-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q0ooyrXHrKqzTFlV0FlhxRAnKwPTF5anAHwpazCvpC5rrjrnSDQfTWOSz55e60vq 1lQ8l5kpPqHpJ9LqLxTToA== 0001042910-98-000030.txt : 19980115 0001042910-98-000030.hdr.sgml : 19980115 ACCESSION NUMBER: 0001042910-98-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980114 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH PROFESSIONALS INC /DE CENTRAL INDEX KEY: 0000879257 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 113076108 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10966 FILM NUMBER: 98506162 BUSINESS ADDRESS: STREET 1: 2601 E OAKLAND PARK BLVD STREET 2: 3RD FL CITY: FORT LAUDERDALE STATE: FL ZIP: 33306 BUSINESS PHONE: 3057662552 MAIL ADDRESS: STREET 1: 515 E LAS OLAS BLVD STREET 2: SUITE 1600 CITY: FT LAUDERDALE STATE: FL ZIP: 33301 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10966 ------- HEALTH PROFESSIONALS, INC. -------------------------- (Exact name of Registrant as specified in its charter) Delaware 11-3076108 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2601 East Oakland Park Blvd. - Suite 300, Fort Lauderdale, Florida 33306 - ------------------------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 766-2552 Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, NASDAQ BULLETIN BOARD - ------------------------ ------------------------- par value $.02 per share (Name of Each Exchange on (Title of Class) which Registered) Securities registered pursuant to Section 12(g) of the Act: ------------------------------- TO PURCHASE COMMON STOCK ------------------------ (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO _______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of January 9, 1998, the aggregate market value of voting stock held by non-affiliates of Health Professionals Inc. (the "Company") was $ _________. As of December 31, 1997, the number of shares outstanding of the Company's Common Stock, par value $.02 per share, was 5,445,000. DOCUMENTS INCORPORATED BY REFERENCE None PART I ITEM 1. BUSINESS General Business Description The Company was formed pursuant to the laws of the State of New York in 1975 under the name Health Extension Services, Inc. In fiscal 1986, following the merger of its primary operating subsidiary into itself, the Company changed its name to Professional Care, Inc. ("PCI"). On November 25, 1991, the shareholders of the Company approved a merger and restructuring whereby each share of PCI common stock was exchanged for a share of common stock of Health Professionals, Inc. ("HPI"), a Delaware corporation formed on August 12, 1991 for the purpose of the restructuring. PCI became a wholly-owned subsidiary of HPI, and the existing subsidiaries of PCI also became subsidiaries of HPI. HPI and its subsidiaries (and any subsidiaries of such subsidiaries) are sometimes hereinafter collectively referred to as the "Company." The executive offices of the Company are located at 2601 East Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33306. The Company's telephone number is (954) 766-2552. In December, 1991, the Company acquired 100% of Center for Special Immunology, Inc., a Delaware corporation ("CSI") and its subsidiaries which have since become the only operating businesses of the Company. CSI, owns and operates an integrated health care delivery and clinical research system that includes a multi-state network, operating in 9 states, of primary care and clinical research facilities specializing in immune system disorders, consisting primarily of HIV, AIDS and Chronic Fatigue Immune Dysfunction Syndrome (CFIDS). The network also conducts multi-center trials in cooperation with biotechnology and pharmaceutical companies. CSI was founded in 1986 by William M. Reiter, M.D., FACP, and Paul J. Cimoch, M.D., FACP, who are both internationally recognized research physicians. Dr. Reiter is currently Chairman of the Board and Dr. Cimoch also currently serves on the Board. General CSI owns and operates an integrated health care delivery and clinical research system that includes a multi-state network of primary care and clinical research facilities specializing in immune system disorders consisting primarily of HIV, AIDS and CFIDS. The network also conducts multi-center clinical trials in cooperation with biotechnology and pharmaceutical companies. The Company became engaged in this health care delivery and research business in December 1991, when it acquired all of the stock of CSI. Historical outcomes analysis has demonstrated that the course of HIV disease can be profoundly and positively altered by the use of early intervention strategies and by preventive treatment directed against opportunistic infections. Through its efforts in research and practical application, CSI has developed protocols for the treatment of HIV patients. These protocols specify the treatments and therapies to be provided to HIV patients, depending on the stage of the disease as determined by a multi-parametric evaluation of clinical status, viral activity and immunologic function. Treatment of HIV patients at CSI facilities by their affiliated physicians is offered in accordance with these protocols. CSI has also developed research protocols which govern the processes and record keeping practices to be followed in specified studies performed by CSI. These studies may be undertaken at CSI's initiative or in conjunction with a separate organization (e.g., a pharmaceutical company), which would typically finance the study and pay certain fees to CSI in return for conducting its portion of the clinical trial. CFIDS is believed to result from a genetic failing occurring in the immune response genes. This defect, when coupled with certain viral infections or other activating factors, leads to a state of chronic immune activation, which causes a variety of symptoms, including profound fatigue. CSI has developed treatment protocols for chronic fatigue patients, the goal of which is to re-balance the immune system or otherwise alleviate symptoms. Services provided by CSI (including its CSI Clinical Facilities, CSI Clinical Laboratories, Inc., CSI Therapeutics, Inc., CSI Clinical Trials, Inc. and CSI Managed Care, Inc. subsidiaries) have accounted for all of the Company's operating revenues from continuing operations since the Company acquired CSI. Organization and Operation The Company through CSI owns and operates 5 facilities (hereinafter the `Clinical Treatment Facilities'),located in Ft. Lauderdale, Fla., Miami, Fla., Chicago, Ill., Irvine, CA,and Los Angeles, CA. CSI Clinical Laboratories, Inc. ("CSI Clinical Laboratories") is a licensed clinical laboratory that currently provides services to CSI's network of clinical facilities. CSI Therapeutics, Inc. ("CSI Therapeutics") provides pharmaceutical distribution, home care and infusion care in connection with the operation of CSI's facilities. CSI Clinical Trials, Inc. ("CSI Clinical Trials") conducts multi-center clinical trials for biotechnology and pharmaceutical companies as well as its own internally developed treatment protocols. CSI Managed Care, Inc. ("CSI Managed Care") markets and administrates managed care contracts with third party payers, including preferred provider organizations, health maintenance organizations and self insured organizations. Each of the Clicinal Treatment Facilities is owned by a wholly-owned subsidiary of CSI. In states where the corporate practice of medicine is permitted, CSI employs physicians to render medical services to its patients. In states where the corporate practice is not permitted, a medical professional association (the "PC") enters into an Independent Practice Affiliation Agreement (IPAA) with CSI to utilize the facility in order to provide care to its patients with immunological and related diseases. The Company had IPAA for utilization of each of these facilities prior to January 1, 1996. On January 1, 1996, the Company purchased the medical practices affiliated with the Fort Lauderdale and Miami facilities. On April 1, 1996, the Company purchased the medical practice affiliated with the Chicago facility. On September 30, 1996, the Company created a Management Service Organization in California, which purchased the medical practice operations affiliated with the Irvine and Los Angeles , California facilities. Under the IPAA, CSI provides a non-exclusive license to utilize the facility, cognitive services and practice management services to the PC, including: (i) the use of the facility for treatment of its patients; (ii) management, administration and support services, including but not limited to case management, financial and business management, accounting, marketing and bookkeeping; (iii) professional personnel for support services, including, nurses, physicians assistants and other non-physician personnel; and (iv) access to and the use of treatment protocols and research data developed by CSI. In addition, CSI provides the PC with the opportunity to participate in multi-center clinical trials through CSI Clinical Trials, Inc., which CSI Clinical Trials, Inc. may have under contract from time to time or which CSI maybe conducting as part of its own research efforts. The PC is responsible for employing all professional personnel and maintaining its own malpractice insurance as well as for maintaining the quality of medical care offered at the facility. Under the IPAA'S, (i)facility management fees are charged to the PCs by CSI at cost plus 10% on direct expenses and corporate overhead. Network participation fees are charged to the PCs at 10% of net PC revenues; (ii) CSI was reimbursed for a portion of its corporate overhead related to other services provided to the facilities through December 31, 1995;(iii)CSI received a network participation fee equal to 7 1/2% percent of the total net revenues of the PC for provided medical and related sources, including hospital procedure revenues, clinical practice revenues and in office therapeutic revenues, through December 31, 1995; and (iv) On January 1, 1996, CSI combined the corporate overhead and network participation fee into one network participation fee, representing 10% of the total net revenues of the PC. Revenues increased in fiscal year 1996 and 1997 under the new form of contract and management believes the new contracts provided for an improved business relationship with the PC?s. The purchases of the Fort Lauderdale, Miami, Chicago, Irvine and Los Angelos practices have substituted the fees charged on direct expenses, and network participation fees for patient revenues. Management believes that by owning these practices not only will the Company increase its revenues, but the Company will be able to better control the operations of the medical practices. In April 1996, the Fort Lauderdale clinic?s independent contractor physician relocated to an unaffiliated practice in Fort Lauderdale and took with him a majority of the Fort Lauderdale facility's patients. The Company has relocated the Fort Lauderdale Clinical Treatment Facility and has instituted a market program to rebuild the patient base of this facility. The Company expects that its marketing efforts will allow it to rebuild the Ft. Lauderdale site's patient base. In addition, the Fort Lauderdale clinic was awarded $169,000 in Ryan White Care funding by the Broward County Commission in February of 1997 which is expected to be earned over a twelve month period in order to provide primary care and support services to medically indigent HIV patients. The first patients using the Ryan White funding were seen in the Fort Lauderdale clinic in October of 1996. Management believes that the Ryan White grant will continue to bring new patients to the Fort Lauderdale facility. In addition, the CSI Fort Lauderdale Clinic has applied for $240,000 in funds for 1998 and they expect to receive a decision from the county in January 1998. The Ryan White Care Act was introduced in 1990 as a means of providing primary care and support services to medically indigent HIV patients through federal funding. Ryan White support accounts for over $205 million in annual funding, which is apportioned to areas hardest hit by the epidemic. Broward County's 1996 share of Ryan White funding is approximately $5.8 million. This marks the first time that CSI has applied for government funding designated for the treatment of HIV/AIDS patients. Following the success of its first application, CSI intends to expand its participation in the Ryan White program and apply for such grants for all of its sites nationally. The Company has applied for an additional grant for its Fort Lauderdale facility and for an initial grant for its Miami______ Clincial Treatment Facility. The Company can give no assurances that additional grants will be awarded. In applying for the Ryan White funding, CSI proposed providing comprehensive ambulatory treatment services for the medically indigent HIV+ population in Broward County. Cost savings resulting from CSI?s integrated care model will allow it to care for a greater number of patients for the same total dollars than could its competitors for the funding. CSI won the support of government officials and local commissioners, who saw the need to expand treatment options for this patient population in a fiscally prudent manner. In addition to the corporately owned medical practices and the IPAA's which are in place in CSI's company owned facilities, CSI has developed a form of Independent Practice Affiliate Agreement for its affiliations with medical practices that own and operate their own facilities (hereinafter the "Privately Owned Facility IPAA"). Under the Privately Owned Facility IPAA, CSI offers the Independent Practice Affiliate a variety of services with the option of utilizing some or all of the cognitive, research, and practice management services which CSI makes available to its wholly owned facilities. CSI does notown an interest in or control any of the Privately Owned Facilies. The Privately owned Independent Affiliate may contract to utilize any or all of the following services: i) An affiliation with CSI Managed Care, Inc. under which CSI will market managed care services to national and regional payers, self insured employers and HMO's and negotiate rates and contracts with said third party payers; ii) A research affiliation with CSI Clinical Trials, Inc. under which the Independent Physician will participate with CSI Clinical Trials in clinical studies conducted for independent third parties or for CSI own internally developed protocols; iii) Case management services and/or the implementation of in office therapeutics; iv) An affiliation with CSI Clinical Laboratories, Inc. under which CSI Clinical Laboratory will act as the independent facilities primary laboratory; and v) A practice management affiliation under which CSI will bill and collect for services rendered by the PC and make available to PC if requested, the use of CSI's blanket factoring agreement with its factor. CSI has entered into Privately Owned Facility IPAA's with established medical practices in Philadelphia, New York City, Tampa, Los Angeles, Denver, Chicago and Hampton, VA. The expansion of the IPAA network enables CSI to conduct larger, multi-center clinical research trials and ultimately will allow CSI to compete more effectively for national HIV disease-specific managed care contracts and increases the information available for analysis under CSI's Data Management Analysis and Royalty Agreement with the Center for Health Outcomes and Economics, Inc., ("CHOE"), a wholly owned subsidiary of the Bristol-Myers Squibb Company. Support Services In addition to providing and updating treatment and research protocols, CSI also offers other ancilliary support services to its facilities. These currently include laboratory, pharmaceutical distribution, home care, out-patient infusion services, clinical trial services and a managed care network. These ancilliary support services consist of the following: 1. Laboratory Services: CSI Clinical Laboratories is a licensed clinical laboratory, operated to research standards. It currently provides services to CSI?s network of clinical facilities and CSI's Privately Owned Facility Independent Practice Affiliates. The laboratory specializes in hematology, immunogenetics and diagnostic immunology; with particular expertise in flow cytometery and immunoassay. General laboratory work is provided by a sub-contract with a national reference laboratory. Laboratory result reporting from all sources is through CSI's integrated information technologies system. All information is archived in relational data bases, enabling customized clinical presentation and post hoc research analysis. 2. Therapeutic Services: CSI Therapeutics is the umbrella subsidiary for pharmaceutical distribution, home care and infusion care. Parenteral pharmaceutical distribution is made to PA's for in office use of injectable medications by the PA. Oral pharmaceutical distribution is made to PA's for dispensing by the PA in accordance with applicable regulations. Home health care and out-patient infusion care is available to patients of the PA through CSI, primarily via a national sub-contract arrangement with unaffiliated home health care companies. 3. CSI Clinical Trials: CSI's Clinical Trials Division is responsible for protocol review, budget development and presentation to the clinical network of all Clinical Trials conducted for biotechnical or pharmaceutical companies or CSI's internally developed protocols. Research physicians and protocol specialists in the Clinical Trials Division oversee study initiation, quality assurance, administrative and regulatory matters. All source documentation from study sites utilizing CSI's Affiliated Physicians Network will be captured on CSI Information Technologies System clinical and research templates. Data will be monitored centrally, automatically extracted to study case report forms and transferred to sponsors for interim analysis. Manual transcription of data from source documents to case report forms and to the sponsor's computer data bases will be obviated. All information will be transformed into electronic records, with security standards making them acceptable for submission to governmental regulatory agencies. 