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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission file number 0-26938
HOME HEALTH CORPORATION OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2224800
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Renaissance Boulevard, 19406
Suite 300, King of Prussia (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 272-1717
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
(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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [_]
On September 30, 1997, the aggregate market value (based upon the closing price
on such date) of the voting stock held by non-affiliates of the Registrant was
approximately $111,202,585. The number of shares of the Registrant's, no par
value shares outstanding as of September 30, 1997 was 9,250,095.
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PART I
ITEM 1. BUSINESS
The Company
Home Health Corporation of America, Inc. ("HHCA" or the "Company") is a
leading provider of comprehensive home health care services and products,
delivering nursing and related patient services, respiratory therapy, infusion
therapy and durable medical equipment. The Company currently operates 61 branch
locations in Florida, Pennsylvania, Delaware, New Jersey, Maryland,
Massachusetts, New Hampshire, Texas, Illinois and Maine. The Company generated
$150.2 million in net revenues in fiscal 1997.
The Company's growth objective is to enhance its position as a leading
provider of quality, cost-effective, comprehensive home health care services and
products by: (i) offering payors access to comprehensive home health care
services and products which are provided directly by the Company; (ii) cross-
selling its services and products through Coordinated Care Centers (See
"Coordinated Care Centers") and home-based evaluations of patient needs; (iii)
developing managed care referral sources; and (iv) expanding through
acquisitions in existing and new markets. See "Strategy."
The Company seeks to provide a "one-stop-shop" of cost effective,
comprehensive home health care services and products. The Company's regional
Coordinated Care Centers serve as focal points for managed care organizations,
hospitals, physicians, discharge planners and other health care providers to
efficiently arrange for Company services and products. The Coordinated Care
Centers and home based evaluations conducted by the Company's nurses enhance the
Company's ability to cross-sell its comprehensive range of services and
products. The Company's nurses are trained to identify at the time of the
evaluation in the patient's home any additional need for Company services and
products. The Company believes that it is well-positioned to benefit from the
increasing preference of payors and referral sources, particularly managed care
organizations, to use home health care providers that both offer and coordinate
the delivery of a full range of home health care services and products. As
managed care organizations continue to increase their market share in regions in
which the Company operates, these organizations continue to become increasingly
important to the Company as referral sources. See "Payor Mix."
The Company intends to continue to expand its operations through
acquisitions in existing and new markets. Since July 1, 1995, the Company has
completed fourteen acquisitions in both existing and new markets. In entering
new markets, the Company generally acquires a home nursing company (primarily
Medicare-based) and adds additional services and products through internal
growth and subsequent acquisitions in order to offer a full range of home health
care services and products to patients, physicians and payors, including managed
care organizations. Acquisitions completed prior to fiscal 1996 enhanced the
Company's presence in Pennsylvania, Delaware, Maryland and New Jersey. During
fiscal 1996, the Company expanded its operations into the Tampa/St. Petersburg,
Florida market with four acquisitions which included nursing and related patient
services, durable medical equipment and respiratory services. During fiscal
1997, the Company entered the Texas and New England regions with five
acquisitions,
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expanding its operations into Texas, Massachusetts, New Hampshire, Rhode Island
and Maine. Additionally, during fiscal 1997, the Company expanded its ongoing
operations in Pennsylvania, New Jersey, Maryland and the Tampa/St. Petersburg,
Florida market with five acquisitions, and also expanded into Illinois as a
result of a merger transaction. The acquisitions in fiscal 1997 included nursing
and related patient services, infusion therapy, durable medical equipment and
respiratory services. Additionally, on September 26, 1997, the Company entered
into a definitive agreement for the acquisition through merger of U.S. HomeCare
Corporation ("USHO"), a provider of paraprofessional and professional home
health care services, including nursing care, personal care and other
specialized therapies, with approximately $56 million in annualized net
revenues, based upon the quarter ended June 30, 1997, and operations in New
York, Connecticut and Pennsylvania (the "USHO Acquisition"). The Company expects
to issue between 2.6 to 2.8 million shares of common stock in connection with
the USHO Acquisition, which is expected to be accounted for as a pooling of
interests. Unless and until the Company's operations become more diversified
geographically (as a result of acquisitions or internal expansion), adverse
economic, regulatory, or other developments in certain states in which the
Company has a concentration of its business operations could have a material
adverse effect on the Company's financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks." Management believes that a substantial
number of acquisition opportunities may continue to arise as Medicare regulatory
changes, managed care and other competitive pressures encourage further
consolidation in the industry. See "Industry Overview" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks."
Since fiscal 1994, the Company generated a compound annual growth rate in
net revenues of 47.6% through a combination of acquisitions and internal growth.
The Company's net revenues increased from $64.1 million in fiscal 1995 to $150.2
million in fiscal 1997 (of which 64.1% represented nursing and related patient
services net revenues), and the Company's net income increased from $758,000 in
fiscal 1995 to $4.5 million in fiscal 1997 (which excludes certain nonrecurring
items aggregating $1.7 million, net of estimated income taxes). The Company
experienced internal growth rates in net revenues of 29%, 19% and 16% for fiscal
years 1995, 1996 and 1997, respectively. The Company's internal growth in net
revenues was primarily the result of cross-selling its services and products,
expanding the range of services and products offered, increasing patient
referrals, particularly from managed care organizations, and increasing cost-
based Medicare reimbursement resulting principally from increased costs. The
percentage of the Company's net revenues from managed care organizations and
other payors increased from 36.9% in fiscal 1995 to 38.7% in fiscal 1997. See
"Payor Mix" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward Outlook and Risks."
Industry Overview
The importance of home health care is increasing as a result of significant
economic pressures within the health care industry. Total expenditures within
the health care industry, which have increased at twice the rate of inflation in
recent years, were approximately $1.1 trillion in 1995. The ongoing pressure to
contain health care costs, while maintaining high quality care, is accelerating
the growth of alternate site care, such as home health care, that reduces
hospital admissions and lengths of hospital stays. Home health care, one of the
fastest growing segments of the health care industry, had total expenditures in
1995 of approximately $36.1 billion, including
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$22.0 billion for nursing and related patient services, $5.8 billion for
infusion therapy services, $5.0 billion for respiratory therapy services, and
$1.9 billion for durable medical equipment. Approximately 17,000 providers
currently serve approximately 8 million patients per year in their homes.
The growth in home health care is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home health care often results in lower costs, which is
increasingly important under managed care. In addition, home health care has
grown rapidly as a result of (i) advances in medical technology, which have
facilitated the delivery of services in alternate sites, (ii) demographic
trends, such as an aging population, and (iii) a strong preference among
patients to receive health care in their homes.
The home health care industry has been highly fragmented and characterized
by local providers that typically do not offer a comprehensive range of cost-
effective services and products. These local providers often do not have the
capital necessary to expand their operations or the range of services and
products offered, which limits their ability to compete for managed care
contracts and other referrals and to realize efficiencies in their operations.
As managed care has become more prevalent, payors increasingly are seeking home
health care providers that offer a "one-stop-shop" of cost-effective,
comprehensive services in each market served, which further inhibits the ability
of local providers to compete effectively. As a result of these economic and
competitive pressures, the home health care industry is undergoing rapid
consolidation, a trend the Company expects to continue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks."
Strategy
The Company's growth objective is to enhance its position as a leading
provider of quality, cost-effective, comprehensive home health care services and
products by continuing to pursue the following strategy:
Offer Payors a Comprehensive Range of Services and Products. The Company
offers managed care organizations and other payors access to cost-effective,
comprehensive home health care services and products provided directly by the
Company's employees, without having to coordinate with other providers. If an
acquired business does not provide all of the services and products generally
offered by the Company, those services and products are generally introduced
over time. The Company believes that offering comprehensive home health care
services and products provides payors with an efficient "one-stop-shop" that
enhances referrals, particularly from managed care organizations.
Cross-Sell Services and Products. The Company cross-sells its services and
products through its Coordinated Care Centers and home-based patient evaluations
conducted by the Company's nurses. The Company's two Coordinated Care Centers
located in the Florida and Mid-Atlantic regions serve as focal points for
managed care organizations, hospitals, physicians, discharge planners and other
health care providers to efficiently arrange for Company services and
products.The Company anticipates establishing additional Coordinated Care
Centers in both its Texas and New England regions. The Company's nurses are
trained to identify, at the time of the nurse evaluation in the patient's home,
any additional need for Company services and products.
