylvania, and three are
in Delaware. The Company closed one non-performing clinic in Massachusetts late in the second
quarter in 1997. The Company also provides managed ancillary health care rehabilitation services
through contract staffing under the name Consolidated Rehabilitation Services, Inc ("CRS"),
principally in Massachusetts and New York. In 1996, the company began development of a
program of Managed Rehabilitation Services ("MRS"), pursuant to which the Company would
furnish contract development, staffing, administrative, payroll, billing, collection and management
services to local, independently owned community based clinics, nursing homes and home health
agencies. The Company expected that over time the MRS business would become the substantial
focus of the Company's operations. During the third quarter 1997, the Company elected to
terminate the current MRS arrangements and not to pursue any additional development of the MRS
product, primarily as a result of the decision made by the Board of Directors to pursue a merger or
sale of the company, and to a lesser extent, as a result of increased cash flow deficiencies being
experienced by the Company. In September 1997, the Company announced that it had entered into
a non-binding Letter of Intent to sell certain operating assets of the Company with Olympus Health
Care Group and was continuing to pursue the sale of the remaining assets of the Company.
Proceeds from the proposed transactions, along with the collections of the Company's receivables,
would be used to satisfy the Company's outstanding liabilities, although there are no assurances that
the completion of such transactions will enable the Company to completely satisfy all liabilities. See
"Other Information" below. Results of operations Net revenues decreased to $5,895,281 for the
nine months ending September 30, 1997 from $6,901,137 as compared to the nine month period
ended September 30, 1996, a decrease of $1,005,856 or 14.6%. Net revenues for the quarter
ending September 30, 1997 declined 45.6% to $1,243,220 from $2,281,626 as compared to the
same period of time during 1996. The year to date net revenue decrease is primarily from a direct
result of four fewer Company owned clinics in operation during the nine month period ended
September 30, 1997 as compared to the similar nine month period during 1996. In February 1997,
the 7 Company's PTS division sold three of its clinics in Pennsylvania ("the Disposition") and in
March 1997, returned one clinic in Florida to its former owner. Lower net revenues during the first
nine months of 1997 are also attributable to higher accruals for contractual allowances as compared
to reserves for contractual allowances recorded during the same period in 1996. Higher accruals of
approximately $223,000 are reflected in the first nine months of 1997 and as a result, cost are not
comparable to those accruals recorded during the same period in 1996. Operating costs
represented 94% and 79% of revenue during the quarter and nine months ended September 30,
1997 compared to 81% and 76%, respectively. The increase in operating costs during 1997 as
compared to the same period in 1996 is specifically related to higher subcontract labor and benefit
cost associated with the Company's nursing home rehabilitation contracts and MRS start up costs,
and to a lesser extent, as a result of lower revenues resulting from the seasonality of the Company's
outpatient business. During 1997, the Company continued the integration of the Company's contract
service division in the Company's out-patient clinics which allowed certain fixed overhead costs to
be reduced, however during the third quarter 1997, the Company was not able to lower fixed costs
at a ratio comparable to the changes occurring in the general business and from the regular seasonal
decline in outpatient revenue. Administrative and selling costs constituted 49% and 30% of net
revenue during the quarter and nine months ended September 30, 1997 as compared to 36% and
24% for the same periods of 1996. The increase reflects $93,063 in higher administrative and
selling costs for nine months ended September 30,1997 as compared to the nine months ended
September 30, 1996. The increase costs are associated with the Company's continued effort to
negotiate an agreement to effectuate a merger or sale of the Company, and are attributable to
increase legal and accounting costs. During the first three quarters of 1997, the Company accrued
for accounting, legal, consulting and financing costs at a higher rate and as a result there are no
comparable accruals during the first six months of 1996, however the Company did record a
significant accounting and legal charge in the third quarter of 1996. Depreciation and amortization
decreased by $20,911 during the nine months ended September 30, 1997 as compared to the
same period during 1996. The decrease is attributable to lower depreciation expenses resulting from
the sale of certain fixed assets in February and March 1997. Interest expense increased by $4,417
for the nine months ended September 30, 1997 as compared to the same period in 1996. The
increase is primarily the result of the increased use of the Company's factoring arrange ment to
support its operations and interest expense accrued on term debt, offset by lower interest expense
resulting from the use of proceeds from the Disposition to retire certain current and long-term debt.