4. CSI Managed Care: CSI Managed Care, Inc. markets and administrates discounted fee for service relationships with third party insurers, preferred provider organizations, health maintenance organizations and self insured organizations. Once negotiated, the contracts are made available to CSI's Independent Affiliated Physicians Network whose physicians have the opportunity to accept or decline the contract. Once it has accepted a contract, the Affiliate agrees to honor the fee structure throughout its term. CSI Managed Care, Inc. has entered into a Data Management Analysis and Royalty Agreement with CHOE, a wholly owned subsidiary of the Bristol-Myers Squibb Company under which CSI received $350,000 of income in fiscal year 1995 for the sale of its historical data on treatment outcomes for various treatment protocols. In addition, CSI Managed Care will receive 50% of all net profits after expenses upon CHOE's resale of all or portions of this data to third parties, if any. CSI Managed Care intends to develop capitated care programs which can be marketed independently or in conjunction with pharmaceutical and other service providers. In an April 1996 report by KPMG Peat Marwick LLP, CSI was cited as providing an ideal model for HIV care. The report, "Integrated Patient Care: Managing Health Care Costs, Maximizing Health Care Value and Quality", stated that CSI's HIV disease management program ?works specifically because treatment of HIV involves a wide range of medical, pharmaceutical, research and social services, which, when integrated within a single facility, work together to help prevent progression of the disease, lower treatment costs and permit prospective cost management.? The report continues to state that ?Results show that CSI patients continue working and experience improved quality of life. Moreover, careful monitoring, preventive care, aggressive prophylaxis combined with strong case management reduces overall cost of care.? Marketing CSI targets its marketing efforts to a number of audiences, including third party payers, prospective patients, physicians, and pharmaceutical and biotechnology companies. Marketing to prospective patients is primarily in the form of media advertising and seminars conducted for appropriate consumer groups. CSI maintains its presence among physicians through articles in trade journals written by CSI physicians as well as through presentations at domestic and international conventions. CSI continues to direct its marketing efforts to address third party insurance companies, preferred provider organizations, health maintenance organizations, and self-insured companies including the negotiation of managed care contracts with some of these groups. In addition to the above, the Company also markets its services to pharmaceutical and biotechnology companies in an effort to generate additional revenues by performing research studies for those companies. Marketing efforts in this area consist primarily of meetings with executives of such companies where CSI marketing personnel can demonstrate that due to its large patient base as well as the successful completion of similar studies in the past, CSI is well suited to perform studies required by health care companies to obtain governmental approval for new drugs or other therapies geared toward patients with immunological and related diseases. The Company's strategy is to expand its clinical network, to actively pursue clinical research studies and to contract with managed care companies and self-insured employers. The Company feels that this approach offers long term strategic advantages to facilitate growth as the market for immunologic research and treatment continues to rapidly expand. Research The Company has 7 scientific and medical employees who spend a significant portion of their time on research-related projects for the Company. In June of 1996, the Company together with collaborators filed a patent application for a method to isolate, culture and propagate the hepatitis E virus(HEV). This method generally relates to the field of immunization against viral diseases and the serological diagnosis of these diseases. In the event a patent is granted, it would allow for the exclusive right to develop, market and implement the invention for 18 years. HEV is one of the leading causes of acute hepatitis in the developing world, especially in parts of Asia, Africa and South America. An estimated 25% of cases of acute viral hepatitis in Egypt are due to HEV infection. HEV can lead to death in up to 20% of infected pregnant women. The ability to isolate, propagate and maintain disease-causing viruses for experimentation has been an important first step in creating vaccines and manufacturing kits for serological diagnosis of those diseases. The patent office has initially found that certain claims in the application may be eligible for patent protection and has requested additional information from CSI which CSI has supplied. Despite these preliminary findings, the Company can give no assurances that the patent will be approved. The company has ongoing clinical trials with the Immune Response Corporation?s HIV-1 Remune? and Dupont Merck?s Sustiva?. Enrollment in Remune? is closed and retention of patients will have a material effect on revenues throughout the year. The Sustiva? clinical trial is expected to have ongoing enrollment throughout the second and third quarter of 1998. Enrollment and retention of patients in the Sustiva? clinical trial will have a material effect on revenues throughout the year. It is anticipated that both of these clinical trials will continue through the end of 1998. CSI Chicago has signed a contract with Glaxo Wellcome for a clinical trial to begin the first quarter of 1998. Although the company has historically achieved full enrollment into its clinical trials, it can give no assurances full enrollment will continue to be achieved. Although advances have been made in the treatment of HIV disease, relatively little research is being conducted toward benefiting those patients who will continue to develop advanced AIDS. The Company's ongoing research program in immune reconstitution, cooperatively supported by the CSI Foundation, continue to place it in the forefront of developing research designed to treat advanced AIDS. Government Regulation The health care industry is highly regulated, and there can be no assurance that the regulatory environment in which CSI operates will not change significantly in the future. In general, regulation of health care companies is increasing. The Company at certain times has been, currently is, or may in the future become, subject to certain federal and state laws and regulations that restrict physician self-referral, prohibit the payment or receipt (or offer or solicitation) of any remuneration in exchange for or to induce the referral of patients or the purchase of health care items or services, require laboratories to accept Medicare or Medicaid reimbursement as payment in full, and impose certain other requirements with respect to billing and collection. These laws and regulations are complex and subject to continuous interpretation by the federal and state agencies that administer them, and could be deemed to encompass practices of the Company that previously may not have presented compliance concerns. The Company has sought to conform its operations to the requirements of these laws. In the event the Company was deemed not to have complied with such laws, it could be subject to substantial penalties which, if imposed, would have a material adverse effect on its results of operations and financial condition. 1. Description of Certain Licensing, Certificate-of-Need, and Other Laws and Regulations. Every state imposes licensing requirements on individual physicians and on many health care facilities and/or services to which physicians refer, including certain facilities operated, and certain services offered, by the Company. In addition, many states require regulatory approval, including certificates-of-need, before establishing certain types of health care facilities, offering certain services, or making expenditures in excess of statutory thresholds for health care equipment, facilities, or programs. Since entering into service agreements with CSI, neither the PA's nor the CSI facilities have been required to obtain certificates of need for their operations. In connection with the expansion of existing operations and the entry into new markets, the Company and its affiliated practice groups may become subject to compliance with additional regulations. The Company believes its operations are currently in material compliance with applicable licensing laws. The ability of the Company to operate profitably will depend in part upon the Company and its affiliated facilities obtaining and maintaining all necessary licenses, certificates of need and other approvals and operating in compliance with applicable health care regulations. The laws and/or regulations of many states prohibit physicians from splitting fees, or giving or receiving rebates or other forms of compensation for services not actually rendered by the licensee. Additionally, a number of states prohibit non-physician entities (such as the Company) from practicing medicine and, in certain circumstances, from employing physicians. The Company believes its current and planned activities do not constitute fee splitting or the practice of medicine as contemplated by these statutes. There can be no assurance, however, that future interpretations of such laws will not require structural and organizational modifications of the Company's existing relationships with its facilities. 2. Description of the Stark Law and Certain State Self-Referral Prohibitions. Certain prohibitions of federal law, commonly known as the "Stark Law," currently prohibit physicians from referring Medicare patients for clinical laboratory and other designated health services including home infusion and outpatient prescription drug services, if the referring physician (or a family member) has a financial relationship (defined as an ownership or investment interest or a compensation arrangement) with an entity, such as the Company, that provides such services. The Stark Law contains numerous exceptions that would permit otherwise prohibited referrals if all the requirements for the exception are met. Among these are exceptions for certain qualifying arrangements for space and equipment rental, provision of personal services, and payment by physicians for items or services provided at fair market value. The Stark Law also applies to the entities to which physicians refer patients. Under the Stark Law, affected entities are prohibited from billing Medicare, Medicaid, or any other party for services furnished pursuant to a prohibited referral. At the present time the Company does not provide designated health services or otherwise financially related referrals for Medicare or Medicaid patients from physicians who are stockholders of the Company. The Stark Law also requires entities providing designated health services to report to the Medicare authorities at the United States Department of Health and Human Services ("DHHS") certain information concerning physicians (or their family members) who may have ownership or compensation arrangements with interest in such entities. In addition, regulations implementing the Stark Law apply the statute to prohibit, among other things, the purchase of a physician-owned laboratory from a referring physician unless, for a period of six months after the transaction, the physician has no additional financial relationship with the purchaser, except for relationships specifically excepted under the statute. Violation of any of the Stark Law's provisions may result in significant penalties, including denial of payment and civil money penalties of up to $15,000 for each bill or claim improperly filed, up to $10,000 per day for each day for which the required reporting has not been made, and possible exclusion from the Medicare and Medicaid programs. The current prohibitions and reporting requirements of the Stark Law, which have been applicable since January 1, 1992 for clinical laboratory services and January 1, 1995 for all other designated health services, do not apply to referrals for clinical laboratory services furnished to a physician's non-Medicare or non-Medicaid patients. There are a number of federal legislative proposals that could further restrict the ability of health care providers to refer patients to entities in which the providers have a financial interest by, among other things, extending Stark-like prohibitions to all referrals (not just referrals of Medicare or Medicaid patients) made by financially interested physicians. There are also proposals before Congress to narrow the scope of the current Stark Law, including elimination of compensation arrangements from the definition of financial relationships which trigger the referral prohibition. A number of these proposals are tied to broaden federal budget congressional proposals. It is not possible to predict the outcome of pending legislation and any impact on the federal self-referral and regulations. In addition to the federal Stark Law and federal "all payor" proposals, the Company's operations are also subject to an increasing number of state self-referral provisions that limit or ban referrals for some or all health care items or services if the physician, or a family member, has an investment or other financial relationship with the entity providing such items or services. In states that have enacted such statutes, the provisions typically apply to all payers. Florida, California, and Illinois, where the Company currently operates clinic sites, all have enacted self-referral statutes, although the specific prohibitions vary and are subject to numerous exceptions. For example, unless one of the statutory exceptions is satisfied, the Florida statute prohibits patient referrals for certain designated health services (including clinical laboratory services), as well as referrals for other health care items or services, if the referring physician or an immediate family member is an investor in entities providing such items or services. Effective January 1, 1995, California law prohibits licensed health professionals, including physicians, from referring patients for clinical laboratory or home infusion services (among other services) if the licensee or a family member has a direct or indirect financial interest in the entity receiving the referral. Since January 1, 1993, Illinois has prohibited health care workers from referring patients for health services to entities outside the worker's office or group practice in which the worker is an investor, unless the work is personally involved in providing care to the referred patient. Violations of these state laws can subject entities to significant penalties. New York has enacted self-referral provisions. New York law forbids practitioners authorized to order clinical laboratory services from making referrals for such services if the practitioner or an immediate family member has a financial relationship with a clinical laboratory or pharmacy services provider to whom the referral is made. The Company believes that its current operations are in compliance with the Stark Law and state self-referral prohibitions within the states in which the Company has operations. 3. Description of the Federal and State Anti-Kickback Statutes. The Medicare/Medicaid "anti-kickback" statute imposes significant civil and criminal sanctions for, among other things, giving or receiving any payment or remuneration, whether direct or indirect, in cash or in kind, in order to induce the referral of patients for items or services for which payment may be made by the Medicare or Medicaid (or certain other federally-funded state health care) programs. The term "remuneration" is not directly defined in the law, but has been interpreted in the safe harbor regulations issued by the DHHS Office of the Inspector General ("OIG"), and understood by government officials and the courts to include, in addition to any kickbacks, bribes, or rebates, other payments of any kind, including fees paid for services and "return on investment." Moreover, this statute has been broadly interpreted by the courts, which have stated that the law is violated if even one purpose (as opposed to the sole or the primary purpose) of the remuneration is to induce the referral. While the item or service must be reimbursable in whole or in part by Medicare or a state health care program in order to trigger the statute, it is also well established that no actual financial harm need result to the program in order for a violation to be found. Because of the broad sweep of the statute, the OIG has adopted regulations that create "safe harbors" for certain business practices or arrangements. Among these are safe harbors for certain qualifying investment interests, space and equipment leases, and personal services and management contracts. To benefit from a safe harbor the practice or arrangement must meet all the regulatory requirements. Failure to qualify for a safe harbor does not necessarily mean that the practice is illegal; however, arrangements that are of the same general type as those for which a safe harbor is available may be subject to scrutiny if they fail to satisfy all the criteria for the appropriate safe harbor. An increasing number of states, including California, Florida and New York, have enacted anti-kickback provisions. These statutes, which can carry significant civil and/or criminal sanctions, generally prohibit the payment of remuneration, rebates, refunds, or other consideration, whether directly or indirectly, as an inducement for referrals for health care items or services. Unlike the federal anti-kickback statute, which is largely limited to referrals for items or services paid by Medicare or Medicaid, state anti-kickback provisions typically, though not always, apply to all payers. In many cases there is little if any formal guidance provided by the courts on the reach of many of these statutes. Because they serve a function analogous to the federal anti-kickback provision, however, it is possible that state courts could apply the principles and broad interpretation given to the federal statute. Even where no separate anti-kickback provision has been enacted, the professional licensing laws for most states, including some in which the Company currently operates or intends to commence operations, incorporate provisions that declare fee-splitting or the paying or receiving of kickbacks, rebates, or other remuneration in exchange for referrals to be unprofessional conduct and grounds for state disciplinary action by the licensing board. 4. Description re: Medicare/Medicaid Reimbursement. Laboratories are required to bill Medicare or Medicaid directly and to accept Medicare or Medicaid reimbursement as payment in full. In 1984, Congress established a reimbursement fee schedule for clinical laboratory testing performed for Medicare beneficiaries (excluding hospital in-patients). State Medicaid programs are prohibited from paying more than the Medicare fee schedule stipulates for testing for Medicaid beneficiaries. When initially established, the Medicare fee schedules were set at 60% of prevailing local charges. Medicare reimbursement rates for clinical laboratory testing subsequently have been reduced several times pursuant to congressional mandate. The reductions in Medicare reimbursement rates have been offset to some extent by increases in both the national cap and local fee schedules tied to the Consumer Price Index ("CPI"). The above changes have not had, and are not expected by the Company to have, a material adverse effect on the Company's results of operations. Any further significant decrease in such fee schedules, however, could have a material adverse effect on the Company. 