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However, there can be no assurance the Company will be able to continue to
successfully cross-sell its services or products either through its Coordinated
Care Centers or home-based patient evaluations conducted by the Company's
nurses, or maintain or increase its current internal growth rate resulting from
cross-selling. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward Outlook and Risks."
Develop Managed Care Referral Sources. Managed care organizations, which
are an increasingly significant source of referrals for home health care
services, accounted for 36.9% and 38.7% of the Company's net revenues in fiscal
1995 and 1997, respectively. Of the Company's 61 branch locations, 19 are
currently accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"). The remaining non-accredited branches, 10 of which were
accredited under the prior ownership, were acquired during fiscal 1996 and 1997,
and are currently under survey for accreditation by JCAHO. The Company believes
JCAHO accreditation enhances its ability to obtain contracts with certain
managed care organizations. The Company is also targeting referrals from managed
care organizations by offering disease management programs for the treatment of
asthma, diabetes, and other chronic illnesses, as well as outcome and
utilization reports. The Company expects that managed care contracts will
generate an increasing number of referrals as the penetration of managed care
accelerates in its markets. The Company believes that it has the local
relationships, the knowledge of the regional markets in which it operates, and
the cost-effective, comprehensive services and products required to compete
effectively for managed care contracts and other referrals. There can be no
assurance the Company will be able to successfully maintain existing referral
sources or develop and maintain new referral sources. The loss of any
significant referral sources or the failure to develop any new referral sources
could have a material adverse effect on the Company's financial condition or
results of operations. See "Payor Mix" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward Outlook and Risks."
Expand Through Acquisitions in Existing and New Markets. The Company seeks
to acquire home health care businesses in existing and new markets. The
Company's acquisition strategy in existing markets generally is to target
companies which broaden the Company's geographic coverage and which complement
and expand the Company's services and products. In entering new markets, the
Company's strategy is to generally acquire a home nursing company (primarily
Medicare-based) and add additional services and products through internal growth
and subsequent acquisitions in order to offer a full range of home health care
services and products to patients, physicians and payors, including managed care
organizations. The Company believes that its acquisition of companies which
provide primarily nursing services at the time of acquisition can enhance the
Company's net revenues as related services and products are introduced by the
Company into the new market through additional acquisitions. The Company
believes there are a substantial number of acquisition opportunities in target
markets due to the fragmentation of the home health care industry. See
"Industry Overview" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Outlook and Risks."
Services
The Company derives substantially all of its net revenues through the
provision of nursing and related patient services, respiratory therapy, infusion
therapy and durable medical equipment.
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The following table shows the percentage of net revenues represented by each of
the Company's services and products for the periods presented:
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------
1995 1996 1997
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<S> <C> <C> <C>
Nursing and related patient services:
Medicare................................ 45.2 % 37.4 % 41.9 %
Non-Medicare............................ 20.8 22.6 22.2
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66.0 60.0 64.1
Respiratory therapy..................... 9.6 17.8 18.1
Infusion therapy........................ 18.0 14.0 8.4
Durable medical equipment............... 6.4 8.2 9.4
---------- ---------- ----------
Total................................... 100.0 % 100.0 % 100.0 %
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</TABLE>
Nursing and Related Patient Services. The Company offers a broad range of
nursing and related patient services, including:
Registered nurses who provide a broad range of nursing care, including
pain management, respiratory therapy, infusion therapy, skilled observation
and assessment and teaching procedures.
Licensed practical nurses who perform technical nursing procedures,
such as injections and dressing changes.
Physical therapists who help patients restore strength and range of
joint motion.
Occupational therapists who help patients regain their ability to
perform the activities of daily living, such as feeding, dressing, hygiene
and social activities.
Speech therapists who retrain patients to overcome speech, swallowing,
language or hearing impediments.
Social workers who help patients and their families deal with
financial, personal and social concerns that arise from health problems.
Home health aides who provide personal care, such as bathing or
assistance with walking.
Homemakers/companions who assist with meal preparation and
housekeeping.
Respiratory Therapy Services. The Company provides respiratory therapy
services to patients who suffer from a variety of conditions, including asthma,
chronic obstructive pulmonary diseases (e.g., emphysema, bronchitis), cystic
fibrosis and neurologically related respiratory conditions. The Company offers
the following respiratory therapy services together with training by, and
assistance from, licensed personnel:
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Oxygen systems of which there are three types: (i) oxygen
concentrators, which are stationary units that extract oxygen from ordinary
air to provide a continuous flow of oxygen, (ii) liquid oxygen systems,
which are portable, thermally insulated containers of liquid oxygen and
(iii) high pressure oxygen cylinders, which are used for portability with
oxygen concentrators.
Nebulizers which deliver aerosol medication to patients to treat
asthma, chronic obstructive pulmonary diseases, cystic fibrosis and
neurologically related respiratory problems.
Home ventilators which sustain a patient's respiratory function
mechanically when a patient can no longer breathe normally.
Continuous positive airway pressure therapy which forces air through
respiratory passage-ways during sleep.
Apnea monitors which monitor and warn parents of apnea episodes in
newborn infants as a preventive measure against sudden infant death
syndrome.
Sleep studies which are used to detect sleep disorders and the
magnitude of such disorders.
Infusion Therapy Services. The Company provides the following infusion
therapy services together with training by, and assistance from, licensed
personnel:
Enteral nutrition which is the infusion of nutrients through a feeding
tube inserted directly into the functioning portion of a patient's
digestive tract. This long-term therapy is often prescribed for patients
who are unable to eat or drink normally.
Antibiotic therapy which is the infusion of antibiotic medications
into a patient's bloodstream typically to treat a variety of serious
infections and diseases.
Total parenteral nutrition which is the long-term provision of
nutrients through surgically implanted central vein catheters or through
peripherally inserted central catheters, for patients who cannot absorb
adequate nutrients enterally due to chronic gastrointestinal conditions.
Pain management which involves the infusion of certain drugs into the
bloodstream of patients suffering from acute or chronic pain.
Chemotherapy which is the infusion of drugs into a patient's
bloodstream to treat various forms of cancer.
Other therapies including new delivery technologies and medications to
address a broad range of patient conditions, such as the side effects
associated with transplants, HIV/AIDS and cancer.
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The Company currently operates pharmacies in King of Prussia and Dupont,
Pennsylvania; Largo and Pompano Beach, Florida; Chicago, Illinois and Dallas,
Texas to serve substantially all of its home infusion patients in these regions
and employs licensed pharmacists and registered nurses who have specialized
skills in home infusion therapy. The Company is in the process of building a
pharmacy in its Canton, Massachusetts location, which was acquired in fiscal
1997.
Durable Medical Equipment. The Company provides durable medical equipment
to serve the needs of its patients, including hospital beds, wheelchairs,
ambulatory aids, bathroom aids, patient lifts and rehabilitation equipment.
Organization
The Company's operations are organized into five regions, as follows: (i)
the Mid-Atlantic region, (ii) the Northeast region, (iii) the Florida region,
(iv) the New England region, and (v) the Texas region, each with an Area Vice
President. The Area Vice Presidents, who report to the Company's Chief Operating
Officer, are responsible for managing the operations of their respective
regions. Regional support staff generally are organized by either nursing and
related patient services or other services or products. Each region, except for
New England, which was acquired during fiscal 1997, has a location providing
pharmacy services, primarily for infusion therapy. The Company is in the
process of building a pharmacy in the New England region, which is expected to
be completed by December 31, 1997. The Company has a Coordinated Care Center in
the Florida and Mid-Atlantic regions to coordinate the delivery of the Company's
services and products to patients referred by managed care organizations,
hospitals, physicians, discharge planners and other health care providers, and
is in the process of opening additional centers in the Texas and New England
regions. Management functions, such as professional services oversight, finance
and accounting, sales training and support, product development, policy and
procedure development, and management information systems are centralized at the
corporate headquarters. The Company manages the integration of the operations of
acquired companies through a team of experienced operations personnel. This team
plans and coordinates the transition for each acquired company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks."
Coordinated Care Centers
The Company has Coordinated Care Centers in the Mid-Atlantic and Florida
regions and is in the process of establishing additional Coordinated Care
Centers in the Texas and New England regions, which are expected to be
established in fiscal 1998. The Northeast region is serviced by the Mid-Atlantic
region. Coordinated Care Centers serve as focal points for managed care
organizations, hospitals, physicians, discharge planners and other health care
providers to arrange for Company services from a Company home care coordinator.