During the third quarter 1997, the Company was advanced $300,000 under an arrangement with
Renaissance, a major stockholder of the Company. Interest expense related to this loan accrues at a
rate of 8% per annum. 8 Other income increased by $49,563 for the nine months ended September
30, 1997 as compared to the same nine months in 1996, primarily as a result of the successful
negotiations and settlements made to lower liabilities of certain outstanding accounts payable debt.
On February 28, 1997, the Company completed the sale of three of its four Pennsylvania clinics for
a purchase price of $1,050,000 in cash and a note, subject to adjustment. The clinics include those
located in Millersburg, PA, Mechanicsburg, PA and Shermansdale, PA. The Company had
purchased these clinics from "the Buyer" in 1993. The cash portion of the transaction was $900,000
which at the closing was reduced by the payment of certain operating expenses due the Buyer of
$15,636. The Buyer also assumed up to $230,000 in associated liabilities. Additionally, in January
1997 the Company agreed to satisfy a note held by the Buyer issued in connection with the 1993
business acquisition in the approximate amount of $413,000, by assigning and without guarantee as
to the amount of the collect ability to the note holder $484,000 in face amount of accounts
receivable, but only to the extent of collections in the amount due under the note. The clinics sold
accounted for approximately 22% of the Company's total revenues for the year ended December
31, 1996. The Company is utilized the proceeds from the Disposition to pay down debt and for
other general corporate purposes. In March 1997, the Company returned one non-performing clinic
in Florida to its "former owner". The Company assigned approximately $64,000 of net trade
receivables, approximately $4,000 of prepaid assets and approximately $6,000 of net fixed assets
related to the returned clinic to the former owner. In conjunction with the return of the clinic, the
former owner agreed to forgive the balance of a Company note held in the amount of $48,000,
forfeit accrued earned time benefits in the approximate amount of $10,000, and assumed certain
accounts payable in the approximate amount of $13,000. The returned clinic accounted for
approximately 4.7% of the Company's total net revenues for the year ended December 31, 1996.
The sale of the Pennsylvania clinics and the return of the Florida clinic resulted in a net gain on sale
of assets for the period ending March 31, 1997 of $802,724. The Company elected to sell certain
Pennsylvania clinics and return the Florida clinic after determining that current and projected future
cash flows of these operations did not and would not satisfy operating and debt service
requirements. The Company's tax provision is substantially the result of state income tax accruals.
As a result of the above factors, the Company incurred a net loss of $44,139 for the nine months of
1997 as compared to a net loss of $458,272 for the same period of 1996. 9 Liquidity and Capital
Resources The Company's liquidity, as measured by its cash increased by $7,434 in the first nine
months of 1997. The increase in cash is primarily the result of the sale of the Pennsylvania clinics
and additional proceeds received from the issuance of new term debt, less certain financing activities
of the Company described below. The Company's cash and working capital continues to decline
primarily as a result of operational losses, making it increasingly difficult for the Company to meet
scheduled debt repayments. Additionally, the Company continues to be dependent upon its
factoring arrangements which it has assigned a certain portion of its accounts receivable to support
its operations. The Company's current factoring arrangement has resulted in availability of funds
equal to the current month's cash collections. The matters described above have resulted in the
Company seeking a merger, sale of the Company assets or to seek additional outside capital that is
required to meet the cash needs of the Company. No assurances can be given that any additional
capital or financing may be available or if available, that it will be on terms and conditions acceptable
to the Company. Additionally, no assurances can be given that any proposed merger or sale will
occur. If the Company is unsuccessful in achieving the above, this would have a material adverse
effect on the Company. Net accounts receivable were $1,079,198 at September 30, 1997
compared to $1,817,036 at December 31, 1996, a decrease of $737,838. In January 1997 the
Company agreed to satisfy a note held by the Buyer issued in connection with the 1993 business
acquisition in the approximate amount of $413,000 by assignment to the note holder of $484,000 in
face amount of accounts receivable, but only to the extent of collections in the amount due under the
note. Subsequently, included in the February 1997 Pennsylvania Disposition were approximately
$230,000 of remaining net accounts receivables related to the clinics included in the disposition. In
the March 1997 return of the Florida clinic to its Former Owner, net accounts receivable returned
were approximately $65,000. Net accounts receivables further decreased through additional
reserves for contractual allowances of approximately $133,000. The decreases were offset by
increased accounts receivables of approximately $175,000 generated primarily in the CRS division.