5. Description of Health Care Reform Efforts. Political, economic and regulatory influences are subjecting the health care industry in the United States to fundamental changes. The Clinton Administration had proposed comprehensive programs to reform the health care system including: (i) increasing access to health care for the uninsured; (ii) controlling the continued escalation of health care expenditures within the economy, and (iii) using health care reimbursement policy to help control the federal deficit. Some reforms which were under consideration included mandated basis health care benefits, controls on health care spending through, among other things, 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 the health care delivery system. While the Clinton Administration's reform proposals were not enacted in comprehensive form, Congress did enact legislation, signed by President Clinton requiring the portablity of health care coverage and there are continuing efforts, both by Congress and the private sector, to limit health care costs, the outcome of which is unknown at this time. Without waiting for national health care reform efforts, various states, including several in which the Company currently operates, have enacted, or are considering enacting, their own health reform laws. Florida, for example, has enacted its own package of reform measures, which includes establishment of a state agency responsible for developing practice guidelines for a range of procedures and services (including clinical laboratory services); establishment and oversight of community health purchasing alliances; development of a basic benefit package for the small group insurance market; and implementation of Medicaid reform. Task forces and commissions also have been organized in New York and other states for the purpose of evaluating various reform proposals and making recommendations for state action. The Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery systems and payment methodologies and public debate of these issues will likely continue in the future. Due to uncertainties regarding the ultimate features of any reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact they may have on the Company. The actual announcement of reform proposals and the investment community's reaction to such proposals, announcements by competitors and payers of their strategy to respond to reform initiatives and general industry conditions could produce volatility in the trading and market price of the Company's Common Stock. FDA Approval. Development and marketing of new biological and drug products is subject to strict regulation through the FDA. Such regulations relate primarily to safety and efficacy of pharmaceutical products, but also govern manufacturing, labeling, advertising and marketing. In order to initiate clinical trials on a product, extensive basic research and development information must be submitted to the FDA in an IND application. The IND application contains a general investigational plan, a copy of the investigator's brochure, copies of all the protocols for the planned studies, a review of the chemistry, manufacturing and controls information for the drug, pharmacology and toxicology information, any previous human experience with the drug, results of preclinical studies and any other information requested by the FDA. If approval is obtained to proceed to clinical trials based on the IND application, initial trials, categorized as Phase 1, are instituted. The initial or Phase 1 trials are used to determine the general overall safety profile of the drug. Once the safety of the drug has been established, Phase 2 and Phase 3 efficacy trials are conducted on expanded patient groups. If Phases 1 through 3 are successfully completed, the data from these trials are collected into an NDA, which is filed with the FDA in an effort to obtain marketing approval. Competition With respect to its patient clientele, CSI competes with other physician practices, independent physician associations (IPAs) and hospital-based or free standing clinics, some of which are substantially larger than CSI's network. In conducting clinical research, CSI competes with public and private medical research companies and academic institutions, many of which have substantially greater financial and technical resources than CSI and are solely focused on clinical trial development. Several major companies and organizations, both public and private, are developing IPA networks solely to treat HIV disease. It is the intent of these groups to then contract with managed care entities for the treatment of HIV. The Company believes that it can compete favorably in this market since it has an already established IPA model network upon which to expand and extensive expertise in HIV treatment and research. Significant Customers Three Clinical Treatment Facilities had contracts with entities controlled by officers and directors of the Company, until the sale of two of the entities to CSI on January 1, 1996 and the sale on September 30th to the Management Service Organization created by CSI on September 30, 1996. These entities were William M. Reiter, M.D., PA, a Professional Association, and Paul Cimoch, M.D., PC, a Professional Corporation. Revenues derived directly or indirectly through these professional associations amounted to $2,717,000, and $4,379,000 or 37% and 47% respectively, of revenues from continuing operations for fiscal years 1996 and 1995. Employees As of December 31, 1997, the Company had approximately 58 employees, including 6 executive officers, 18 office and administrative personnel, and 34 field office personnel. The Company maintains personal liability and malpractice insurance which covers all employees. The Company considers its employee relations to be good and is not a party to any collective bargaining agreement. Insurance The Company maintains malpractice insurance with coverage of up to $1,000,000 (which is in addition to the medical malpractice insurance coverage maintained by the physicians who practice at the Company's facilities). Management of the Company believes such coverage is adequate. ITEM 2. PROPERTIES The Company is obligated pursuant to lease agreements for the following offices: Annual Square Lease Expiration Feet Payment Date ------- ----------- ----------- Corporate Office- Ft. Lauderdale, FL 7,044 $118,614 (1) 2001 Fort Lauderdale - Medical Office 5,500 $ 73,584 (2) 2002 Irvine, CA 4,550 $133,966 (3) 2002 Miami, FL 4,255 $ 83,769 2000 Chicago, IL 3,787 $111,886 (4) 2002 Los Angeles, CA 2,400 $ 78,600 (5) 1998 1) The Corporate office moved to a new location on August 1, 1997. 2) The Fort Lauderdale Medical office moved to a new location effective May 1, 1997. 3) Increases by approximately $4,000 per year. 4) The Irvine, Ca medical office renewed its lease for an additional five years. 5) The Los Angeles, CA medical office became an affiliate on October 28, 1996. In addition to the lease amounts, the Company pays additional amounts for operating expenses, taxes and parking. ITEM 3. LEGAL PROCEEDINGS In early 1993, the Securities and Exchange Commission ("SEC") advised the Company that it had commenced a formal investigation of potential securities law violations in connection with certain trading activities in the Company's securities and in April 1993 requested certain information from the Company in connection with that investigation. The Company has complied with this request. In December 1994, the SEC asked that William Reiter, MD, David Kirchenbaum and Susanne Loarie produce certain information in connection with the investigation. Dr. Reiter, Mr. Kirchenbaum and Ms. Loarie have complied with these requests. In January, 1995, attorneys for the SEC took sworn statements from Dr. Reiter, Mr. Kirchenbaum and Ms. Loarie. Since said statements were taken, the SEC has not made any further requests for information. The Company has been sued by various vendors and landlords as a result of its inability to achieve enough revenue from its ongoing operations to produce the necessary cash flow to both maintain its current operations and its past due payables. The Company has been able to settle many of these suits by entering into settlement agreements which provide for a stipulated payment schedule and the entry of a final judgement in the event of a default of the agreed upon payments. The Company has been able to honor its obligations under the stipulated settlements. The Company has various lawsuits pending where a settlement has not been reached or where the Company believes it has a good faith defense. The Company believes that the resolution of these lawsuits will not have a significant adverse effect on the Company. 1. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock Prior to January 9, 1998, the Company's common stock, par value $.02 per share common stock, was traded on the American Stock Exchange ("AMEX") under the symbol "HPI". The Company's Common Stock was suspended from trading on the AMEX from February 17, 1995, to September 29, 1995 and during such period was traded on the over-the- counter market. From September 29th 1995 through January 9th, 1998 the Company's common stock was traded on AMEX, however, during this period the Company was still unable to fully satisfy all of the financial guidelines for listing on the AMEX and after notice to the Company, a delisting procedure was implemented by AMEX. Although the Company contested the delisting efforts by AMEX, ultimately on January 1st 1998 the Company received final notice from AMEX that its common stock would be delisted from AMEX effective on January 9th 1998. On January 9th, 1998, the company's common stock commenced trading on the NASDAQ bulletin board and the Company intends to apply for trading on NASDAQ'S small cap exchange as soon as it is able to meet the necessary qualifications. The Company's B Warrants which were exercisable until December 17, 1997 at $5.17 per share, were deleted from NASDAQ as of March 15, 1995 and have now expired. The following table sets forth the range of high and low closing sales or high bid and high asked prices for the Company's common stock and B Warrants on the respective Exchanges as reported for the periods indicated. As of December 31, 1997 there were approximately 711 holders of record of the Company's common stock. The Company has not paid any cash dividends on its common stock. For the foreseeable future, it is anticipated that any earnings that may be generated from the Company's operations will be used to finance the growth of the Company and that cash dividends will not be paid to holders of common stock. Common Stock B Warrants Fiscal Year High Low High Low - ----------- ---- --- ---- --- 1995 1st Quarter............. 7 1/2 3 1/8 1 1/4 5/8 2nd Quarter............. 4 3/8 5/8 1 1/4 1 5/16 3rd Quarter............. 6 1/4 30/32 4th Quarter............. 7 1/2 2 1/2 1996 1st Quarter............. 5 1 7/8 2nd Quarter............. 5 1 7/8 3rd Quarter............. 5 1/4 1 14/16 4th Quarter............. 4 1/4 2 9/16 1997 1st Quarter............. 3 3/8 1 3/8 2nd Quarter............. 2 1/4 7/8 3rd Quarter............. 1 11/12 1 1/4 4th Quarter............. 1 7/16 1/2 1998 October 1-December 31, 1997 1 3/16 1/2 ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data) Fiscal Year Ended September 30, --------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Operating revenues $ 7,493 $ 7,339 $ 9,390 $ 7,802 $ 7,994 Loss from continuing operations ($8,381) (2,960) (1,097) (9,092) (2,571) (Loss) from discontinued operations -- -- -- -- (1,093) Net (loss) ($8,381) (2,960) (1,097) (9,092) (3,664) Net (loss) per share (1): From continuing operations ($ 1.68) (.96) (.52) (4.86) (1.72) From discontinued operations -- -- -- -- (.73) Net (loss) per share ($ 1.68) (.96) (.52) (4.86) As of September 30, ----------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance Data Sheet: Working capital (deficit) $ (3,340) $ (1,673) $ 298 $ (921) $ (28) Total assets $ 6,620 12,242 9,634 10,438 16,243 Long term debt, including capitalized lease obligations (less current portion) 1,759 1,519 4,365 4,119 1,489 Stockholders' equity(deficit) 1,526 5,307 1,030 2,146 10,941 Book value per share (.21) 1.17 .47 1.16 7.31
NOTE: Fiscals 1997 and 1994 include a $3,900,000 and a $4,000,000 write down of the excess cost over the net assets acquired and in fiscal 1994 a $1,000,000 provision for a note discount. (1) Based upon the weighted average number of shares of common stock outstanding, including common equivalent shares (stock options and warrants), if dilutive. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND BUSINESS PLAN DEVELOPMENT CSI currently owns and operates five medical clinic and research sites located in Florida (Fort Lauderdale, Miami Beach), California (Irvine, Los Angeles) and Illinois (Chicago). The Company had IPA agreements with physician's professional corporations to utilize these facilities prior to January 1, 1996. On January 1, 1996, the Company purchased the medical practices in Fort Lauderdale and Miami. On April 1, 1996, the Company purchased the medical practice in Chicago. On September 30, 1996, the Company created a Management Service Organization in California, which purchased the medical practice operations in Irvine and Los Angeles, California. The purchases of the Fort Lauderdale, Miami and Chicago practices have substituted the fees charged on direct expenses, and network participation fees for patient revenues. Management believes that by owning these practices not only will the Company increase its revenues, but the Company will be able to better control the operations of the medical practices. Additional physician practices located in Florida, Illinois, California, Kansas, Oklahoma, Virginia, Texas, Pennsylvania and New York are affiliated with the CSI network and utilize CSI services to varying degrees. The Company's business objective is to continue to build revenue from clinical care treatment through both the internal expansion of its existing patient base at all currently operating CSI Clinical Treatment Facilities and by increasing its number of facilities through the acquisition of already existing practices. The Company has targeted for acquisition medical practices that are operating with the same fundamental treatment strategies to Csi,s treatment strategies Management believes that the expansion of its clinical practice network will both increase its revenue base and increase the number of patients eligible to participate in Clinical Drug Trials. The Company's clinical research division has recently signed Clinical Research Agreements with and , and has also been increasing the number of its patients participating in existing clinical research trials. The expansion of the amount of patients participating in ongoing and additional clinical research trials will allow the Company to provide more comprehensive services to these sites, thereby increasing the revenue earned from each site. The expansion of owned and affiliated sites will create further market outlets for the Company?s services and allow greater market capture of the underlying populations requiring those services. The expanded network will be positioned to capture health services contracts as a national managed care disease-specific provider, will be able to provide larger economies of scale, will provide more clinical data for medical and financial analysis and will allow CSI to conduct larger clinical trials. The Company has signed a letter of intent with a major managed care provider that owns and operates both primary care and hospital operations. Under the terms of the letter of intent, the Company has been asked to propose standardized protocals for the treatment and care for the HIV/AIDS patients utilizing these facilities. In the event that the Company closes the transactions contemplated by the letter of intent, the proposed strategic alliance will increase the Company's revenues through the rendition of additional services and improved economies of scale. The Company continues to focus further on the implementation of its business plan by, purchases of established practices, establishing new strategic alliances, either by purchase or other affiliation, obtaining new clinical trials contracts, contracting for the sale of its historical outcomes data while also attempting to locate additional sources of cash. The infrastructure continues to be developed to service a greater number of facilities. The Company is still utilizing cash from operations and will require additional sources of cash to continue to implement its business plan. These sources of cash include the cash received from new clinical trials contracts, cash from anticipated increase in operating activities, and the additional cash to be received from certain strategic alliance contracts. In addition, the Company has received cash form the issuance of converttibble debt instruments. No assurance can be made that sufficient additional sources of cash will be available on terms reasonably acceptable to the Company, The Company can give no assurances that future revenues from the operations discussed in Item 1, "organization and Operation" above will be consistent with historical revenues or of the magnitude of additional revenues to be expected from the implementation of the new CSI programs. RESULTS OF OPERATIONS The Company's facilities revenues are derived from rendition of medical services (where allowed by State Law) practice management services provided directly or from providing diagnostic laboratory, in-office infusion care and oral pharmaceuticals to the patients of the medical professional associations under contract with CSI. Home infusion revenues and out patient infusion care results from services provided to patients of the professional medical associations, primarily through sub-contracts with home infusion companies. In addition, the Company earns revenues from performing research studies for pharmaceutical and biotechnology companies and from the sale of its historical outcomes data. Year Ended September 30, 1997 1996 1995 ---------- ---------- ---------- Total facilities revenues $7,196,000 $5,974,000 $7,435,000 Home health 135,000 935,000 1,209,000 Other revenue 162,000 430,000 746,000 ---------- ---------- ---------- $7,493,000 $7,339,000 $9,390,000 ========== ========== ========== Total facilities revenues increased by $1,222,000, Home Health revenue decreased by $800,000 and other revenues decreased by $268,000 in fiscal 1997 as compared to fiscal 1996. Significant factors causing the increase in total facilities revenues were due in part to an increase in infusion, lab and research revenues of $550,000, $350,000, and $422,000 offset by a decrease in network participation revenue. The decrease in total facilities revenue of $1,461,000 in fiscal 1996as compared to fiscal 1995 was due in part to facilities whose contacts whose contracts were not renewed, which provided revenues of $1,928,000, a decrease in network participation fees and facilities management revenue of $63,000 and $359,000 respectively, due to purchases of physician practices, offset by patient revenues of $379,000, a decrease in research revenue and lab revenue of $105,000 and $34,000 respectively, a decrease in pharmaceutical revenue of $293,000, due to facilities no longer dispensing oral pharmaceuticals and an increase in infusion revenue of $942,000. The decrease in home health revenue of $800,000 is primarily due to the shifting of service locations to the physician?s office. The decrease in home health revenue of $274,0000 for foscal 1996 was primarily due to the cyclical nature of the services required to care for these patients in an integrated health care setting and the shifting of service locations to the physician's office. The decrease in other revenue