The home care coordinator facilitates the delivery of the comprehensive range of
services and products to patients referred to the Company. After reviewing the
referral, the Company's home care coordinator reviews the patients' medical
history, confirms insurance coverage and arranges for physician-prescribed home
health care services and products to be delivered to the patient.
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Management Information Systems
The Company maintains several management information systems to support (i)
billing operations for the Company's services and products, including an
integrated clinical database, (ii) accounting and financial operations, and
(iii) data transfer among the Company's branch locations, regional Coordinated
Care Centers, regional offices, and corporate headquarters. Capital expenditures
for management information systems are for maintaining and upgrading existing
operations, enhancing the Company's ability to track clinical data, including
outcomes measurement data, and improving data transfer.
Sales and Marketing
The Company's marketing department provides planning and development,
market research, public and community relations support and educational program
development for all of the Company's branch locations. As of September 30, 1997,
the Company employed approximately 60 sales representatives whose primary
responsibilities are to generate referrals from managed care organizations,
hospitals, physicians, discharge planners and other health care professionals.
The Company focuses its marketing efforts and sales resources on referral
sources. The Company generates referrals from managed care organizations,
hospitals, physicians, discharge planners and other health care professionals.
The Company offers its referral sources a comprehensive range of products and
services delivered in a coordinated manner, disease management programs for the
treatment of asthma, diabetes and other chronic illnesses, continuing education
seminars, as well as outcome and utilization reports. The Company has contracts
with numerous managed care organizations, including organizations affiliated
with Humana Health Care Plans, Inc., HIP Network of Florida, Inc., Aetna/U.S.
Healthcare, Inc., Independence Blue Cross, Keystone Health Plans East and
Prudential Health Care Plan, Inc. See "Strategy" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Forward Outlook
and Risks."
New Division
The Company formed a new division in May 1997, HHCA Health Alliance, which
is responsible for the development of three new distinct business units
including (i) national managed care contract development, (ii) network
management, and (iii) contract management services. As a result of the changing
home care industry and the significant growth of managed care, the Company has
determined there is a growing need for the provision of management services and
the need to form strategic alliances with managed care organizations, hospitals,
nursing homes, physician groups and subacute facilities. This division will be
responsible for establishing new relationships outside existing regions and
strengthening current relationships with health care providers and payors.
Competition
The home health care industry is highly competitive and includes national,
regional and local providers. The Company competes with a large number of
companies in all areas in which its branches are located. The Company's
competitors include major national and regional companies, hospital-based
programs, numerous local providers and nursing agencies. Some current and
potential competitors have or may obtain significantly greater financial and
marketing resources
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than the Company. Other companies, including managed care organizations,
hospitals, physicians, discharge planners and other health care providers that
currently are not serving the home health care market, may become competitors.
As a result, the Company could encounter increased competition in the future
that may limit its ability to maintain or increase its market share or otherwise
materially adversely affect its financial condition or results of operations.
The Company believes that the principal competitive factors in the industry are
quality of care, including responsiveness of services and quality of
professional personnel; breadth of services offered; geographic coverage; cost
of services and general reputation with patients, payors and the medical
community, including physicians, hospitals and other health care providers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks."
Payor Mix
The Company derives substantially all of its net revenues from Medicare,
Medicaid and private payors, which include managed care organizations, including
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs"), traditional indemnity insurers and third party administrators
("TPAs"). While Medicare is expected to continue to represent a significant
component of net revenues, the Company anticipates net revenues from managed
care organizations will increase significantly. The following table outlines the
payor mix for the Company's net revenues for the periods presented:
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Medicare....................... 54.7 % 50.3 % 55.5 %
Medicaid....................... 8.4 11.9 5.8
Managed care and other......... 36.9 37.8 38.7
---------- ---------- ----------
Total..................... 100.0 % 100.0 % 100.0 %
========== ========== ==========
</TABLE>
Medicare and Medicaid Programs. A majority of the Company's business is,
and is expected to continue to be, reimbursed by Medicare and Medicaid. Medicare
is a federally funded health program which provides health insurance coverage
for certain disabled persons and persons age 65 or older. Medicaid is a health
insurance program, jointly funded by the federal and state governments, which
provides health insurance coverage for certain financially or medically needy
persons regardless of age. Medicaid benefits supplement Medicare benefits for
financially needy persons age 65 or older. Congress has provided, through the
Medicare program, for coverage of home health care services including part-time
or intermittent skilled nursing care; physical, occupational, or speech therapy;
medical social services under the direction of a physician; part-time or
intermittent services of a home health aide; medical supplies (but not drugs or
biologicals except for osteoporosis drugs) and durable medical equipment.
Medicare reimburses the Company for the services it renders under Parts A and B
of the Medicare program. Medicare Part A reimburses the Company on a " cost
basis" based on the lower of the Company's allowable cost, as defined by
Medicare regulations, not to exceed annual cost limits or the Company's actual
charges. Allowable cost is the actual cost directly related to providing home
health care services, plus an overhead allocation. Cost reports evidencing the
fiscal year allowable costs, visit data, charges and other financial information
are filed annually
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and are subject to audit. Medicare Part B is paid on a fixed fee-for-service
basis similar to other third-party payors, such as managed care organizations.
See "Government Regulation - Current Developments."
In the states in which the Company operates, Medicaid provides
reimbursement for certain home health care services for eligible recipients
primarily on a fee-for-service basis. Services provided by the Company to
Medicaid-eligible recipients, primarily to pediatric patients, are under a
special program established by Medicaid for specific types of patients.
Reimbursement rates for such services generally are higher than otherwise
allowed under the Medicaid programs.
Reimbursement Payments. The Company operates eleven Medicare-certified home
health agencies, of which seven receive periodic interim payment ("PIPs") from
the Medicare program for services provided. PIPs are biweekly payments, the
amounts of which are reviewed quarterly to reflect increases or decreases in the
volume of nursing services provided. Because PIPs are paid biweekly, the
arrangement has a substantially more favorable effect on the Company's cash flow
than other payment arrangements. The Medicare program is scheduled to
discontinue PIPs effective for the Company's cost reporting period beginning
July 1, 2000. This change could result in a material adverse effect on the
Company's cash flow. The Company's remaining Medicare-certified home health
agencies are currently reimbursed on a claims-processed basis. Generally the
Company is paid for these claims within two to six weeks after submission to the
intermediary at rates that reflect the Company's historical costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks."
Reimbursement from Medicare and Medicaid for certain services is subject to
audit and retroactive adjustment. Retroactive adjustments made to prior-year
cost reports could have a material adverse effect on the Company's financial
condition or results of operations. In addition, the home health care industry
is generally characterized by long collection cycles for accounts receivable due
to the complex and time consuming requirements for obtaining reimbursement from
private and governmental third party payors. The Company has recently
experienced an increase in the length of time required to collect receivables
owed by managed care organizations. In the fourth quarter of fiscal 1997, the
Company added approximately $3.0 million to its account receivable reserve in
addition to amounts historically reported as a percentage of net revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Provision for Doubtful Accounts." While management of the Company
believes that ongoing implementation of stronger controls in the distribution of
its products and services and devoting increased resources to collection
activities will allow for a reduction of the Company's provision for doubtful
accounts to historical levels, there can be no assurance that management's
efforts to obtain timely payment for the Company's products and services will be
successful. A continuation of the lengthening of the amount of time required to
collect accounts receivables from managed care organizations or other payors
could have a material adverse effect on the Company's financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Outlook and Risks."
Pricing Pressures. Medicare, Medicaid and other payors, including managed
care organizations and traditional indemnity insurers, are attempting to control
and limit increases in health care costs and, in some cases, are decreasing
reimbursement rates. While the Company's
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net revenues from managed care organizations have increased and are expected to
continue to increase, payments per visit from managed care organizations
typically have been lower than cost-based reimbursement from Medicare and
reimbursement from other payors for nursing and related patient services,
resulting in reduced profitability on such services. In addition, payors and
employer groups are exerting pricing pressure on home health care providers,
resulting in reduced profitability. Such pricing pressures could have a material
adverse effect on the Company's financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks."
Medicare Case Mix Study
The Company was selected recently to participate in a study of Medicare-
certified home health agencies (the "Medicare Case Mix Project") being
conducted by the Health Care Financing Administration of the U.S. Department of
Health and Human Services ("HCFA"), the federal agency responsible for the rules
governing Medicare and Medicaid. The Medicare Case Mix Project is a result of
HCFA's commitment to implement a prospective payment system for Medicare-
certified home health services by October 1999. See "Government Regulation -
Current Developments." The study, which commenced August 1997, will include an
eighteen month data collection period concluding on March 31, 1999, and is
expected to determine the extent to which measurable characteristics of the home
health patient, combined with other factors, can be utilized to predict resource
use in Medicare home nursing visits. The Company is among 90 Medicare-certified
home nursing agencies selected for the study, primarily as a result of the
Company's utilization data being below the national averages of comparable home
health agencies.