Accounts payable, accrued payroll, taxes and benefits, and accrued other increased by $29,827 in
the first nine months of 1997 as compared to the balances at December 31, 1996. As the Company
continues to incur losses during 1997, its working capital and available cash declined. In response,
the Company extended the time needed to satisfy its obligations to vendors, resulting in increased
accounts payable. Increased accounts payables were offset by the combined assumption of
approximately $269,000 of accounts payable and accrued payroll and related benefit costs by the
Buyer of the Pennsylvania clinics and by the former owner of the Florida clinic. Cash provided by
investing activities for the nine months ended September 30, 1997 was $874,181, which consisted
of net proceeds provided by the sale of clinics of $884,361 less cash used for the purchases of
equipment of $10,180. The cash portion of the 10 Pennsylvania disposition was $900,000 which at
the closing was reduced by the payment of certain operating expenses due the Buyer of $15,639.
Financing activities in the first nine months of 1997 used cash of $526,962. Proceeds from the
issuance of debt were $450,000 and payments of $976,416 were made on term debt. Due to the
shortfalls in working capital as discussed above, the Company discontinued scheduled principal and
interest payments on several of its note payable obligations during 1996. During 1997, in
conjunction with the assignment of accounts receivables and the utilization of proceeds from the
dispositions, the Company cured certain defaults in principal and interest payments by remitting
past-due amounts. At September 30, 1997 and December 31, 1996, the Company had outstanding
approximately $1,699,000 and $2,158,000 in notes payable and long-term debt, respectively. At
December 31,1996 of such amount, approximately $462,000 related to clinics included in the
February disposition and the March 1997 clinic returned to the former owner. During the three
months ended March 31,1997 by assignment of accounts receivable from the Company to the note
holders, the remaining balance of these notes were satisfied. Net term debt remaining decreased
during the nine months ended September 30, 1997 primarily as a result of the continuation of certain
scheduled payments of term debt offset by the issuance of new term debt of $450,000.
Stockholders' equity increased $20,859 during the first nine months of 1997 due to the issuance of
common stock $65,998 offset by the net loss $44,139. In January 1997, the Company negotiated a
$150,000 promissory note with Davstar II Managed Investments Corporation N.V. Pursuant to the
promissory note, the Company is obligated to pay interest on the unpaid monthly balance of the
promissory note at a rate of 10% per annum, computed in arrears, with the entire principal balance
plus any unpaid interest due in full in May 1997. In consideration of the promissory note, the note
holder was issued 90,000 shares of the Company's common stock at $.375 per share. In early
April 1997, the Company subsequently satisfied in full, the outstanding principal and interest balance
under this promissory note. In July 1997, the Company negotiated a $300,000 promissory note
with Renaissance Capital Group, Inc.. Pursuant to the promissory note, the Company is obligated to
pay interest on the unpaid monthly balance of the promissory note at a rate of 8% per annum,
computed in arrears, with the entire principal plus any unpaid interest due in full November 20,
1997.
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