of $268,000 and $316,000 for fiscal 1997 and 1996 is due the conclusion of certain contracts prior to the initiation of new contracts. The gain on the sale of securities in fiscal year 1996 is due to the Company exercising warrants previously issued to the Company to purchase 22,191 shares of stock in a former subsidiary of the Company and the exchange of the shares to 9,735 shares of unregistered stock in a publicly traded company. The Company sold its interest in 8,705 shares of the publicly traded company to an unrelated party for $145,000. Interest and other income decreased to $ 9,000 for fiscal 1997 as compared to fiscal 1996 of $59,000, which decreased from fiscal 1995 of $219,000, as a result of the decrease in the note receivable from the sale of the discontinued operations. Direct service expense as a percentage of operating revenues was 55% for fiscal 1997 the same as fiscal 1996. Direct expenses in 1995 were 44% of revenues. Direct expenses as a percentage of revenues increased in 1996 compared to 1995 and is primarily due to the purchase of physician practices which increased the Company?s salary cost. This was offset by a decrease in Home Infusion and by facilities no longer dispensing oral pharmaceuticals. Selling, general and administrative expenses increased by $770,000 (12%) to $7,010,000 for fiscal 1997 as compared to the previous fiscal year. This increase relates primarily to expenses incurred with the issuing of securities as additional consideration in connection with the conversion of a convertible loan and the increase in bad debt provisions which were offset by a decrease in wages. Selling, general and administrative expenses increased by $376,000 (6%) to $6,240,000 for fiscal 1996 as compared to the previous fiscal year. This increase primarily relates to an increase in the use of consulting and professional fees offset by a decrease in wages. Prior to its acquisition of certain physician practices, the Company has entered into contractual relationships with professional medical associations for utilization of its facilities and in connection therewith, made cash advances for the professional association to meet their cash flow requirements. The Company recorded reserves related to advances due from the professional associations with which CSI has contracted, based upon the excess of the amounts due from the professional associations above the collateral, primarily the receivables of these professional associations and certain other collateral, even though such advances are expected to be collected from future operations. The recovery in PA physician association reserves of $765,000 in fiscal year 1996 principally resulted from an increase in collateralization of the receivables provided by one of the former CSI shareholders who is now a director of the Company and from the collection of the advance and upon the sale of the Chicago practice to the Company. The remaining recovery was due to the liquidation of the advance made by the Company to the Professional Association owed by the Chairman of the Company, upon the sale of the Florida practice to the Company. The reserve balance is reviewed by the Company on a quarterly basis. Any increases or decrease to such balances by the Company could materially impact reporting results. During the 1995 fiscal year, the Company recorded a $20,000 reserve relating to these advances. Interest decreased to $466,000 in fiscal 1997, as compared to $518,000 in fiscal 1996. Interest was $575,000 in fiscal 1995. The decrease in fiscal 1997 was due primarily to a decrease in interest from the factors as new arrangements were negotiated with our factors. The decrease in fiscal 1996 compared to fiscal 1995 was primarily related to the termination on February 21, 1996 of the obligation due to the former CSI shareholders, due to the conversion of $3,000,000 of the obligation due to the former CSI shareholders to stock. Certain litigation matters, including an FDA inquiry and an SEC investigation required the Company to incur litigation costs of $379,000 in 1994 in connection with these matters. The Company was not required to incur additional expenses in connection with these matters during fiscal 1997, 1996 and fiscal 1995. The litigation cost was $75,000 for 1996 and $62,000, for 1995. The Company incurred research and development expenses of $362,000 in1997, $403,000 in 1996 and $20,000 in 1995. The decrease in fiscal 1997 was due primarily to the decrease in wages caused by the restructurring of the research department. The increase in 1996 relates primarily to costs associated with the Company's efforts in developing its Immune Reconstitution Cell-Transfer Therapy for late stage AIDS patients. In fiscal 1997, the Company recorded a $3,900,000 write down of goodwill, an expense of $318,000 with the issuing of securities as additional consideration in connection with the conversion of a convertible loan and a bad debt provision of $938,000. These were the primary reason for the increase in the net loss of $5,421,000 as compared to fiscal 1996. The write down of goodwill was based upon management's belief that without an infusion of cash, impairment to the asset may be other than temporary. The Company reported a net loss for fiscal 1997, 1996 and 1995 of $8,381,000, $2,969,000 and $1,097,000 respectively. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1997, the Company had stockholders' deficit of $1,526,000 and a working capital deficit of $3,340,000 as compared to stockholders' equity of $5,307,000 and working capital deficit of $1,673,000 at September 30, 1996. The Company used cash in its operating activities of approximately ($1,221,000), $2,315,000) and ($1,262,000), respectively, for fiscal years 1997, 1996 and 1995. The decrease in the working capital was primarily a result of a decrease in accounts receivable and an increase in accounts payable and accrued expenses as a result of the Company being unable to pay for goods and services in the normal course of operations, and securities issued for services. No cash was provided from investing activities in 1997, however in 1996 and 1995 investing activities provided cash as a result of payments of notes receivable, including $369,000 and $830,000 from a discounting of the note receivable with Premier in 1996 and 1995, respectively. In fiscal 1997, financing activities provided cash from convertible loans and proceeds of a term loan as discussed below. No cash was provided from the sale of common stock for fiscal 1997. In fiscal 1996, financing activities provided cash from the sale of common stock, and the proceeds of two loans discussed below, offset by the payment of a obligation to the New York Attorney General. CSI and certain medical professional associations under contract with subsidiaries of CSI are a party to a $1,100,000 factoring agreement. The agreement provides for factoring of eligible receivables, of which approximately $100,000 was available for borrowing at December 31, 1997, and $1,400,000 has been drawn at December 31, 1997. Fees charged by the factor for factoring was amended in June, 1996 from an initial 1% of all eligible receivables to an initial 1% of eligible receivables up to $5,000,000 a year. The fee then progressively decreases to .75% for eligible receivables in excess of $10,000,000 a year. Funds are then advanced by the factor at 2% over prime. In fiscal years 1996 the Company sold 500,000 shares of its post-split stock and received $2,000,000 in proceeds under Regulation S to a group of foreign investors. In fiscal year 1995, the Company did not sell any common stock or receive any funds related to the exercise of common stock equivalents. The present market price of the Company's common stock is at or below the conversion price of many of its existing common stock equivalents and accordingly, unless the Company's market price per share materially increases, future conversions are not anticipated. The improvement in 1995 principally resulted from the decreased net loss. In 1995 the increase in accounts receivable was primarily due to slower collections on increased billings and amounts due from clinical trials and other revenues. Accounts payable and accrued expenses increased as a result of the Company being unable to pay for goods and services in the normal course of operations offset by the Company repaying vendors out of the funds received from discounting the note receivable due from Premier Medical Services. Investing activities provided cash in 1995 principally as a result of payments of notes receivable, including $830,000 from a discounting of the note receivable with Premier in 1995. The Company is continuing its efforts to expand its network of company-owned facilities and is acquiring established physician practices despite its deficit in working capital. Certain start-up and acquisition costs increase the Company deficit in working capital which deficits should ultimately be offset by increased revenues which include several research studies that the Company has recently received. The research studies include the Immune Response Corporation's HIV-1 Immunogen trial, Bristol-Myers Squibb's two Lobucovair trials and Dupont Merck's DMP-266. The Company anticipates that cash will continue to be used by its operating activities during fiscal 1998, a portion of which will be funded by the factoring arrangement. From October 1996 to August 1997, the Company received $1,171,000 in cash proceeds from $1,351,000 in convertible loans less original issue discount of $180,000. Of these loans $925,000 bear interest at 5% and $426,000 at 7% interest. Furthermore $551,000 of the loans mature between April to August 1999 and $800,000 mature between August to November 2001. The loans are convertible at 70% of the fair value of the stock on the day preceding the conversion. The Company also received a short term loan of $200,000, bearing interest at prime plus 4% which matured in September 1997, but remains unpaid as of January 8, 1998. Negotiations are being made to extend the due date of this loan. During October and November 1997, the Company received proceeds of $300,000 in convertible loans in a Regulation S transaction. Of these loans, $250,000 bears interest at 5% and $50,000 was at 8% interest. The loans will mature in October and November 1999. In connection with thes loans, the Company issued warrants to acquire 100,000 shares of common stock exercisable at $.50 per share through October 2002 and 25,000 shares of common stock exercisable at $1.00 per share through November 2002. In order to continue as a going concern in 1997, the Company must generate cash flow from operations, continue the informal arrangement with the Company's factor and obtain additional sources of cash to ultimately achieve profitabie operations. The Company?s plans for raising additional sources of cash primarily rely on (1) obtaining a strategic partner who will provide capital to the Com[pany while also offering certain operational opportunities: and or (2) obtaining a investment partner to further develop certain technology owned by the Company. The Company also intends to down size operations, thereby reducing costs while attempting to increase market share for the existing clinics, until operations can produce positive cash flow. While all these sources of capital are being pursued, the Company intends to continue reducing costs, work with the vendors to obtain extended credit terms and increasing revenues at existing facilities. No assurances can be made that the Company can obtain additional sources of capital or that operations can produce positive cash flow. (See Report of Independent Certified Public Accountants regarding the Company's ability to continue as a going concern). Future Accounting Pronouncements Statement of Financial accounting Standards (SFAS) No. 128, "Earnings per Share," issued in February 1997, replaces the current methodology for calculating and presenting earnings per share. Under SFAS No. 128, primary earning per share will be replaced with a presentation of basic earnings per share and fully diluted earnings per share will be replaced with diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shares outstanding. Diluted earnings per share is computed similarly to fully diluted earnings per share in accordance with APB Opinion No. 15. The Statement will be effective for financial statements issued by the Company after December 15, 1997. The impact of AFAS No. 128 is not expected to be material. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displaced with the same prominence as other financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, Financial Reporting for Segments of a business Enterprise, establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate the resources and in assessing performance. Both SFAS No. 130 and 131, issued in June 1997, are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Due to the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, they may have on futuer financial statement disclosures. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed in Item 14(a)(1) and (2) are included in this report beginning on Page F-1. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is submitted concerning the directors, executive officers and significant employees of the Company based upon information received by the Company from such persons: NAME AGE POSITION - ---- --- -------- William M. Reiter 42 Chairman of the Board Paul Merrigan 62 Chief Executive Officer And President and Director Bradford J. Beilly 43 General Counsel Gary M. Cedeno 58 Chief Financial Officer Paul J. Cimoch 41 Director Floyd Kephardt 55 Director Fred Roa 61 Director Dr. Reiter was Chairman of the Board of Directors, President and Chief Executive Officer of the Company between August 1992 and September 1997. Dr. Reiter has also been President, Chief Executive Officer and Director of Research of CSI since 1986. On September 1997, Dr. Reiter voluntarily resigned as CEO and President. Dr. Reiter attended the Johns Hopkins University and the Albany Medical College of Union University and received his M.D. in 1980. He completed his residency in Internal Medicine at the University of Miami and was Board Certified in 1983. He was elected a Fellow of the American College of Physicians in 1988. Mr. Merrigan has served as CEO and President of the Company since September 6, 1997. He has more than twenty-five years of successful senior management experience in the medical, pharmaceutical, technical and chemical industry. Mr. Merrigan was with Warner Lambert Corporation for many years in positions of successive responsibility including new drug application development, marketing and division management. Mr. Merrigan has extensive experience in corporate turnaround and international marketing Mr. Beilly has been outside General Counsel of the Company since July 1993, and in October 1993 he was elected Vice President--General Counsel of the Company. As of October 1, 1997 Mr. Beilly resigned his position as a Vice-President of the Company, however, he has agreed to remain as the Company,s General Counsel. Prior to serving as the Company,s General Counsel, Mr. Beilly was a partner in the law firm Miller, Beilly and Pozzuoli, and is now a partner in Beilly & Pozzuoli. Mr. Beilly received his B.A. from the State University of New York at Albany in 1976 and his J.D. from Nova University in 1980. Mr. Cedeno has been the Principal Accounting Officer since March 1997 and was appointed the Chief Financial Officer of the Company in October, 1997. He brings over thirty years of experience in auditing , financial and business operations. He previously held the position of Chief Financial Officer of Caribbean Satellite Network, a television broadcasting station. Mr. Cedeno received his education at Fatima College, Trinidad W.I. and has a diploma from the Association of Certified and Corporate Accountants (ACCA) London, England. Dr. Cimoch has been a Director of the Company since April 1996. Dr. Cimoch is also the Company?s Director of Medical Affairs. He co-founded CSI with Dr. Reiter in 1986. He attended the University of Texas Medical Branch in Galveston, where he received his medical degree in 1983, completed his residency in Internal Medicine at the University of Miami and was Board certified in 1986. He was elected a Fellow of the American College of Physicians in 1991. Dr. Cimoch is a past President of the Physicians? Association for AIDS Care. Mr. Roa has been a Director of the Company since February 1993. Mr. Roa has been the managing director of Telesis Corp. (a merger and acquisitions consulting firm specializing in the healthcare field) since 1980. Mr. Roa is a licensed public accountant and is affiliated with several professional organizations, including the New York State Association of Health Care Providers. Mr. Kephardt is chairman of Solutions Corporation of America, Applied Health Technologies and Insight Marketing Corporation which provide corporate strategy, electronic marketing and technological consulting to corporations and government. Mr. Kephart was chairman and CEO of McDowell Corp. (Amex) and Southern States Corporation. In 1985 Mr. Kephart created Sports News Network and acted as its chairman until 1988. Mr. Kephart has provided management and marketing consulting to many major corporations including Gulf & Western (Paramount), General Motors, Chrysler, Proctor & Gamble, Sega, ABC and NBC. All directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors are elected and qualified. Executive officers hold office until their successors are elected and qualified, subject to earlier removal by the Board of Directors. No family relationship exists between any director or executive officer and any other director or executive officer of the Company. However, Marvin Reiter, CSI'S Executive Vice President for Clinic Operations is the uncle of Dr. William Reiter. ITEM 11. EXECUTIVE COMPENSATION Cash Compensation The following table shows the cash compensation paid to, or accrued for, the Company's Chief Executive Officer and the Company's executive officers who are serving as executive officers at September 30, 1997 and who received more than $100,000 during the fiscal year ended September 30,1997:
Long-Term Compensation Annual Compensation Awards ------------------- ------ Option All Other Name and Principal Position FYE Salary (1) Bonus Shares Compensation - --------------------------- --- ---------- ----- -------- ------------ William M. Reiter 1997(3) $185,301 -- -- $ 57,800 Chairman of the Board 1996(2) $170,800 -- 90,000(5) 1995 $220,500 -- Bradford J. Beilly 1997 -- -- -- $119,120(4) General Counsel 1996 -- 45,000(5) $148,000(4) 1995 $ 33,200 -- 10,000(5) $106,200(4)