Recent Developments
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery and payment systems and will continue to
propose and adopt legislation effecting fundamental changes in the health care
delivery system. Changes in the applicable laws or new interpretations of
existing laws may have a dramatic effect on the definition of permissible or
impermissible activities, the relative cost of doing business, and the methods
and amounts of payments for medical care by both governmental and other payors.
Legislative changes to "balance the budget" and slow the annual rate of growth
of Medicare and Medicaid expenditures are expected to continue in the future. In
August 1997, Congress approved the Balanced Budget Act of 1997 (the "Budget
Act"). Although the Budget Act contains numerous changes in reimbursement to
health care providers and is expected to have a significant impact on the health
care industry, additional changes may occur in the future. There can be no
assurance that future legislation or regulatory changes will not have a material
adverse effect on the future operations of the Company. The level of net
revenues and profitability of the Company, like those of other health care
providers, will also be affected by the continuing efforts of other payors to
contain or reduce the costs of health care by lowering reimbursement rates,
slowing payment for services provided, increasing case management review of
services and negotiating reduced contract pricing and capitation arrangements.
See "Government Regulation- Current Developments" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward Outlook
and Risks."
12
<PAGE>
Government Regulation
The Company's business is subject to extensive federal, state and local
regulation.
Permits and Licensure. The federal government and all states regulate
various aspects of the home health care industry. Such regulations include
federal and state laws covering the dispensing of drugs and the operation of
pharmacies, as well as state laws which may impose licensure requirements on
home health care agencies and on certain types of health care practitioners
employed by the Company. Federal laws may require registration with the Drug
Enforcement Administration of the United States Department of Justice and the
satisfaction of certain requirements concerning security, record keeping,
inventory controls, prescription order forms and labeling. The Company's home
health agencies and pharmacies are currently licensed where required by the
applicable laws of the federal government and the states in which they currently
operate. In addition, certain health care practitioners employed by the Company
require state licensure and/or registration and must comply with laws and
regulations governing standards of practice. The failure to obtain, renew or
maintain any of the required regulatory approvals or licenses could materially
adversely affect the Company's financial condition or results of operations.
There can be no assurance that either the states or the federal government will
not change current interpretations of existing regulations or impose additional
regulations upon the Company's activities which might adversely affect its
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Outlook and
Risks."
Certificates of Need. Certain states require companies providing home
health care services to obtain a certificate of need issued by a state health
planning agency. Some states require such certificates of need only for
Medicare-certified home health agencies. The Company has eleven Medicare-
certified home health agencies in its existing operations. Where required by
law, the Company has obtained certificates of need from those states in which it
operates. There can be no assurance that the Company will be able to obtain any
certificates of need which may be required in the future if the Company expands
its operations or if state laws change to impose additional certificate of need
requirements. Any attempt to obtain additional certificates of need will cause
the Company to incur certain expenses.
JCAHO Accreditation. Since 1993, the Company has been accredited by JCAHO,
a nationally-recognized organization that develops standards for various health
care industry segments and monitors compliance with those standards through
voluntary surveys of participating providers. Upon acquiring companies in
existing or new regions which are non-accredited, the Company undergoes survey
for accreditation by JCAHO generally within twelve to eighteen months after
acquisition. With the advent of managed care, the need for objective quality
measurements has increased. Not all providers have chosen to undergo the
accreditation process because of its expense and time burden. Consequently, the
Company has positioned itself to procure managed care contracts in part because
of its choice to undergo rigorous review of its operations.
13
<PAGE>
Fraud and Abuse Laws. The Company is subject to federal and state laws
prohibiting direct or indirect payments for patient referrals, prohibiting
referrals to an entity in which the referring provider has a financial interest,
and regulating reimbursement procedures and practices under Medicare, Medicaid
and state programs as well as in relation to private payors. While the Company
believes that it is in material compliance with such laws, it continues to
monitor its compliance.
The anti-kickback provisions of the federal Medicare and Medicaid Patient
and Program Protection Act of 1987 (the "Anti-kickback Statute") prohibit the
offer, payment, solicitation or receipt of any remuneration in return for the
referral of items or services paid for in whole or in part under the Medicare or
Medicaid programs (or certain other state health care programs). While the
federal Anti-kickback Statute expressly prohibits transactions that have
traditionally had criminal implications, such as kickbacks, rebates or bribes
for patient referrals, its language has been construed broadly and has not been
limited to such obviously wrongful transactions. Some court decisions state
that, under certain circumstances, the statute is also violated when one purpose
(as opposed to the "primary" or a "material" purpose) of a payment is to induce
referrals. The United States Department of Health and Human Services ("HHS") has
adopted regulations creating "safe harbors" from federal criminal and civil
penalties under the Anti-kickback Statute by exempting certain types of
ownership interests and other financial arrangements that do not appear to pose
a risk of Medicare and Medicaid program abuse. Transactions covered by the Anti-
kickback Statute that do not conform to an applicable safe harbor are not
necessarily in violation of the Anti-kickback Statute, but the practice may be
subject to increased scrutiny and possible prosecution. The criminal penalty for
conviction under the Anti-kickback Statute is a fine of up to $25,000 and/or up
to five years imprisonment. Civil suspension for anti-kickback violations can
also be imposed through an administrative process, without the imposition of
civil monetary penalties. Federal enforcement officials may also attempt to use
other federal statutes to punish behavior considered fraudulent or abusive,
including the Federal False Claims Act and the Health Insurance Portability Act
of 1996. The Federal False Claims Act provides for penalties of up to $10,000
per claim plus treble damages and permits private persons to sue on behalf of
the government in qui tam actions. The Health Insurance and Portability Act of
1996, which established a whole new category of crimes known as "federal
healthcare offenses" including healthcare fraud, theft or embezzlement, false
statements, obstruction of criminal investigation of healthcare offenses and
money laundering, is expressly applicable to all payors.
In addition to the payment or receipt of illegal remuneration for the
referral or generation of business reimbursable under federal health programs,
the fraud and abuse laws cover other billing practices that are considered
fraudulent (such as presentation of duplicate claims, or claims for services not
actually rendered or for procedures that are more costly than those actually
rendered) or abusive (such as claims presented for services not medically
necessary based upon a misrepresentation of fact), subject to the same remedies
described above.
The federal government has enacted the so-called "Stark Law," which
generally prohibits physicians from referring patients for laboratory services
to entities in which they have a financial relationship. More recently, the
Stark Law was broadly expanded by "Stark II," which provides that where a
physician has a "financial relationship" with a provider of "designated health
services" (including, among other things, the provision of parenteral and
enteral nutrients, equipment and supplies, home health services, ultrasound
services, and durable medical equipment, which are
14
<PAGE>
products and services, provided by the Company), the physician will be
prohibited from making a referral to the health care provider and the provider
will be prohibited from billing for the designated health service for which
Medicare or Medicaid payment would otherwise be made. Certain exceptions are
available under Stark II, which may or may not be available to the Company for
arrangements in which the Company may be involved. Submission of a claim that a
provider knows or should know is for services for which payment is prohibited
under the Stark II could result in refunds of any amounts billed, civil money
penalties of not more than $15,000 for each such service billed, and possible
exclusion from the Medicare and Medicaid programs. Furthermore, Medicare
regulations contain similar self-referral restrictions and provide that unless
certain conditions are met, a plan of care for home health services generally
may not be certified by a physician who has a significant ownership interest in,
or a significant financial or contractual relationship with, that home health
agency. It is the Company's policy to monitor its compliance with Medicare and
Medicaid laws and regulations and Stark II, generally, and to take appropriate
actions to ensure such compliance.
Many states have adopted statutes and regulations, which vary from state to
state, prohibiting provider referrals to an entity in which the provider has a
financial interest or other financial arrangement including direct or indirect
remuneration and fee-splitting. Sanctions for violation of these state
restrictions may include loss of licensure, civil and criminal penalties and
program exclusion. Certain states, including Pennsylvania, also require health
care practitioners to disclose to patients any financial relationship with a
provider and advise patients of the availability of alternative providers.
The federal government has increased significantly the financial and human
resources allocated to enforcing the fraud and abuse laws. In May 1995, the
Clinton Administration instituted Operation Restore Trust ("ORT"), a health care
fraud and abuse initiative focusing on nursing homes, home health care agencies
and durable medical equipment companies located in the five states with the
largest Medicare populations. The states initially targeted included
California, Florida, Illinois, New York and Texas. ORT has been responsible for
millions of dollars in civil and criminal restitution, fines, recovery of
overpayments and the exclusion of a number of individuals and corporations from
the Medicare program. ORT has been expanded to all fifty states, with a
specific concentration on twelve states including Arizona, Colorado, Georgia,
Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee,
Virginia and Washington. Private insurers and various state enforcement agencies
also have increased their scrutiny of health care providers' practices and
claims, particularly in the home health and durable medical equipment areas.
While the Company believes that it is in material compliance with such laws,
there can be no assurance that the practices of the Company, if reviewed, would
be found to be in full compliance with such laws or with any future laws, as
such laws ultimately may be interpreted. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Outlook and
Risks."
Additionally, HCFA has implemented "Wedge Surveys" in at least 13 states,
including Connecticut, Florida, Tennessee, Illinois, Indiana, Massachusetts,
Minnesota, Ohio, Oklahoma, Texas, Utah, Virginia and Wyoming. In these surveys,
HCFA completes ORT-type surveys on a much smaller scale. Generally, HCFA reviews
a small, limited number of claims over a two-month period and extrapolates the
percentage which was paid in error to all claims paid for the period under
review.
15
<PAGE>
Assuming the reviewer uncovered nothing significant, the home health agency then
has the option to repay the amount determined by HCFA or undergo a broader
review of its claims. If the survey uncovers significant problems, the matter
may be referred for further review.
While the Company believes that it is in material compliance with the fraud
and abuse laws, there can be no assurance that the practices of the Company, if
reviewed, would be found to be in full compliance with such requirements, as
such requirements ultimately may be interpreted. It is the Company's policy to
monitor its compliance with such requirements and to take appropriate actions to
ensure such compliance. Although the Company does not believe it has violated
any fraud and abuse laws, there can be no assurance that future related
legislation, either health care or budgetary, related regulatory changes or
interpretations of such regulations, will not have a material adverse effect on
the future operations of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward Outlook and Risks."
Current Developments. Political, economic and regulatory influences are
subjecting the health care industry in the United States to fundamental change.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery and payment systems and will
continue to propose and adopt legislation effecting fundamental changes in the
health care delivery system. Although the recently passed Budget Act contains
numerous changes in reimbursement to health care providers and is expected to
have a significant impact on the health care industry, additional changes may
occur in the future. There can be no assurance that future legislation or
regulatory changes will not have a material adverse effect on the future
operations of the Company. The level of net revenues and profitability of the
Company, like those of other health care providers, will also be affected by the
continuing efforts of other payors to contain or reduce the costs of health care
by lowering reimbursement rates, slowing payment for services provided,
increasing case management review of services and negotiating reduced contract
pricing and capitation arrangements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward Outlook and Risks."
Currently, Medicare reimburses participating Medicare-certified home health
agencies for the reasonable costs incurred to provide covered visits to eligible
beneficiaries, subject to certain cost limits which vary according to geographic
regions of the country. The Budget Act requires HCFA to implement a prospective
payment system (the "PPS") for home health agencies by October 1, 1999, with up
to a four-year phase-in period. Prospective rates determined by HHS would
reflect a 15% reduction to the cost limits and per-patient limits in place as of
September 30, 1999. In the event the implementation deadline is not met, the
16
<PAGE>
reduction will be applied to the reimbursement system then in place. The impact
of such a change, if implemented, on the Company's results of operations cannot
be predicted with any level of certainty at this time and would depend, to a
large extent, on the reimbursement rates for home nursing established on an
interim basis and under the PPS. There can be no assurances that such
reimbursement rates would cover the costs incurred by the Company to provide
home nursing services. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Outlook and Risks."
Until PPS takes effect on October 1, 1999, the Budget Act establishes an
interim payment system (the "IPS") that provides for the lowering of
reimbursement limits for home health visits. As amended, cost limit increases
for fiscal 1995 and 1996 will be eliminated. In addition, for cost reporting
periods beginning on October 1, 1997, home health agencies cost limits will be
determined as the lesser of (i) their actual costs, (ii) cost limits based on
105% of median costs of freestanding home health agencies, or (iii) an agency-
specific per-patient cost limit, based on 98% of 1994 costs adjusted for
inflation. The new cost limits will apply to the Company for the cost reporting
period beginning July 1, 1998, except for the Company's Medicare-certified home
health agency located in Texas, for which the new cost limits will apply for the
cost reporting period beginning January 1, 1998. For cost reporting periods
beginning after October 1, 1997, the Budget Act also requires a home health
agency to submit claims for payment for home health services only on the basis
of the geographic location at which the service was furnished. HCFA has publicly
expressed concern that some home health agencies are billing for services from
administrative offices in locations with higher per-visit cost limitations than
the cost limitations in effect in the geographic location of the home health
agency furnishing the service. The Company is unable to determine the effect of
the IPS or the reimbursement impact resulting from payments for services based
upon geographic location until HCFA finalizes related regulatory guidance. Any
resultant reduction in the Company's cost limits could have a material adverse
effect on the Company's financial condition or results of operations. However,
until regulatory guidance is issued, the effect of such reductions cannot be
predicted with any level of certainty. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward Outlook and Risks."
The Budget Act provides for a 25% reduction in home oxygen reimbursement
from the 1997 fee schedule effective January 1, 1998 and a further reduction of
5% effective January 1, 1999. Compounding these reductions is a freeze on
consumer price index updates for the next five years. Approximately 5.8% of the
Company's current net revenues are derived from reimbursement of oxygen
services. This reduction in oxygen reimbursement could have a material adverse
effect on the Company's financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks."
Various other provisions of the Budget Act may have an impact on the
Company's business and results of operations. Venipuncture will no longer be a
covered skilled nursing home care service unless it is performed in connection
with other skilled nursing services. The Company is currently assessing the
potential impact of this provision, however, the effect of such reductions
cannot be predicted with any level of certainty at this time. Additionally, the
Company will be required to have surety bonds of at least $50,000 for each
Medicare-certified home health agency and durable medical equipment company.
Additionally, payments will be frozen for
17
<PAGE>
durable medical equipment, excluding orthotic and prosthetic equipment, and
payments for certain reimbursable drugs and biologicals will be reduced. The
impact of these reimbursement changes could have a material adverse effect on
the Company's financial condition or results of operations. However, this impact
cannot be predicted with any level of certainty at this time. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks."
In addition to the impact on health care reimbursement resulting from the
Budget Act, other changes have been announced in a federal policy which may
adversely impact the Company's operations. HCFA has recently required branch
offices to be redesignated as separate providers and to obtain separate
licensure and separate provider agreements. Such redesignation generally results
in adding additional costs to the Medicare home health agency necessary to
comply with the related licensure requirements. On September 15, 1997, President
Clinton related in a speech before the Service Employees International Union
that there will be a six-month waiting period on certifying new home health
agencies. It is unclear what effect this six-month waiting period would have on
redesignated branch offices or on the Company's business, generally. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Forward Outlook and Risks."
Employees
The retention of qualified employees is a high priority for the Company. As
of June 30, 1997, the Company employed approximately 3,070 full- and part-time
employees. Of these employees, approximately 2,030 are nurses and approximately
110 are employed at the Company's executive offices. In addition, the Company
maintains registries of approximately 2,290 licensed nurses, therapists, home
health aides and other home health care providers available for staffing
assignments on a temporary basis. Management believes that the Company's
employee relations are good. The Company's employees are not represented by a
labor union.
Insurance
The Company maintains a commercial general liability policy which includes
product liability coverage on the durable medical equipment that it sells or
rents with both per-occurrence and annual aggregate coverage limits of $1.0
million and $2.0 million, respectively. In addition, the Company has an umbrella
liability or "excess" policy with a single limit of $10.0 million for any one
occurrence in excess of certain minimum amounts. The umbrella policy excludes
professional liability. The Company maintains a health care agency professional
liability insurance policy with limits of $4.0 million per occurrence and an
annual aggregate limit of $6.0 million. Health care professionals with whom the
Company has contracted must provide evidence that they carry at least $1.0
million of insurance coverage, although there is no assurance that such
providers will continue to do so, or that such insurance is, or will continue to
be, adequate or available to protect the Company, or that the Company will not
have liability independent of that of such providers and/or their insurance
coverage. While the Company believes that it has adequate insurance coverage,
there can be no assurance that any such insurance will be sufficient to cover
any judgments, settlements or costs relating to any pending or future legal
proceedings (including any related judgments, settlements or costs) or that any
such insurance will be available to the Company in the future on satisfactory
terms, if at all. Any judgments, settlements or costs relating to pending or
future legal proceedings which are not
18
<PAGE>
covered by insurance could have a material adverse effect on the Company's
results of operations or financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Outlook and
Risks."