(1) Represents all amounts earned during the fiscal year shown; although some compensation may have been deferred and paid in the subsequent fiscal year. (2) During Fiscal 1996, Dr. Reiter took a one time voluntary pay cut of $67,000. (3) During Fiscal 1997 Dr. Reiter receivd $58,400 in cash , $51,800 worth of unregistered common stock of the company valued at $0.54 per share (95,926) and has deferred $126,900 which is due and owing. (4) Paid to Beilly and Pozzuoli, a law firm in which Mr. Beilly is a partner. (5) These options were repriced in September, 1995 to $.50 per share (along with all other shares issued under the company's option plan) when the market price of the Company's Common Stock was $.25 per share. In connection with the reverse stock split in April, 1996, these options were automatically repriced to $5.00 per share. In July, 1997 the Board of Directors repriced these options (along with all other shares issued under the company's option plan) to $1.00 per share. Compensation Agreements CSI entered into a Services Agreement, dated December 23, 1991, with AGA, Inc. ("AGA"), for the purpose of retaining the services of Dr. William M. Reiter, the sole shareholder of AGA, to act as the President of CSI, for a term of five years. In consideration for such services, CSI agreed to pay AGA a fee of $200,000 per annum, subject to annual increases, as well as to reimburse AGA for the cost of providing Dr. Reiter with employee benefits, including health insurance, employee benefit plans and incentive compensation plans. In connection with Dr. Reiter becoming the Company's Chairman of the Board, the Company and AGA in October 1992 agreed that the Company would pay Dr. Reiter a salary of $150,000 per annum and that CSI would pay AGA a fee of $50,000 per annum in lieu of the foregoing arrangement, with the new compensation arrangement including a cost of living adjustment. Effective October 1, 1993, the AGA agreement was terminated and Dr. Reiter and the Company executed a three-year agreement with similar terms. The new agreement also provided Dr. Reiter with a bonus for each fiscal year of the Company during the term of this agreement equal to 5% of pre-tax profits for each year to the extent such pre-tax profits exceed the greater of $1,500,000 or the highest pre-tax profits earned during any preceding year for which Dr. Reiter is entitled to a bonus. For fiscal 1996, Dr. Reiter agreed to a one time 30% voluntary pay cut, while other senior executives took similar pay cuts in fiscal 1997. The Agreement expired on October 1, 1996 and Dr. Reiter has elected to defer formalization of a new agreement until additional outside members are elected to serve on the Board of Directors and a compensation committee is formed. The Company entered into an employment agreement with Mr. Beilly, effective as of September 1, 1993, pursuant to which Mr. Beilly serves as Vice President--General Counsel of the Company. The employment agreement was for a three-year term at an initial annual base salary of $120,000 adjusted annually for cost of living increases. The annual base salary was increased to $132,800 on September 1, 1994. In January, 1995, as part of the Company's internal restructuring, Mr. Beilly's compensation was changed to an Independent Contractor relationship under which Beilly & Pozzuoli was paid $11,800 per month for providing Mr. Beilly's legal services. In October 1996, effective for fiscal 1997 only, the monthly compensation to Beilly & Pozzuoli was reduced to $8,260 per month. In addition, as part of his original employment agreement, Mr. Beilly received warrants to purchase 5,000 post split shares of the Company's common stock at $1.375 per share, which since have been modified to $.1.00 per share, along with the repricing of all of Mr. Beilly's stock options. Mr. Beilly received additional options to purchase 45,000 shares of the Company's common stock which has been repriced to $1.00 per share in July 1997. In addition, in February 1996, the Board of Directors approved the issuance of 10,000 (post split) shares of the Company's common stock which were issued to Mr. Beilly to compensate him for additional significant responsibilities taken on beyond that of General Counsel and Secretary. The Company entered into an employment agreement with Mr. Merrigan, effective as of September 2, 1997, pursuant to which Mr. Merrigan serves as Chief Executive Officer and President of the Company for the three-year term ending September 7, 2000. The employment agreement contains an initial annual base salary of $275,000, plus an incentive bonus equal to 5% of earnings before interest and taxes (EBIT), subject to certain limitations. Additionally, pursuant to the employment agreement, the Company granted Mr. Merrigan options to purchase in an amount of 750,000 shares. The stock options vested as follows: (i) 50% upon execution of Mr. Merrigan's employment agreement; and (ii) 2.08% per month for each month of service thereafter. The Company currently compensates outside directors for their services in such capacity at an annual fee of $6,000, paid on a quarterly basis in cash or at the director's option, in shares of the Company's common stock. During fiscal 1996, Fred Roa received 3,000 post-split shares of the Company's common stock in lieu of $7,500 which was owed to him as director's fees. In addition, Messrs. Roa and Marsh were each issued 2,500 post-split unregistered shares of the Company's common stock in consideration for them agreeing to serve without directors and officers liability insurance, the absence of which saves the Company approximately $110,000 per year. Stock Option Plans 1991 Stock Option Plan. In December 1991, the Company adopted its 1991 Stock Option Plan ("1991 Plan") providing for an aggregate of 600,000 shares of common stock to be reserved for issuance thereunder. The Plan is administered by the Board of Directors of the Company and is maintained for the purpose of encouraging employees, directors and officers of the Company to participate in the growth and development of the Company. The Board of Directors determines, in accordance with the provisions of the Plan, the number of shares to be optioned, the option price and any other terms in respect of such option. In no event shall the purchase price of an option issued to an employee of the Company be less than the fair market value of the common stock on the date of grant (or, for persons who own more than 10% of the Company's outstanding voting stock, no less than 110% of such fair market value). The aggregate fair market value (determined as of the time the option is granted) of shares of common stock with respect to which incentive stock options become exercisable for the first time by the optionee under the Plan during any calendar year may not exceed $100,000. No option granted under the 1991 Plan may be exercised more than five years from the date of grant. If a participant ceases to be an employee, officer or director of the Company (for any reason other than death, disability or retirement at age 65), any option not previously exercised shall automatically lapse, terminate and expire. The 1991 Plan terminates on December 22, 2001. The following table sets forth certain information with respect to stock options exercised during fiscal 1996 by each of the executive officers named in the summary compensation table under "Cash Compensation" above: Aggregate Option Exercise in the Last Fiscal Year and Year-End Option Values
Number of Securities Value of Unexercised Underlying Unexercised In The Money Options Options (1) ------- ----------- Shares Value Name Acquired Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- William M. Reiter, M.D. -- -- 100,000 0 $ 0 $ 0 Bradford J. Beilly -- -- 50,000 0 0 0
- ----------------- (1) The fair market value of the Company's Common Stock on September 30, 1996 and September 12, 1997 was $3.31 and $.6875 per share, respectively. (2) Ms. Loarie resigned from the Company effective February 7, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of September 12, 1997 by all persons known by the Company to be beneficial owners of more than five (5%) percent of its Common Stock, each director and nominee director of the Company and all officers and directors as a group. Amount and Nature of Beneficial Percent Name and Address * Ownership (1) of Class - ---------------- --------------------- -------- William M. Reiter, M.D. 1,068,330 (2)(3) 19.4% Fred Roa 6,200 (4) ** John Marsh 2,500 (4) ** Paul J. Cimoch, M.D. 513,987 (4)(5) 9.4% Bradford Beilly 55,000 (6) ** Sundance Venture Partners, L.P. 280,000 (7) 5.0% Floyd Kephart 0 ** Paul Merrigan 0 (8) ** All officers and directors 1,926,017 35.0% as a group (7 persons) - -------------------- * All addresses are care of the Company at 2601 East Oakland Park Boulevard, 3rd Floor, Fort Lauderdale, Florida 33306, except as otherwise indicated. ** Represents less than 1% of the Company's outstanding common stock. (1) Unless otherwise indicated below, all shares are owned beneficially and of record. (2) Includes 100,000 shares issuable under currently exercisable stock options. (3) Excludes 370,370 shares which shall be issued to Dr. Reiter in connection with deferred compensation and which shall be issued after the Record Date. (4) Includes 10,000 shares issuable under currently exercisable stock options. (5) Excludes 55,555 shares which shall be issued to Dr. Cimoch in connection with deferred compensation and which shall be issued after the Record Date. (6) Includes 55,000 shares issuable under currently exercisable warrants and vested stock options. (7) Consists of 280,000 warrants issuable under a warrant agreement exercisable at $2.50 per share. (8) Excludes options exercisable at $.75625 per share which Mr. Merrigan shall receive under his employment agreement equal to 10% of the outstanding shares of the Company as of September 3, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As discussed under "Business" above, for each facility owned and prior to the Fort Lauderdale and Miami, Florida purchase on January 1, 1996, and the Irvine purchase on September 30, 1996, CSI contracted with a professional corporation to utilize the facility in order to provide care to its patients. In the case of the facilities located in Fort Lauderdale and Miami, CSI had contracted with William M. Reiter, M.D., PA, a Professional Association, which is owned by Dr. Reiter, the Company's Chairman of the Board and Chief Executive Officer, although in 1996 and 1995, the only contract in effect related to the Fort Lauderdale facilities. Revenues derived by the Company from the Fort Lauderdale contract amounted to $321,000 for fiscal 1996 as compared to $1,241,000 and $2,109,000 for fiscal 1995 and fiscal 1994 for both the Miami and Fort Lauderdale facility. The Florida medical practices were acquired for $1,366,000. The purchase price approximated one year's net revenues from March 1995 to February, 1996. The proceeds were used to pay amounts due to the Company of $1,300,000 and the Company assumed the medical practice net amounts receivable of $124,000. The balance of $66,000 was paid in cash. In the case of the facility located in Irvine, CSI had contracted with Paul J. Cimoch, M.D., PC, a Professional Corporation, which is owned by Dr. Cimoch, a member of the Company's Board of Directors. Revenues derived by the Company from the Irvine contract amounted to $2,396,000 for fiscal 1996 as compared to $2,147,000 and 2,291,000 for fiscal 1995 and fiscal 1994. The Irvine practice was purchased by a Management Service Organization in California, which was created by the Company for $2,309,000. The purchase price approximated one year's net revenues from August 1995 through July, 1996. The proceeds were used to pay amounts due to the Company of $2,303,000 and the Company assumed the medical practice net accounts receivable of $921,000. The balance of $6,000 was paid in cash. Pursuant to the contracts with the professional associations, the Company advances funds from time to time to the professional associations to meet their cash requirements. As of September 30, 1996, the receivables, including advances due to the company from William M. Reiter, M.D. and Paul Cimoch, M.D., were fully paid from the proceeds of the sale of the practices to the Company on January 1, 1996 and September 30, 1996, respectively, with the net proceeds being paid to Dr. Reiter, Dr. Cimoch, respectively. As described in Footnote 3 to the Company's Financial Statements, the Company in December 1991 acquired CSI, of which Dr. Reiter was then a 60% shareholder. Under the terms of that acquisition, the Company is was required to make certain payments of cash and stock to Dr. Reiter and the other former shareholders of CSI based upon CSI's earnings (as defined in the acquisition agreement) over the next two years. During fiscal 1993, the Company became obligated under the terms of the foregoing acquisition to issue Dr. Reiter 384,175 shares of its common stock and to pay him $1,311,316, of which $731,316 remains owing to him as of December 31, 1993. The Company has provided a guarantee to the former shareholders of CSI that sales of shares of the Company's common stock issued to them in connection with the Company's acquisition of CSI would generate certain specified minimum proceeds to them. The Company has granted a security interest in all of the outstanding common stock of CSI to these former shareholders in connection with these guarantees. These guarantees included the agreement of the Company to fund any loss realized by Dr. Reiter on any sales by him of approximately 720,000 shares that were issued to him by the Company at a price of approximately $1.00 per share if made within one year from the date of issuance and to pay Dr. Reiter with respect to approximately 60,000 shares previously issued to him an amount equal to the amount, if any, by which his net proceeds from any sales of these shares made within the next year are less than $5.12 per share (the defined market value at the time of the Company's acquisition of CSI). On December 5, 1994, the Company received a notice of default from the counsel for the former CSI shareholders together with a settlement proposal. The Board, excluding Dr. Reiter, after engaging outside legal counsel and extensive discussions, negotiated and agreed to a final settlement offer, which was ratified and approved by the Board of Directors. In January, 1995, the Board of Directors of the Company approved a settlement transaction with Dr. William Reiter, the Chairman and Chief Executive Officer of the Company, and the other CSI shareholders. The settlement transaction resulted from one actual default, two stock price guarantee obligations which, when the related shares were sold, would likely become defaults and the third year earn out which would require additional consideration to be paid to CSI shareholders. Pursuant to the settlement the CSI shareholders were issued 3,102,000 shares of common stock resulting from the third year earn out. The Company agreed to register 1,679,000 shares previously issued, and the Company issued to the CSI shareholders, a convertible note (the "Convertible Note") for the cash arising from the stock price guarantees, without selling such shares, and the cash portion of the 1995 earn out. The $3,193,000 Convertible Note bore interest at prime and is convertible into common stock at 70% of the market price at anytime after February 1, 1997. In February 1996, the Company?s Board of Directors approved an agreement to immediately convert, $3,000,000 of the $3,193,000 convertible debt owed to the former CSI shareholders into 1,200,000 (post-split) share of the Company?s common stock valued at $2.50 a share (post-split). In September, of 1996, Dr. Reiter, the Company?s Chairman of the Board and Chief Executive Officer loaned the Company $125,000 in order for the company to meet current commitments. In October through December approximately $96,000 of the loan has been repaid in August , 1997, he again loaned the Company $20,000 of which $4,000 was repaid by September 30, 1997 and a further $10,000 was repaid in November, 1997. Dr. Reiter also received during 1997 370,370 shares in satisfaction of $200,000 of deferred compensation. The CSI Foundation, Inc. is controlled by Dr. William Reiter, Dr. Paul Cimoch and Marvin Reiter and performs research and development activities primarily in connection with its Immune Reconstitution Cell Transfer Therapy for late stage AIDS patients. Previously, the Foundation did not have assets to support the project and the Company continued to perform the research. During Fiscal years 1997, 1996 and 1995, the Company recorded expenses of $184,000, $192,,000 and $59,,000, respectively, related to the Foundation. Dr. William Reiter, Dr. Paul Cimoch and Marvin Reiter, collectively reimbursed the Company the sums of $0 (1997), $124,000 (1996), and $136,000 (1995) , respectively for services rendered to the Foundation. All such reimbursements and contributions to the Foundation were for ordinary charitable purposes. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (a)(2) Financial Statements and Schedules See the Index to Consolidated Financial Statements on Page F-1 hereafter, which is incorporated herein by reference. The following Financial Statement Schedules for the years 1996, 1995 and 1994 are submitted herewith: Schedule II - Valuation and Qualifying Accounts. [All other Schedules are omitted from this report as they are inapplicable or not required under Regulation S-X or because the required information is set forth in the Consolidated Financial Statements or related notes.] (a)(3) Exhibits Exhibit Number Exhibit Description ------ ------------------- 3(a) Certificate of Incorporation (5) 3(b) By-Laws (5) 3(c) Amendment to the Certificate of Incorporation 4(a) Form of Warrant Agreement between the Warrant Agent and the Company (including form of Class B Warrants) (1) 4(b) Form of Unit Purchase Option (1) 10(a) Settlement Agreement, dated July 16, 1990, between Edward J. Kuriansky as claiming authority and on behalf of the State of New York, and the Company (2) 10(b) Form of Modified Settlement, dated January 12, 1994, by and among Edward J. Kuriansky as claiming authority and Deputy Attorney General for Medicaid Fraud Control, Professional Care, Inc., the Company, Martin and Harriet Weissman, Israel Cohen and Arthur I. Goldberg as executor of the Estate of Arlene Cohen (9) 10(c) Lease Agreement dated December 21, 1984 between 125 East Bethpage Associates and the Company, as amended (3)(4)(6) 10(d) 1982 Stock Option Plan (6) 10(e) 1991 Stock Option Plan (7) 10(g) Agreement and Plan of Merger, dated December 23, 1991, by and among Center for Special Immunology, Inc., CSI Development Corp., William M. Reiter, M.D., Paul Cimoch, M.D., Marvin Reiter and the Company (the "CSI Merger Agreement")(6) 10(h) Employment Agreement dated September 18, 1992 between Susanne Loarie and the Company (7) 10(i) Services Agreement dated December 23, 1991 between AGA, Inc. and Center for Special Immunology, Inc. (7) 10(j) Severance Agreement dated May 14, 1992 between Martin Weissman and the Company; Promissory Note by Martin Weissman to the Company dated June 26, 1992; Agency Agreement dated June 26, 1992 (7) 10(k) Settlement Agreement dated January 11, 1994 by and among the Company, Martin Weissman and Breslow & Walker (10) 10(l) Lease Agreement dated November 20, 1992 between I-SBC Limited Partnership and the Company (7) 10(m) Asset Purchase Agreement dated April 15, 1993 by and among Premier Service, Inc. and Health Professionals East, Inc., Health Professionals West, Inc., Hematech, Inc., Insurance Medical Reporter, Inc., and Professional Care, Inc. and related documents and agreements (10) 10(n) Employment Agreement dated October 26, 1993 between Bradford J. Beilly and the Company (9) 10(o) Consulting Agreement dated July 19, 1993 between J.D. Ross International and the Company and related Warrant (9) 10(p) Attorney's Retention Agreement dated July 19, 1993 between Richard Morganstern, a Professional Corporation, and the Company and related Warrant (9) 10(q) Form of identical Factoring Agreements between each of Paul J. Cimoch, M.D., P.C., William M. Reiter, M.D., P.A., and Daniel S. Berger, M.D., Ltd., respectively, subsidiaries of CSI, and Capital Factors (9) 10(r) Modification and Supplement to Premier Asset Purchase Agreement (9) 10(s) Second Modification to CSI Merger Agreement (10) 10(t) Employment Agreement dated November 1, 1995, between W. Douglas Kahn and the Company 10(u) Amended Employment Agreement dated September 19, 1995, between Susanne Loarie and the Company 10(v) Loan and Securities Purchase Agreement dated December 28, 1995 between SunDance Venture Partners, L.P. and the Company 10(w) Fort Lauderdale purchase 10(x) Chicago purchase 10(y) Irvine purchase 10(z) Los Angeles purchase 22 Subsidiaries 24 Independent Certified Public Accountants' Consent - --------------- (1) Incorporated by reference from Professional Care, Inc.'s (predecessor to Registrant) Registration Statement on Form S-1, File No. 33-37204. (2) Incorporated by reference from Professional Care, Inc.'s (predecessor to Registrant) Form 8-K, which date of report is July 6, 1990. (3) Incorporated by reference from Professional Care, Inc.'s (predecessor to Registrant) Form 10-K for the fiscal year ended September 30, 1990. (4) Incorporated by reference from Professional Care, Inc.'s (predecessor to Registrant) Form 8-K, which date of report is November 29, 1984. (5) Incorporated by reference from Registrant's Registration Statement on Form S-4, File No. 33-42675. (6) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1991. (7) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1992. (8) Incorporated by reference from Registrant's Form 8-K, dated June 21, 1993. (9) Incorporated by reference from Registrant's Form 10-K, for the fiscal year ended September 30, 1994. (10) Incorporated by reference from Registrant's Form 10-Q for the quarter ended December 31, 1994. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH PROFESSIONALS, INC. Date: January 13, 1998 By: -------------------------- --------------------------------------- Paul F. Merrigan President and Chief Executive Officer Date: January 13, 1998 By: -------------------------- --------------------------------------- Gary M. Cedeno, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Date: January 13, 1998 -------------------------- --------------------------------------- Fred Roa, Director Date: January 13, 1998 -------------------------- --------------------------------------- Paul F. Merrigan, Director Date: January 13, 1998 -------------------------- --------------------------------------- William Reiter, M.D., Director Date: January 13, 1998 -------------------------- --------------------------------------- Paul J. Cimoch, M.D., Director Health Professionals, Inc. and Subsidiaries Index Report of Independent Certified Public Accountants .........................F-2 Consolidated Balance Sheets, September 30, 1997 and 1996....................F-3 Consolidated Statements of Operations, Years Ended September 30, 1997, 1996 and 1995......................F-4 Consolidated Statements of Stockholders' Equity (Deficit), Years Ended September 30, 1997, 1996 and 1995......................F-5 Consolidated Statements of Cash Flows, Years Ended September 30, 1997, 1996 and 1995......................F-6 Notes to Consolidated Financial Statements..................................F-7 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders of Health Professionals, Inc. We have audited the accompanying consolidated balance sheets of Health Professionals, Inc. and subsidiaries as of September 30, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 1997. We have also audited the accompanying schedule of valuation and qualifying accounts. These consolidated financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Professionals, Inc. and subsidiaries at September 30, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. Also in our opinion, the schedule referred to above presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and the schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has negative working capital, a deficit in stockholders' equity and has a cash deficiency from operations which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements and schedule do not include any adjustments that might result from the outcome of this uncertainty. Miami, Florida BDO SEIDMAN, LLP January 10,1998 F-2 Health Professionals, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 1997 and 1996 (Note 1)
1997 1996 ----------- ----------- ASSETS CURRENT ASSETS: Cash $ -- $ 49,000 Accounts receivable, less allowance for doubtful accounts of $2,461,000 and $1,981,000, respectively (Note 6) 2,782,000 3,425,000 Inventory 63,000 108,000 Prepaid consulting fees, current portion (Note 9) 171,000 115,000 Prepaid expenses and other 31,000 46,000 ------------ ------------ Total current assets 3,047,000 3,743,000 EQUIPMENT, FURNITURE AND FIXTURES AND LEASEHOLD IMPROVEMENTS, net (Note 4) 845,000 1,338,000 PREPAID CONSULTING FEES, less current portion (Note 9) 102,000 145,000 COVENANTS NOT TO COMPETE, less accumulated amortization of $418,000 and $131,000 (Note 3) 158,000 419,000 COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, less accumulated amortization of $136,000 and $765,000 (Note 3) 2,287,000 6,134,000 OTHER ASSETS 181,000 463,000 ------------ ------------ TOTAL $ 6,620,000 $ 12,242,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY( DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses (Note 7) 4,149,000 3,725,000 Accrued salaries and payroll taxes 278,000 117,000 Factoring line of credit (Note 6) 1,312,000 1,100,000 Current portion of long-term debt (Note 6) 749,000 474,000 ------------ ------------ Total current liabilities 6,488,000 5,416,000 ------------ ------------ LONG-TERM DEBT, less current portion (Note 6) 1,658,000 1,519,000 ------------ ------------ LITIGATION, COMMITMENTS AND SUBSEQUENT EVENTS (Notes 8 and 13) STOCKHOLDERS' EQUITY (DEFICIT) (Notes 3, 6 and 9): Serial preferred stock, $1 par value; authorized 100,000 shares; issued - none -- -- Common stock, $.02 par value; authorized 25,000,000 shares; issued 7,246,000 and 4,554,000 shares 145,000 91,000 Additional paid-in capital 44,774,000 43,280,000 Less: 4,000 shares of Treasury Stock at cost (42,000) (42,000) Deficit (46,403,000) (38,022,000) ------------ ------------ Total stockholders' equity (deficit) (1,526,000) 5,307,000 ------------ ------------ TOTAL $ 6,620,000 $ 12,242,000 ============ ============
See notes to consolidated financial statements. F-3 Health Professionals, Inc. and Subsidiaries Consolidated Statements of Operations Years Ended September 30, 1997, 1996 and 1995 (Note 1)
1997 1996 1995 ---- ---- ---- REVENUES: Operating revenues $ 7,493,000 $ 4,622,000 $ 5,011,000 Operating revenues - related parties (Note 10) -- 2,717,000 4,379,000 Interest and other income 9,000 59,000 219,000 Gain on sale of securities -- 166,000 -- ------------ ------------ ------------ 7,502,000 7,564,000 9,609,000 ------------ ------------ ------------ COSTS AND EXPENSES: Direct service 4,111,000 4,053,000 4,165,000 Selling, general and administrative (Note 8) 7,010,000 6,240,000 5,864,000 Interest 466,000 518,000 575,000 Research and development (Note 10) 362,000 403,000 20,000 Provision for impairment of costs in excess of net assets of businesses acquired (Note 3) 3,934,000 -- -- Provision (recovery) for loss on advances and other professional association reserves to related parties (Note 3) -- (765,000) 20,000 Costs incurred in connection with litigation (Note 8) 75,000 62,000 ------------ ------------ ------------ 15,883,000 10,524,000 10,706,000 ------------ ------------ ------------ NET LOSS $ (8,381,000) $ (2,960,000) $ (1,097,000) ============ ============ ============ NET LOSS PER SHARE $ (1.47) $ (.96) $ (.52) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,683,000 3,092,000 2,089,000 ============ ============ ============
See notes to consolidated financial statements. F-4 Health Professionals, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Deficit) Years Ended September 30, 1997, 1996 and 1995 (Notes 1 and 9)
Common Stock Additional Treasury Paid-in Shares Amount Stock Capital Deficit Total ------ ------ -------- ---------- ------- ----- Balances at September 30, 1994 1,845,000 $37,000 $(42,000) $36,016,000 $(33,965,000) $2,046,000 Earn Out Shares issued in lieu of cash (Note 3) 310,000 6,000 - (6,000) - - Shares Issued for Services 34,000 1,000 - 80,000 - 81,000 Net Loss - - - - (1,097,000) (1,097,000) Balances at September 30, 1995 2,189,000 44,000 (42,000) 36,090,000 (35,062,000) 1,030,000 Sale of Common Stock (Note 9) 500,000 10,000 - 1,990,000 - 2,000,000 Conversion of debt owed to former CSI shareholders to equity (Note 9) 1,200,000 24,000 - 2,976,000 - 3,000,000 Acquisition of Chicago practice (Note 3) 246,000 5,000 - 1,078,000 - 1,083,000 Stock warrants issued at a discount (Note 9) - - - 42,000 - 42,000 Shares issued for services (Note 9) 419,000 8,000 - 1,104,000 - 1,112,000 Net Loss - - - - (2,960,000) (2,960,000) Balances at September 30, 1996 4,554,000 91,000 (42,000) 43,280,000 (38,022,000) 5,307,000 Acquisition of Los Angeles practice (Note 3) 168,000 3,000 - 379,000 - 382,000 Shares issued for services (Note 9) 300,000 6,000 - 213,000 - 219,000 Conversion of debt owed on debentures (Note 9) 630,000 13,000 - 775,000 - 788,000 Conversion of liabilities to CSI shareholders to equity (Note 9) 463,000 9,000 - 241,000 - 250,000 Amendment and final determination of Chicago practice acquisition (Note 9) 1,131,000 23,000 - (23,000) - - Amendment reallocating price for Chicago Practice acquisition (Note 9) - - - (297,000) - (297,000) Warrants issued in connection with convertible loans (Note 9) - - - 122,000 - 122,000 Options issued to employees - - - 84,000 - 84,000 Net Loss - - - - (8,381,000) (8,381,000) ------ ------ ------- ------ ------ ------ Balances at September 30,1997 7,246,000 $145,000 $(42,000) $44,774,000 $(46,403,000) $(1,526,000) ========= ======== ========= =========== =============== ============
See notes to consolidated financial statements. F-5 Health Professionals, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended September 30, 1997, 1996 and 1995 (Notes 1, 9 and 11)
1997 1996 1995 ----------- ------------ ------------ OPERATING ACTIVITIES: Net loss $(8,381,000) $(2,960,000) $(1,097,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 550,000 565,000 504,000 Amortization of goodwill and covenants 634,000 309,000 149,000 Provision (recovery) for bad debts 938,000 (765,000) 320,000 Provision for impairment of costs in excess of net assets acquired 3,934,000 -- -- Securities issued for services 47,000 852,000 81,000 Options issued to employees 84,000 -- -- Securities issued as additional consideration in connection with the conversion of debt 318,000 -- -- (Decrease) increase of lease obligation reserves (455,000) (106,000) 141,000 Loss on Disposal of Fixed Assets 72,000 -- -- Change in assets and liabilities, net of effects of acquisitions: (Increase) in accounts receivable (295,000) (730,000) (1,884,000) Decrease (increase) in inventory 45,000 (2,000) 174,000 Decrease (increase) in prepaid expenses and other 152,000 (31,000) 97, 000 Decrease( increase) in other assets 282,000 (195,000) (11,000) Increase in accounts payable and accrued expenses 446,000 859,000 218,000 Increase(decrease) in accrued salaries and payroll taxes 411,000 (111,000) 46,000 ----------- ----------- ----------- Net cash (used in) operating activities (1,221,000) (2,315,000) (1,262,000) ----------- ----------- ----------- INVESTING ACTIVITIES: Collection of notes receivable -- 683,000 1,404,000 Cash paid for acquisition of medical practices -- (72,000) -- Capital expenditures, net (109,000) (444,000) (135,000) ----------- ----------- ----------- Net cash (used in) provided by investing activities (109,000) 167,000 1,269,000 ----------- ----------- ----------- FINANCING ACTIVITIES: Repayment of long-term debt and current maturities (500,000) (887,000) (645,000) Proceeds from long-term debt 1,569,000 682,000 -- Proceeds from sales of common stock -- 2,000,000 -- Cash received from Factor, net 212,000 382,000 618,000 ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,281,000 2,177,000 (27,000) ----------- ----------- ----------- NET (DECREASE)INCREASE IN CASH (49,000) 29,000 (20,000) CASH, BEGINNING OF PERIOD 49,000 20,000 40,000 ----------- ----------- ----------- CASH, END OF PERIOD $ 0 $ 49,000 $ 20,000 =========== =========== ===========
See notes to consolidated financial statements. F-6 1. GOING CONCERN The Company's consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses of $8,381,000, $2,960,000 and $1,097,000 for each of the three years in the period ended September 30, 1997, respectively. In addition, the Company used $1,221,000 of cash for its fiscal 1997 operations, has negative working capital of $3,441,000 and has a deficit in stockholders' equity of $1,526,000. In order to remain a going concern the Company must obtain additional sources of cash and ultimately achieve profitable operations. The Company's plans for raising additional sources of cash primarily rely on (1) obtaining a strategic partner who will provide capital to the Company while also offering certain operational opportunities; and/or, (2) obtaining an investment partner to further develop certain technology owned by the Company. While additional sources of cash are being pursued, the Company intends to further down size operations, thereby reducing costs while attempting to increase market share for the existing clinics until operations can produce positive cash flow. No assurances can be made that the Company can obtain additional sources of cash or that operations can produce a positive cash flow. The Company's continued existence is dependent upon its ability to resolve its liquidity problems by raising additional cash and by achieving profitable operations as set forth above. Working capital limitations continue to impinge on day-to-day operations, thus, contributing to continued operating losses. The continued support of the Company?s creditors will be required, although this is not assured. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. 2. SUMMARY OF ACCOUNTING POLICIES Description of Business - Center For Special Immunology (CSI), a subsidiary owns and operates an integrated healthcare delivery and clinical research system that includes a multistate network of primary care and clinical facilities specializing in immune system disorders, consisting primarily of HIV, AIDS and Chronic Fatigue Immune Dysfunction Syndrome (CFIDS). This network also conducts multi-center trials in cooperation with biotechnology and pharmaceutical companies. CSI derives the major portion of its revenues from medical professional corporations either which CSI owns or which contract with CSI to utilize its facilities and utilize CSI's ancillary services in order for the professional corporation to provide care to its patients. Concentration of Credit Risk - The Company grants credit, including cash advances to the contracted medical professional corporations and its other customers, substantially all of whom are in the health care industry. Principles of Consolidation - The accompanying financial statements include the accounts of Health Professionals, Inc. and its wholly owned subsidiaries (the "Company"). All operations are conducted by CSI and its subsidiaries. All material intercompany accounts and transactions have been eliminated. Revenue Recognition - The Company recognizes revenues as services are provided. Accounts Receivable - The Company records allowances related to the amounts due from the professional corporations, with whom CSI has contracted, based upon the excess of the amounts due from the professional corporations above the collateral, primarily the receivables of the professional corporations, even though such advances are expected to be collected from future operations. The Company records patient accounts receivable for those medical professional associations that it owns at net of allowances for those items that the company won't collect on, such as certain contractual amounts and bad debts. Depreciation and Amortization - Equipment, furniture and fixtures are recorded at cost and are depreciated over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the related lease or the useful life of the asset, whichever is shorter. Depreciation and amortization are computed principally by the straight-line method. Inventory - Inventory is recorded at the lower of cost or market. Cost is determined by the first-in, first-out method. Per Share Information - Per share information is computed based on the weighted average number of common shares outstanding. Per share information excludes common equivalent shares since their inclusion would be anti-dilutive. All share and per share data in the accompanying financial statements reflect the effects of the Company's 1996 one-for-ten reverse split for all periods presented. F-7 Costs in Excess of Net Assets of Businesses Acquired and Covenants Not to Compete - The excess of costs over net assets of businesses acquired is being amortized on a straight-line basis over 25 years. Covenants not to compete are amortized over their 2 year economic life. The Company periodically reviews the carrying value of these intangible assets and records adjustments when it is determined that the assets are no longer considered fully recoverable from future operating cash flows. Asset Impairments - During fiscal 1997, the Company adopted Financial Accounting Standard Statement No. 121 entitled "Accounting for the Impairment of Long-Lived Assets to be Disposed" of which was not significantly different from the Company's previous asset impairment accounting policy. The Company periodically reviews the carrying value of certain of its assets in relation to historical results, current business conditions and trends to identify potential situations in which carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company estimates the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if a permanent impairment exists. The Company determines the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company discounts the expected future cash flows of such assets. Income Taxes - The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, effective October 1, 1993 and elected not to restate financial statements for prior periods. The statement requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The adoption of Statement No. 109 did not have a material effect on the accompanying consolidated financial statements. Stock Based Compensation - On October 23, 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for financial statements for fiscal years beginning after December 15, 1995. Statement No. 123 provides a fair value method of accounting for stock-based compensation arrangements rather than the intrinsic value based method contained in APB Opinion No. 25. The Statement does not require an entity to adopt the new fair value based method of accounting as it relates to employees for the purpose of preparing its basic financial statements. Entities which retain the APB Opinion No. 25 method of accounting will be required to display in the footnotes pro forma net income and earnings per share information as if the fair value based method had been adopted. The Company currently does not intend to adopt the Fair-Value Method provided in Statement No. 123. Reclassifications - Certain reclassifications to the prior year consolidated financial statements have been made to conform to the 1997 presentations. Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Future Accounting Pronouncements - Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," issued in February 1997, replaces the current methodology for calculating and presenting earnings per share. Under SFAS No. 128, primary earnings per share will be replaced with a presentation of basic earnings per share and fully diluted earnings per share will be replaced with diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shares outstanding. Diluted earnings per share is computed similarly to fully diluted earnings per share in accordance with APB Opinion No. 15. The Statement will be effective for financial statements issued by the company after December 15, 1997. The impact of SFAS No. 128 is not expected to be material. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, Financial F-8 Reporting for Segments of a Business Enterprise, establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate the resources and in assessing performance. Both SFAS No. 130 and 131, issued in June 1997, are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Due to the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, they may have on future financial statement disclosures. 3. ACQUISITION OF CSI AND MEDICAL PRACTICES On December 23, 1991, the Company acquired 100% of the outstanding common stock of the Center for Special Immunology, Inc. ("CSI"). The purchase price was $400,000 in cash, and unregistered shares of Common Stock of $600,000, based upon the quoted market price (valued at $330,000 since such shares are not freely tradeable). In addition, the acquisition agreement provided for contingent consideration based upon the earnings of CSI for each of the three years in the period from April 1, 1992 through March 31, 1995. For the year ended March 31, 1994, no additional consideration was required. The final year was calculated at two and one half times the increase in after tax earnings, as defined, for the year ended March 31, 1995 over the year ended March 31, 1993, or two and one half times the base year earnings amount if funds were not made available during the year ended March 31, 1994 to CSI to open three new facilities. As funds were not made available during the year ended March 31, 1994 to open three new centers, the minimum additional consideration of $1,616,000 was recorded at September 30, 1994 as additional consideration due resulting in an increase in "Costs in excess of net assets of business acquired." The amount of additional consideration in each year was to be payable 40% in cash and 60% in stock. The number of shares is based upon the market value of the Company's stock. Any unregistered shares issued in connection with the acquisition have a one year price guarantee (protection year) following the date on which the shareholders may first sell any of the acquired shares. If any such shares are sold at less than $5.12, or such lower amount, the Company is obligated to pay the difference in cash, subject to certain adjustments, one year after the expiration of the protection year. The Company, may at its option make the cash portion of the contingent payments in common stock of the Company based upon the then prevailing market value per share. (See Note 9) In fiscal 1992 to 1995, the Company recorded aggregate reserves of $925,000 related to estimated losses on cash advances and trade receivables from the medical practices. In early fiscal 1996, the related party physicians collateralized the cash advances with specific security and a $765,000 recovery was recorded. From 1991 to part of fiscal 1996, the Company's services to the above medical practices were conducted under the terms of contractual agreements, whereby fees were earned by the Company for specific services and the underlying medical practices remained under the ownership of physicians. During fiscal 1996, the Company's Board of Directors decided, as a result of the recent permissibility of corporations to practice medicine in certain states, among other factors, to purchase the underlying medical practices and to release the collateral discussed above. On January 1, 1996, the Company purchased the medical practices in Fort Lauderdale and Miami, Florida from the Chairman of the Company's Board of Directors, on April 1, 1996, purchased the medical practice in Chicago, Illinois from its physician owner, and on September 30, 1996, purchased the Irvine, California medical practice from a stockholder and member of the Board of Directors of the Company. The purchase price of each location approximated one year's net revenues (based upon the prior one year's net revenues for the California and Florida practices and upon the next years estimated net revenues for Illinois). The Florida medical practices were acquired for $1,366,000, of which $1,300,000 was comprised of amounts then due to the Company from the medical practices with the balance paid in cash. The Chicago practice was acquired for $1,873,000, which was comprised of $786,000 in shares (valued at fair value) of the Company's common stock and a purchase money obligation payable of $750,000 and cancellation of amounts owed the Company of $337,000. As of September 30, 1996, the Company issued 246,000 shares of common stock and during year ended September 30, 1997, based upon an amendment of the original acquisition agreement, a further 1,131,000 shares were issued. The amended agreement decreased the value of the shares to be issued from 80% of the acquisition price to 60%. The Irvine, California medical practices were acquired for $2,309,000, of which F-9 $2,303,000 was comprised of amounts then due to the Company from the medical practice with the balance in cash. In connection with the transaction, the selling stockholders, each of whom are physicians, businesses acquired and elimination of intercompany transactions as if the Company had acquired all of the practices on October 1, 1995 and October 1, 1994.entered into non-compete agreements with the Company for two years for Florida, Illinois, and California which are valued at $250,000, $150,000 and $150,000, respectively, in the accompanying balance sheet. Costs in excess of net assets acquired in connection with the above fiscal 1996 transactions aggregated $992,000, $1,445,000, and $876,000, for Florida, Illinois and California, respectively. The following is a proforma summary of consolidated results of operations after giving effect to proforma amortization of costs in excess of net assets of businesses acquired and elimination of intercompany transactions as if the Company had acquired all of the practices on October 1, 1995 and October 1, 1994. Year Ended September 30, 1996 1995 ---- ---- (unaudited) (unaudited) Revenues $ 8,551,000 $ 11,170,000 Net Loss $ (2,527,000) $ (628,000) Net Loss per common share $ (0.82) $ (0.30) On October 28, 1996, the Company purchased a medical practice located in Los Angeles, California for $382,000. The acquisition price for the practice was paid with 168,000 shares of the Company?s common stock (valued at estimated fair value) and will be supplemented by an earn-out. The earn-out will also be paid in Company shares and will be calculated at 75% of collected revenues derived from specified services provided to new patients during the one year period commencing after the effective date of the practice operations transfer. The earn-out stock will be valued at 70% of the average market closing price calculated during the 20 trading days preceding the close of the earn-out period. Costs in excess of net assets acquired in connection with the above fiscal 1997 transaction aggregated $337,000. Based on current market conditions and an analysis of projected undiscounted future cash flows calculated in accordance with the provisions of SFAS 121, the Company has determined that the carrying amount of the excess cost over net assets of businesses acquired for certain acquisitions may not be recoverable. The resultant impairment has necessitated a write-down of $3,934,000. 4. EQUIPMENT, FURNITURE AND FIXTURES AND LEASEHOLD IMPROVEMENTS Equipment, furniture and fixtures and leasehold improvements consist of the following:
Useful September 30, Lives (Years) 1997 1996 ------------- ---- ---- Equipment, furniture and fixtures 5 - 7 $2,083,000 $2,561,000 Assets under capital lease obligations 5 - 7 164,000 325,000 Leasehold improvements 1 - 12 625,000 176,000 2,872,000 3,062,000 Less accumulated depreciation and amortization 2,027,000 1,724,000 ---------- ---------- $ 845,000 $1,338,000 ========== ==========
5. INCOME TAXES The Company has not recorded any expense for Federal or state income taxes for the years September 30, 1995 through September 30, 1997, due to the existence of tax losses for all applicable periods. The Company has investment and other tax credit carryforwards, and net operating loss carryforwards of approximately $600,000 and $32,000,000, respectively, expiring through the year 2012. The net operating loss is subject to an annual limitation of approximately $1,300,000 based upon certain ownership changes. F-10 Deferred income taxes are comprised of the following: Year ended September 30, 1997 1996 ------------ --------- Loss carryforwards $ 11,800,000 $ 10,500,000 Tax credit carryforwards 600,000 600,000 12,400,000 11,100,000 Deferred tax asset valuation allowance (12,400,000) (11,100,000) ------------ ------------ Net deferred tax asset $ -- $ -- ============ ============ Realization of any portion of the net deferred tax asset is not considered to be more likely than not and accordingly, a valuation allowance has been provided for such amount. 6. LONG-TERM DEBT AND FACTORING LINES OF CREDIT Long-term debt consists of the following:
September 30, 1997 1996 -------- -------- Due to Officer (a) $ 16,000 $ 125,000 Notes Payable, less unamortized Discount of $300,000 and $36,000 respectively(b) 1,322,000 664,000 Medical practice purchase obligation (c) 648,000 355,000 Lease obligation (d) 51,000 474,000 Capital leases 164,000 199,000 Other (e) 206,000 176,000 ---------- ---------- 2,407,000 1,993,000 Less current portion 749,000 474,000 ---------- ---------- $1,658,000 $1,519,000 ========== ==========
(a) In September, of 1996, the Company's Chairman of the Board and Chief Executive Officer loaned the Company $125,000, due upon demand and bearing interest at 8.25% per annum in order for the Company to meet current commitments. This loan was repaid during year ended September 30, 1997. In August 1997, he again loaned the Company $20,000 of which $4,000 was repaid by September 30,1997 and a further $10,000 was repaid by November 1997. (b) On December 28, 1995 and February 13, 1996, the Company closed on two loans and securities purchase agreements with SunDance Venture Partners, Ltd. (SunDance), from which the Company received net proceeds of $700,000 in loans. Both notes provide for payments of interest at 12% per annum for the first twenty-four months and at 13% per annum for the next twelve months, followed by quarterly payments of principal and interest at 15% through December 2000. The funds were utilized for working capital. From October 1996 to August 1997, the Company received $1,171,000 in cash proceeds from $1,351,000 in convertible loans less original issue discounts of $180,000. Of these loans $925,000 bear interest at 5% and $426,000 at 7% interest. Furthermore $551,000 of the loans mature between April to August 1999 and $800,000 mature between August to November 2001. The loans are convertible at 70% of the fair value of the stock on the day preceding the conversion (Note 9). During 1997, the Company accrued approximately $42,000 of interest to the balance of these loans. (c) In connection with the purchase of the Chicago, Illinois medical practice, the Company issued a $750,000 note payable bearing interest at 5% per annum, payable in 22 monthly installments of principal and interest through April, 1999. (d) Lease obligations consist of accruals for office space leases with reduced rents in early years to straight-line rent expense over the life of the lease. At September 30, 1997 and 1996 the Company had obligations of $ 52,000 and $474,000, respectively. During 1997 and 1995 the Company had settlements with landlords in the amounts of ________ and $97,000, respectively. In connection with the settlements with the landlords the Company wrote off lease reserves of approximately $347,000. (e) Included in the current portion of long term debt are proceeds from a loan of $200,000, bearing interest at prime plus 4% which F-11 matured in September 1997, but remains unpaid as of January 10, 1998. Negotiations are being made to extend the due date of this loan (Note 9). Payments required on long-term debt and lease obligations during each of the five years subsequent to September 30, 1997 are as follows: Year Ending September 30 1998 $ 749,000 1999 900,000 2000 255,000 2001 468,000 2002 35,000 ----------- Total $ 2,407,000 =========== Factoring Agreement - Certain subsidiaries of CSI together with the medical professional corporations presently under contract with or owned by said subsidiaries entered into factoring agreements providing for up to $2,500,000 in lines of credit, based upon eligible accounts receivable. Fees charged by the factor for factoring was amended in June, 1996 from an initial 1% of all eligible receivables to an initial 1% of eligible receivables up to $5,000,000 a year. The fee then progressively decreases to .75% for eligible receivables in excess of $10,000,000 a year. Funds are then advanced by the factor at 2% over prime. The advances are collateralized by the related receivables. The advances drawn by the medical professional corporations are guaranteed by CSI. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Included in accounts payable and accrued expenses are Therapeutics and Home Health expenses of approximately $1,077,000 at September 30, 1997, and $266,000 at September 30, 1996. No other items included therein exceed 5 percent of total current liabilities. 8. LITIGATION AND COMMITMENTS (a) During 1993, the SEC advised the Company that it had commenced a formal investigation of potential securities law violations in connection with certain trading activity in the Company's stock and requested certain information from the Company and certain of its officers in connection with that investigation. The Company, and the officers have complied with these requests. While management believes that it has been successful in the matter mentioned above, there is no assurance that there will not be a material adverse effect on the financial condition or results of operations of the Company and the accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (b) In November 1997, two of the Company's lenders filed suit against the Company for failing to comply with the conversion features of the convertible loans. Management believes that this matter will be resolved and such result will not have a material adverse affect on the consolidated financial statements of the Company. (c) The Company is subject to various legal proceedings, claims and liabilities which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these matters will not materially affect the consolidated financial statements of the Company. F-12 (d) Employment Agreements - The Company has an employment agreement with a key executive for an initial term ranging of 3 years and at annual salary of $275,000 , subject to annual increases and incentive bonuses in some instances. Future minimum commitments under this agreements are as follows: Year Ending September 30, 1998 276,000 1999 291,000 2000 278,000 -------- $845,000 ======== (e) Operating Leases - The Company is obligated under operating leases for the use of its office facilities. Office leases provide for rent increases due to escalation of real estate taxes and cost of living. Future minimum payments on operating leases with non cancelable terms in excess of one year at September 30, 1997 are: Year Ending September 30, 1998 $ 540,000 1999 544,000 2000 551,000 2001 400,000 2002 294,000 ------- $2,329,000 ========== Aggregate rental expense under operating leases was approximately $536,000, $812,000, and $810,000, for the years ended September 30, 1997, 1996, and 1995 respectively. 9. STOCKHOLDERS' EQUITY Reverse Stock Split-On April 19, 1996, the stockholders approved a one-for-ten reverse stock split. All share and per share data in the accompanying financial statements reflect the effects of the reverse stock split for all periods presented. Stock Option Plan- At September 31, 1997, the Company has one Employee Stock Option Plan which is described below. The Company applies APB opinion 25 and related Interpretations in accounting for its plan. Compensation costs charged against income for its employee stock option plans was $84,000, $0 and $0, for fiscal years ended September 30, 1997, 1996 and 1995 respectively. Had compensation costs for the Company's Stock Option Plan been determined based on the Fair Value at the grant dates for awards under those plans consistent with the method of FASB statement 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Net Income As reported $8,381,000 $2,960,000 $1,097,000 Proforma $8,827,000 $2,983,000 $2,107,000 Loss Per Share As reported $(1.47) $(.96) $ (.52) Proforma $(1.55) $(.97) $(1.00)
The Company has a stock option plan which provides for the granting of options to its employees for up to 600,000 shares of common stock. The exercise price of the option equals the market price of the Company?s common stock on the date of the grant and an options maximum term is 5 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1995, 1996 and 1997, respectively: no dividend yield for all years; expected volatility of 46.5 percent in all years, risk-free interest rates of 6.2 , 6.8 and 6.0 percent for the option plan; and expected lives of 5 years for the option plan. F-13 A summary of the status of the Company?s stock options and warrants as of September 30, 1995, 1996 and 1997, and changes during the years ended on those dates is presented below:
1995 1996 1997 --------------------------- -------------------------- -------------------------- Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average Options and Warrants Exercise Price ExercisePrice Exercise Price O/S @ beginning of year 99,625 $ 297 52,950 $ 66 62,950 $ 48 Granted 51,000 50 10,000 5 1 ,235,734 1 Exercised -- -- -- -- -- -- Forfeited (98,575) 291 -- -- (101,600) (40) O/S @ End of year 52,950 66 62,950 48 1,197,084 1 Options and Warrants Exercisable at year-end 52,950 62,950 833,331 Weighted-Average fair value Of Options and Warrants Granted during the Year $ 19.46 $ 2.28 $ 0.94
The following table summarizes information about stock options and warrants outstanding at September 30, 1997.