19
<PAGE>
ITEM 2. PROPERTIES
The Company leases its corporate office in King of Prussia, Pennsylvania.
The corporate office is approximately 16,000 square feet with a remaining lease
term through calendar 1999. The Company leases all of its branch locations.
Management believes that the leased properties are adequate for its present
needs and that suitable additional or replacement space will be available as
required. The Company currently has 61 branch locations in five regions
encompassing ten states, as indicated in the following chart, which also
indicates the services and products provided at each branch:
<TABLE>
<CAPTION>
Services and Products Provided
-----------------------------------------------------
Date Nursing
Opened Related Respiratory Infusion Durable
or Patient Therapy Therapy Medical
Region Branch Location Acquired Services Services Services Equipment
- -------------- --------------- ---------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic
Southeastern Pennsville, NJ 7/97 x x
PA Bristol, PA 10/96 x x x
and King of Prussia, PA 5/92 x x x x
Southern NJ (1) (2) (3)
Philadelphia, PA 10/88 x x x x
DE and Dover, DE 3/95 x x x x
Eastern MD Newark, DE 3/95 x x x
Newark, DE 3/95 x
Seaford, DE 6/95 x x x x
Berlin, MD 9/96 x
Columbia, MD 11/96 x x x
Salisbury, MD 1/97 x x x x
Northeast
Northeastern Allentown, PA 3/97 x x x x
PA Bartonsville, PA 5/97 x x x x
Dupont, PA (2) 3/93 x x x x
Hazelton, PA 6/97 x
Scranton, PA 2/95 x
Wilkes-Barre, PA(1) 12/94 x x x x
Chicago, IL(2) 11/96 x x x
Florida
Southeastern Boca Raton 3/95 x x x x
FL Ft. Pierce 9/90 x x x x
Lauderhill 8/86 x x x x
Pompano Beach(1)(2) 3/93 x x x
Vero Beach 10/93 x x x x
W. Palm Beach 8/90 x x x x
Western FL Bradenton 6/97 x
Hudson 7/97 x
Largo (3) 9/96 x
Largo (1)(2) 10/95 x x x
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Services and Products Provided
-----------------------------------------------------
Date Nursing
Opened Related Respiratory Infusion Durable
or Patient Therapy Therapy Medical
Region Branch Location Acquired Services Services Services Equipment
- -------------- --------------- ---------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
New Port Richey 6/97 x
St. Petersburg 5/96 x
Tampa 5/96 x
Tarpon Springs 5/96 x
New England Manchester, NH 3/97 x x
New London, NH 12/96 x
Salem, NH (1) 12/96 x
Arlington, MA 12/96 x
Canton, MA 3/97 x x
Chicopee, MA 3/97 x x
Danvers, MA 12/96 x
Lowell, MA 12/96 x
Malden, MA 12/96 x
Maynard, MA 12/96 x
Newton, MA 12/96 x
Portland, ME 3/97 x x
Texas Abilene 1/97 x
Abilene 9/97 x
Amarillo 1/97 x
Austin 1/97 x
Dallas (1)(2) 1/97 x x
Fort Worth 1/97 x
Fort Worth 2/97 x x
Granbury 1/97 x
Odessa 1/97 x
Odessa 2/97 x x
Plano 1/97 x
Richardson 2/97 x x
San Angelo 1/97 x
San Antonio 2/97 x x
Sherman 1/97 x
Stephenville 1/97 x
Temple 1/97 x
</TABLE>
(1) Regional Office.
(2) Regional institutional pharmacy servicing the infusion requirements of
branch locations.
(3) Regional Coordinated Care Center.
21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
insurance coverage for these actions and the ultimate outcome of these actions
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
THE COMPANY'S COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market under
the symbol "HHCA." The following table sets forth the quarterly range of high
and low sales prices of the common stock on the Nasdaq National Market for each
quarter since the common stock commenced trading on November 8, 1995:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
June 30, 1997 $11.13 $8.38
March 31, 1997 13.13 9.81
December 31, 1996 13.00 9.75
September 30, 1996 13.88 9.13
June 30, 1996 15.38 11.00
March 31, 1996 12.50 8.25
December 31, 1995 11.25 7.25
</TABLE>
As of September 30, 1997, there were 9,250,095 shares of common stock
outstanding and approximately 119 stockholders of record of common stock. The
number of stockholders of record does not include an indeterminate number of
stockholders whose shares are held by brokers in "street name." Management
believes there are in excess of 400 beneficial stockholders of the Company's
common stock.
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company's senior credit agreement does not permit the
payment of cash dividends on the Company's common stock.
ISSUANCE OF UNREGISTERED SECURITIES
During fiscal 1997, the Company completed seven acquisitions in which it
issued shares of its common stock as certain of the consideration for the
securities or assets acquired in each of the acquisitions. The shares issued in
connection with these acquisitions were not registered under the Securities Act
of 1933 (the "Act"), as amended, in reliance upon the exemption from such
registration provided by Section 4(2) of the Act. The transactions in which the
shares were issued and the aggregate number of shares issued in each transaction
are set forth in the following table:
<TABLE>
<CAPTION>
Aggregate
Acquisition Date Acquisition Shares Issued
- -------------------- -------------------------------- ------------------
<S> <C> <C>
August 5, 1996 Dailey Resources, Inc. 22,779
August 14, 1996 National Home Infusion, Inc. 38,483
October 1, 1996 Medical Express, Inc. 38,540
November 12, 1996 Home Health Systems, Inc. 455,238
December 1, 1996 R.S.D. Management, Inc. 94,118
March 27, 1997 Nahatan Drug, Inc. 380,048
April 9, 1997 PDN, Inc/Medical I.V., Inc. 84,243
</TABLE>
For additional information with respect to these acquisitions see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Acquisitions."
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of June 30,
1996 and 1997, and for each of the years in the three-year period ended June 30,
1997, have been derived from the Company's consolidated financial statements,
which were audited by Coopers & Lybrand L.L.P., independent accountants, and are
included elsewhere in this Report. The selected consolidated data set forth
below as of June 30, 1993, 1994 and 1995 and for the fiscal years ended June
30, 1993 and 1994 have been derived from the Company's consolidated financial
statements, as restated for the merger with Home Health Systems, Inc. (see Note
1, Pooling of Interests, to the Company's consolidated financial statements),
which are not included in this report. This data should be read in conjunction
with the Company's consolidated financial statements and notes thereto, and
other financial information included elsewhere in this Report.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Consolidated Statement of Income Data: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues........................... $42,177 $46,706 $64,149 $95,878 $150,232
Adjusted EBITDA (1).................... 2,971 2,020 3,799 10,102 18,761
Income before income taxes (2)......... 1,724 957 1,551 5,690 5,001
Income taxes........................... 830 646 793 2,396 2,187
Income before extraordinary item
and cumulative effect of change
in accounting principle.......... 894 311 758 3,294 2,814
Net income............................. $ 894 $ 555 $ 758 $ 2,133 $ 2,814
======== ======== ======== ======== ========
Net income available to common
and common equivalent
stockholders..................... $ 766 $ 456 $ 635 $ 1,229 $ 2,808
======== ======== ======== ======== ========
Net income per common and common
equivalent share................. $0.22 $0.13 $0.17 $0.18 $0.32
======== ======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding...................... 3,550 3,572 3,676 6,653 8,673
======== ======== ======== ======== ========
<CAPTION>
June 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital........................ $9,491 $11,201 $12,059 $20,346 $43,204
Total assets........................... 17,731 20,745 34,572 69,975 153,263
Long-term debt and capital lease
obligations, less current
portion.......................... 2,921 7,664 14,264 16,287 78,793
Redeemable stock....................... 2,931 2,991 3,555 1,744 -
Total stockholders' equity............. $2,740 $3,275 $4,938 $37,648 $50,572
</TABLE>
23
<PAGE>
(1) Adjusted EBITDA is a non-generally accepted accounting principle
measurement and is calculated by deducting patient care, general and
administrative, and provision for doubtful accounts from net revenues
(Adjusted EBITDA represents earnings before interest, income taxes,
depreciation, amortization, the cumulative effect of a change in accounting
principles of $244,000 in fiscal 1994, nonrecurring bridge financing
expenses of $913,000 in fiscal 1996, an extraordinary loss of $1.2 million
in fiscal 1996, merger and other nonrecurring costs of $3.0 million in
fiscal 1997 and a nonrecurring charge of $3.0 million in additional
reserves for doubtful accounts in fiscal 1997). Management believes
adjusted EBITDA allows the Company to evaluate its profitability before
certain cash and noncash charges which do not directly result from the
provision of services directly to patients. However, this measurement
should not be relied upon as an indicator of cash flow from operations or
an indicator of future trends and should not be used as a substitute for
net income. There can be no assurance that the Company's calculation of
adjusted EBITDA is comparable to similarly-titled items reported by other
companies. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Results of Operations."
(2) Income before income taxes in fiscal 1996 includes nonrecurring bridge
financing expenses of $913,000 incurred in connection with an acquisition
in Tampa, Florida and repaid with a portion of the net proceeds from the
Company's initial public offering. Income before income taxes in fiscal
1997 includes merger and other nonrecurring costs of $3.0 million and a
nonrecurring charge of $3.0 million in additional reserves for doubtful
accounts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is a leading provider of comprehensive home health care
services and products, delivering nursing and related patient services,
respiratory therapy, infusion therapy and durable medical equipment. Since
fiscal 1994, the Company has generated a compound annual growth rate in net
revenues of 47.6% through a combination of acquisitions and internal growth. The
Company experienced internal growth rates in net revenues of 29%, 19% and 16%
for fiscal years 1995, 1996 and 1997, respectively. The Company's internal
growth in net revenues was primarily the result of cross-selling its services
and products, expanding the range of services and products offered, increasing
patient referrals, particularly from managed care organizations, and opening new
branch locations.
Net revenues are derived from the provision of nursing and related
patient services, respiratory therapy, infusion therapy and durable medical
equipment. Patient care costs are comprised of salaries and related benefits for
patient care personnel, cost of sales for durable medical equipment and supplies
and depreciation on equipment held for rental. General and administrative
expenses are comprised of administrative and support staff salaries and
benefits, occupancy and other operating costs. The provision for doubtful
accounts consists principally of an estimate of net revenues that may prove to
be uncollectible. Amortization expense includes
24
<PAGE>
the amortization of goodwill and other intangible assets.
Net Revenues
The following table shows the percentage of net revenues represented by
each of the Company's services for the periods presented:
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Nursing and related patient services:
Medicare............................ 45.2 % 37.4 % 41.9 %
Non-Medicare........................ 20.8 22.6 22.2
---------- ---------- ----------
66.0 60.0 64.1
Respiratory therapy................... 9.6 17.8 18.1
Infusion therapy...................... 18.0 14.0 8.4
Durable medical equipment............. 6.4 8.2 9.4
---------- ---------- ----------
Total............................ 100.0 % 100.0 % 100.0 %
========== ========== ==========
</TABLE>
Since the end of fiscal 1994, service mix has fluctuated primarily as a
result of companies acquired. Nursing and related patient services decreased and
respiratory therapy services and durable medical equipment increased as a
percentage of total net revenues from fiscal 1995 to fiscal 1996, principally
due to an acquisition of a company providing respiratory therapy, durable
medical equipment and mobile diagnostic services in October 1995. During fiscal
1997, nursing and related patient services increased as a percentage of total
net revenues, principally as a result of the acquisition of two significant
Medicare nursing and related patient service companies in the Texas and New
England regions.
The following table sets forth the visits and hours for nursing and related
patient services for the periods presented:
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Medicare nursing visits............... 391,000 434,000 873,000
Non-Medicare nursing services:
Hours............................... 373,000 438,000 980,000
Visits.............................. 97,000 120,000 173,000
</TABLE>
The significant growth in Medicare visits in fiscal 1997 is a result of
the acquisition of two Medicare nursing and related patient service companies in
the Texas and New England regions, as well as other Medicare nursing
acquisitions during these periods, increased referrals, and effective cross-
selling of nursing services through the Company's other services. The
significant increase in non-Medicare nursing hours and visits from fiscal 1995
to 1997 was due to acquisitions during these periods, increased referrals, and
effective cross-selling of nursing services through the Company's other
services.
Respiratory therapy, infusion therapy and durable medical equipment net
revenues
25
<PAGE>
increased to $53.9 million in fiscal 1997 from $21.8 million in fiscal 1995, as
a result of acquisitions, increased referrals and effective cross-selling of
these services to the Company's nursing patients.
Pending Transaction
On September 26, 1997, the Company entered into a definitive agreement for
the acquisition through merger of USHO, a provider of paraprofessional and
professional home health care services, including nursing care, personal care
and other specialized therapies, with approximately $56 million in annualized
net revenues, based upon the quarter ended June 30, 1997, and operations in New
York, Connecticut and Pennsylvania. The Company expects to issue between 2.6 and
2.8 million shares of common stock in connection with the USHO Acquisition,
which is expected to be accounted for as a pooling of interests.
Acquisitions
The Company seeks to establish and increase market share through
acquisitions in existing and new markets. During fiscal 1996, the Company
expanded its operations into the Tampa/St. Petersburg, Florida market with four
acquisitions which included nursing and related patient services, durable
medical equipment and respiratory services. During fiscal 1997, the Company
entered the Texas and New England regions with five acquisitions, expanding its
operations into Texas, Massachusetts, New Hampshire, Rhode Island and Maine.
Additionally, during fiscal 1997, the Company expanded its ongoing operations in
Pennsylvania, New Jersey, Maryland and the Tampa/St.Petersburg, Florida market
with five acquisitions, and also expanded into Illinois as a result of a merger
transaction. The acquisitions in fiscal 1997 included nursing and related
patient services, infusion therapy, durable medical equipment and respiratory
services. The merger was accounted for as a pooling of interests and,
accordingly, financial data included in this Form 10-K/A, including the
Company's consolidated financial statements and notes thereto, have been
restated to combine the accounts and operations of the merged company with those
of the Company for all periods presented. The remaining acquisitions were
accounted for as purchases. Under the purchase method, the results of operations
from acquisitions are included in the Company's results of operations from the
dates of acquisition and the purchase price is allocated to net identifiable
assets, principally accounts receivable, fixed assets and inventory, with any
excess allocated to goodwill and other intangible assets.
The results of operations of the companies acquired in fiscal 1995, 1996
and 1997 are included in the Company's consolidated results of operations from
their respective acquisition dates, which occurred at various times during the
respective fiscal years. Accordingly, the operating results for any fiscal year
are not necessarily comparable with the results for any past or future fiscal
year.
Fiscal 1997 Acquisitions
Effective February 1, 1997, the Company acquired the assets of Medical Air
Supply, Inc. and Cambridge Medical Company, durable medical equipment providers
located in Texas with $6.5 million of net revenues for the twelve month period
ended December 31, 1995. Additionally, effective March 1, 1997, the Company
acquired the stock of Nahatan Drug, Inc., a
26
<PAGE>
durable medical equipment provider with operations in Massachusetts, New
Hampshire and Maine with $7.2 million of net revenues for the twelve month
period ended February 29, 1996. Also, effective May 14, 1997, the Company
acquired certain assets of Diamond Home Care, Inc., a provider of primarily
Medicare cost-reimbursed nursing and related patient services located in
Northeastern Pennsylvania with $1.3 million of net revenues for the twelve month
period ended December 31, 1996. The aggregate consideration paid and debt
assumed for these three acquisitions was $24.2 million, the cash portion of
which was funded through the Company's senior credit facility (the "Credit
Facility"). These acquisitions were accounted for as purchases.
Effective January 1, 1997, the Company acquired certain assets of LHS
Holdings, Inc. ("LHS") and certain assets of two of its subsidiaries, which
provide primarily Medicare cost-reimbursed nursing and related patient services.