Options and Warrants Outstanding Options and Warrants Exercisable Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price $ .50 125,000 4.8 years $ .50 125,000 $ .50 $ .75 to $ 1.00 1,047,084 4.8 years $ .82 683,371 $ .86 $ 1.25 25,000 5.0 years $1 .25 25,000 $ 1.25 --------- ------- 1,197,084 833,371 ========= =======
Warrants - As of September 30, 1997, warrants initially issed in the Company's 1991 public offering remain outstanding to acquire 57,256 shares of the Company's common stock, exercisable at $53.50 per share through 1998. In connection with the Company's 1996 loans from SunDance, the Company issued SunDance warrants to acquire 280,000 shares of common stock exercisable at $2.50 per share through January 2001, which were valued at fair value of $42,000. In July 1997, warrants were issued in connection with a loan to acquire 100,000 shares of common stock exercisable at $.50 per share through July 2000, which were valued at fair value of $24,000. In August 1997, warrants were issued in connection with certain covertable loans to acquire 133,334 shares of common stock exercisable at $.50-$1.25 per share through August 2000 which were valued at fair value of $98,000. These warrants were recorded as original issue discounts. Underwriter Units - An underwriter holds an option to purchase 21,000 units, which was issued in connection with the sale of the Company's stock in 1990. Once the holder exercises the option, the aggregate exercise price of which is $598,500, the holder will be issued 21,000 shares of the Company's common stock and class A warrants. The class A warrants are exercisable at an aggregate exercise price of $748,125 to purchase 21,000 shares of the Company's Common Stock and 5,200 Class B warrants until December 9, 1997. Each Class B warrant entitles the holder to purchase two shares of the Company's Common Stock for $106.875 ($53.4375 per share). F-14 In September through November 1991, 104,890 Class A Warrants to purchase 209,580 shares of common stock were exercised for net proceeds to the Company of approximately $7,460,000. In conjunction with the exercise, 52,445 Class B Warrants to purchase 104,890 shares of common stock were issued. During the fiscal year 1992, 4,355 Class B Warrants to purchase 8,710 shares of common stock were exercised for net proceeds to the Company of approximately $465,000. During the fiscal year ended September 30, 1994, 19,462 Class B Warrants to purchase 38,924 shares of common stock were exercised for net proceeds to the Company of approximately $2,080,000. The Class B Warrants are callable by the Company if the average closing price of the Company's common stock equals or exceeds $75.00 for twenty consecutive days prior to the five days before calling. In January 1992, the Company issued warrants to purchase 4,000 shares of common stock, exercisable over a period of five years at $85.00 per share, to a landlord in return for certain rent abatements. In connection with a subsequent settlement with that landlord, the exercise price of the warrants was decreased to $6.875 per share. In June 1992, the Company issued warrants to purchase 2,000 shares of common stock, exercisable over a period of five years at $75.00 per share, to the former Chairman of the Board and Chief Executive Officer of the Company. In July 19, 1993, the Company issued warrants to two consultants to purchase a total of 60,000 shares of common stock, exercisable over a period of five years at $31.25 per share. In connection therewith $120,000 was charged to operations. The warrants were cancelled and 40,000 warrants were issued at an exercise price of $8.00 per share with the other terms unchanged. In October,1993, the Company issued warrants to purchase 10,000 shares of common stock exercisable over a period of five years at $13.75 per share. These warrants were issued to the Company's internal general counsel (5,000) and a litigation attorney (5,000). In February 1994 the 5,000 warrants issued to the litigation counsel were cancelled. In December 1995, the 5,000 warrants given to the Company's general counsel were modified to change the exercise price to $5.00 per share. At September 30, 1997, the Company has reserved 1,197,084 shares of common stock for issuance upon exercise of outstanding options and warrants. Conversion of Debt to Equity- In February 1996, the Company?s Board of Directors approved an agreement to immediately convert, $3,000,000 of the $3,193,000 convertible debt owed to the former CSI shareholders into 1,200,000 (post-split) shares of the Company?s common stock valued at $2.50 a share (post-split). In April 1997, the Board of Directors agreed to convert $470,000 worth of convertible loans into 630,000 shares of the Company?s common stock and recorded $318,000 as additional cost in connection with this conversion. Sale of Common Stock - On May 3, 1996, the Company completed a selling agreement with Societe Financiere du Seujet, LTD., a foreign investment banking concern, pursuant to Regulation S in which the Company sold 500,000 shares of common stock for $2,000,000. During fiscal 1996, the Company issued 160,000 shares of common stock to a consultant. The shares of common stock were valued at $470,000 and were issued in exchange for consulting services relating to financial matters, and evaluating and structuring business acquisitions to be performed through 1999. Also during fiscal 1996, the Company issued 259,000 shares of common stock, valued at an aggregate $642,000, to professional advisors and consultants for services rendered during the year. During fiscal 1997, the Company issued 168,000 shares of common stock valued at $382,000 towards the purchase of a medical practice in Los Angeles, 1,131,000 shares were issued for the purchase of the Chicago medical practice, 200,000 shares valued at $94,000 were issued in exchange for legal services rendered, 100,000 shares valued at $125,000 were issued for consulting services rendered, and 463,000 shares were issued in exchange for liabilities amounting to $250,000 owed to CSI shareholders. 10. SIGNIFICANT CUSTOMERS AND RELATED PARTIES One of the medical professional corporations that was under contract prior to the sale to the Company on January 1, 1996 with CSI was controlled by the Chairman of the Board and one was controlled prior to its sale to the Company on September 30, 1996 by another individual who was a founder of CSI, both of whom are physicians. Revenues derived by CSI directly from those professional corporations amounted to $0, $2,717,000, and $4,379,000, or 0%, 37% and 47% of operating revenues from continuing operations for the years ended September 30, 1997, 1996 and 1995 respectively. F-15 The CSI Foundation, Inc. is controlled by the Chairman of the Board and two other stockholders and performs research and development activities primarily in connection with its Immune Reconstitution Cell Transfer Therapy for late stage AIDS patients. During Fiscal years 1997, 1996, and 1995, the Company recorded expenses of $184,000, $192,000 and $59,000, respectively to the Foundation and was reimbursed by the stockholders the sums of $0 , $124,000 and $136,000, respectively. All such contributions to the Foundation were for ordinary charitable purposes. 11. CASH FLOWS Supplemental disclosures of cash flow information:
Year Ended September 30, 1997 1996 1995 ---------- ---------- ------- Cash paid during the year for: Interest (no amounts were capitalized) $255,000 $ 249,000 $338,000
Supplemental schedule of noncash investing and financing activities: 1996 During fiscal 1996, the Company issued 160,000 shares of common stock to a consultant. The shares of common stock were valued at $470,000 and were issued in exchange for consulting services relating to financial matters, and evaluating and structuring business acquisitions to be performed through 1999. Also during fiscal 1996, the Company issued 259,000 shares of common stock, valued at an aggregate $642,000, to professional advisors and consultants for services rendered during the year. During 1996, the Company acquired three medical practices for which $3,603,000 of the purchase price consisted of amounts previously advanced to or otherwise due from the medical practices, $1,083,000 consisted of equity securities and $355,000 consisted of a note payable. In connection with the transactions, the Company recorded accounts receivable, covenants not to compete and costs in excess of net assets acquired of $1,250,000, $550,000 and $3,313,000, respectively. In February 1996, the Company's Board of Directors approved an agreement to immediately convert, $3,000,000 of the $3,193,000 convertible debt owed to the former CSI shareholders into 1,200,000 shares of the Company's common stock valued at $2.50 a share. 1997 During fiscal 1997, the company entered into an addendum to an agreement to purchase the Chicago medical practice. The addendum among other things changed the amount of consideration to be paid in shares of the company's common stock From 80% to 60% of the total purchase price. This change resulted in a reduction of additional paid in capital of $320,000. In addition the Company issued 1,131,000 shares in connection with the acquisition. During fiscal 1997, $470,000 of convertible loans were converted into 630,000 shares of common stock. In connection with the conversion the Company recorded $318,000 of additional cost. During the year the company issued 463,000 shares of common stock in satisfaction of $250,000 of certain liabilities owed to three officers of the company. During fiscal 1997, the company issued 100,000 shares of common stock valued at $125,000 as a prepayment of consulting fees. In addition the company issued 200,000 shares of common stock valued at $94,000 for legal services rendered during the year During the year the Company acquired a medical facility in Los Angeles for which 168,000 shares of common stock were issued. The F-16 stock was valued at $2.275 per share, the guaranteed per share price stipulated in the purchase agreement. During fiscal 1997, the Company issued 233,334 warrants valued at $122,000 in connection with certain loans. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist principally of cash, accounts receivables, prepaid expenses and current payables and long-term debt. The carrying value of such financial instruments approximate fair value. The estimated fair value is not necessarily indicative of the amounts the Company could realize in a current market exchange or of future earnings or cash flows. 13. SUBSEQUENT EVENTS During October and November 1997, The Company received proceeds of $300,000 in convertible loans in a Regulation S transaction. Of these loans $250,000 bears interest at 5% and $50,000 was at 8% interest. The loans will mature in October and November 1999. In connection with these loans, the Company issued warrants to acquire 125,000 shares of common stock exercisable at $.50 per share through October 2002 and 12,500 shares of common stock exercisable at $1.00 per share through November 2002. F-17 HEALTH PROFESSIONALS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E -------- --------- -------- -------- -------- Additions Balance at Charged to Charged Balance beginning costs and to other at end Description of period expenses accounts Deduction of period Year ended September 30, 1997: Allowance for doubtful accounts $1,981,000 $ 938,000 $ -- $(458,000)A $ 2,461,000 Accumulated amortization of costs in excess of net assets of businesses acquired $ 765,000 $ 347,000 -- $(976,000)B $ 136,000 Accumulated amortization of covenants not to compete $ 131,000 $ 287,000 $ -- $ -- $ 418,000 Year ended September 30, 1996: Allowance for doubtful accounts $1,702,000 $ (765,000) $1,044,000(C) $ -- $1,981,000 Accumulated amortization of costs in excess of net assets of businesses acquired $ 587,000 $ 178,000 $ -- $ -- $ 765,000 Accumulated amortization of Covenants not to compete $ -- $ 131,000 $ 131,000 Year ended September 30, 1995: Allowance for doubtful accounts $1,382,000 $ 320,000 $ -- $ -- $1,702,000 Accumulated amortization of costs in excess of net assets of businesses acquired $ 438,000 $ 149,000 $ -- $ -- $ 587,000
(A) Write-off of uncollectible receivables, net of recoveries. (B) Write-off of accumulated amortization relating to costs in excess of net assets of businesses acquired included in provision for impairment. (C) Allowances acquired upon purchases of medical practices. S-1 EX-24 2 CONSENT CONCSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in Post-Effective Amendment No. 3 to Registration Statement No. 33-37204 on Form S-3, and Post-Effective Amendment No.1 to Registration Statement 33-42675 on Form S-8 of our report dated January 10, 1998, which report raises substantial doubt about the Company's ability to continue as a going concern, relating to the consolidated financial statements and schedule of Helath Professionals, Inc. and subsidiaries apperaring in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. /s/ BDO Seiderman, LLP ----------------------- BDO Seiderman, LLP Miami Florida January 13, 1998 EX-27 3 FDS --
5 1000 12-MOS SEP-30-1997 OCT-1-1997 SEP-30-1997 0 0 5,243 2,461 63 3,047 2,872 2,027 6,620 6,448 0 0 0 145 (1,671) 6,620 7,493 7,502 0 15,883 0 0 466 (8,381) 0 (8,381) 0 0 0 (8,381) (1.47) (1.47)
-----END PRIVACY-ENHANCED MESSAGE-----