The Company also purchased certain assets of two LHS affiliated companies on
April 9, 1997, which provide primarily pediatric nursing and infusion therapy
services (collectively, the purchases, including those related to the
affiliates, are hereafter referred to as the "LHS Acquisition"). The operations
of the companies acquired in the LHS Acquisition had net revenues of $16.0
million for the twelve month period ended June 30, 1996. The aggregate
preliminary consideration payable for the LHS Acquisition is $8.2 million,
including an estimated earnout amount of $1.6 million, which will be adjusted as
of December 31, 1997. Of this amount, $2.0 million and $6.2 million were paid
on January 10, 1997 and April 9, 1997, respectively, which included $6.2 million
funded through borrowings under the Credit Facility with the remainder comprised
of subordinated notes and common stock. This acquisition was accounted for as a
purchase.
Effective December 1, 1996, the Company acquired all of the outstanding
capital stock of R.S.D. Management Services, Inc., a provider of primarily
Medicare cost-reimbursed nursing and related patient services with approximately
$18.3 million of net revenues for the twelve month period ended June 30, 1996
and operations in Massachusetts and New Hampshire (the "RSD Acquisition"). The
consideration paid for the RSD Acquisition was approximately $11.1 million. The
cash portion of this consideration was funded through borrowings under the
Credit Facility. This acquisition was accounted for as a purchase.
On November 12, 1996, the Company acquired, in a merger transaction, Home
Health Systems, Inc. ("HHSI"), a provider of durable medical equipment and
infusion and respiratory therapy services with $8.2 million in net revenues for
the twelve month period ended June 30, 1996 (the "HHSI Merger") and operations
in New Jersey, Pennsylvania, Maryland and Illinois. The Company issued 455,000
shares of its Common Stock, net of shares that are treated similarly to treasury
shares for accounting purposes, in exchange for all the issued and outstanding
shares of HHSI. The HHSI Merger was accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements and notes thereto
have been restated to combine the accounts and operations of HHSI with those of
the Company for all periods presented. Merger costs of $1.6 million resulting
from this acquisition were recorded during fiscal 1997 and are reflected in the
accompanying consolidated statement of income.
On October 1, 1996, the Company acquired certain assets and assumed certain
liabilities of Medical Express, Inc., a durable medical equipment and
respiratory therapy company located in Bristol, Pennsylvania with $2.5 million
in net revenues for the twelve month period ended June 30, 1996. The aggregate
purchase price for this acquisition was $3.2 million. The cash
27
<PAGE>
portion of this consideration was paid through borrowings under the Credit
Facility. This acquisition was accounted for as a purchase.
In the first quarter of fiscal 1997, the Company acquired the assets of (i)
Dailey Resources, Ltd., a provider of durable medical equipment and respiratory
therapy services with $1.8 million in aggregate net revenues for the twelve
month period ended December 31, 1995, and operations in Scranton, Pennsylvania,
(ii) National Home Infusion, Inc., a provider of infusion therapy services with
$1.3 million in aggregate net revenues for the twelve month period ended
September 30, 1995, and operations in Sarasota, Florida, and (iii) Eastern Shore
Health Services, Inc., a provider of home nursing services with $3.6 million in
aggregate net revenues for the twelve month period ended June 30, 1996, and
operations in Berlin and Salisbury, Maryland. The aggregate consideration paid
and debt assumed for these acquisitions was $5.3 million, the cash portion of
which was funded through the Credit Facility. These acquisitions were accounted
for as purchases.
Fiscal 1996 Acquisitions
In May 1996, the Company acquired three companies in three separate
transactions with approximately $8.9 million in aggregate net revenues for the
twelve months ended June 30, 1995, for an aggregate purchase price of $5.2
million, the cash portion of which was funded through the Credit Facility.
These acquisitions were accounted for as purchases. Two of these acquisitions
provided the Company with nursing services in the Tampa/St. Petersburg, Florida
market and one provided mobile diagnostic services in the Tampa and Palm Harbor,
Florida markets.
In September 1995, the Company acquired a company in the Tampa, Florida
market (the "Tampa Acquisition"), with approximately $8.7 million in aggregate
net revenues for the twelve months ended June 30, 1995, for an aggregate
purchase price of $17.5 million, the cash portion of which was funded through
the Credit Facility. This acquisition was accounted for as a purchase. This
acquisition provided the Company with respiratory therapy, durable medical
equipment and mobile diagnostic services.
28
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues............................ 100.0 % 100.0 % 100.0 %
Operating costs and expenses:
Patient care........................ 50.5 48.2 47.8
General and administrative.......... 40.9 37.7 36.1
Provision for doubtful accounts..... 2.7 3.6 5.6
Depreciation........................ 0.9 0.9 1.0
Amortization........................ 0.4 1.1 1.6
Interest, net....................... 2.2 1.6 2.6
Merger and other nonrecurring....... - 1.0 2.0
----- ----- -----
Income from operations.................. 2.4 5.9 3.3
Provision for income taxes.......... 1.2 2.5 1.4
----- ----- -----
Income before extraordinary item........ 1.2 3.4 1.9
Extraordinary item.................. - 1.2 -
----- ----- -----
Net income.............................. 1.2 % 2.2 % 1.9 %
===== ===== =====
</TABLE>
Fiscal 1997 Compared with Fiscal 1996
Net revenues. In fiscal 1997, net revenues increased to $150.2 million.
This represented an increase of $54.4 million, or 57%, over fiscal 1996. Of
this increase, $41.8 million, or 77%, was attributable to acquisitions completed
since the beginning of the fourth quarter of fiscal 1996. The balance of the
increase was due to internal growth of 16%, resulting from volume growth at
existing branch locations. Net revenues from nursing and related patient
services increased from $57.5 million in fiscal 1996 to $96.3 million in fiscal
1997, a 67% increase. Total Medicare nursing visits increased 101% to 873,000
visits in fiscal 1997. Total non-Medicare nursing hourly and visit volume
increased 124% and 44%, respectively, to 980,000 hours and 173,000 visits,
respectively, in fiscal 1997. Acquisitions, effective cross-selling of other
services and increased referrals contributed to these volume increases.
Respiratory therapy, infusion therapy and durable medical equipment net revenues
increased $15.6 million, or 41%, to $53.9 million for fiscal 1997 from $38.3
million in fiscal 1996 as a result of acquisitions, increased referrals and
effective cross-selling of these services and products to the Company's nursing
patients. Managed care organizations and other payors accounted for 37.8% and
38.7% of the Company's net revenues in fiscal 1996 and 1997, respectively. The
Company expects revenues from managed care organizations to continue to
increase. See "Forward Outlook and Risks."
Patient care. In fiscal 1997, patient care costs increased to $71.8
million. This represented an increase of $25.6 million, or 55%, over fiscal
1996. This increase was principally related to the increases in net revenues.
Patient care costs decreased slightly as a percentage of net revenues from 48.2%
to 47.8% due to the increase in the portion of net revenues from higher-
29
<PAGE>
margin non-nursing services, principally due to acquisitions, and an increase in
the percentage of corporate and regional overhead allocated to the Medicare-
certified home health agencies.
General and administrative. In fiscal 1997, general and administrative
expenses increased to $54.3 million. This represented an increase of $18.2
million, or 50%, over fiscal 1996. This increase was principally related to
increases in net revenues. General and administrative expenses decreased as a
percentage of net revenues from 37.7% to 36.1% due to the Company's
implementation of cost containment initiatives and because certain general and
administrative expenses did not increase proportionately to increases in net
revenues.
Provision for doubtful accounts. In fiscal 1997, the provision for doubtful
accounts increased to $8.4 million. This represented an increase of $5.0
million, or 143%, over fiscal 1996. The provision for doubtful accounts
increased from 3.6% to 5.6% as a percentage of net revenues in fiscal 1997. For
financial reporting purposes, the Company historically has fully reserved
accounts receivable exceeding an established number of days outstanding.
During the fourth quarter of fiscal 1997, the provision for doubtful accounts
was $4.7 million, or 9.7% of net revenues. Of this amount, approximately $3.0
million was in addition to amounts historically reported as a percentage of net
revenues. The $3.0 million of additional accounts receivable reserves was
recorded to (i) comply with the Company's reserve policy and (ii) reflect
management's estimate of potential further exposure. The additional reserve
primarily resulted from a slow down in payments during the fourth quarter from a
number of the Company's larger managed care payors and increasing attempts by
them to deny payments for appropriate products and services furnished to their
subscribers. Management believes that stronger controls, implementation of which
is nearing completion, in the distribution of products and services and
increased resources devoted to collection activities will reduce the provision
for doubtful accounts as a percentage of net revenues to levels historically
provided. Excluding the $3.0 million additional provision, the provision for
doubtful accounts remained consistent as a percentage of net revenues at 3.6% in
fiscal 1997. The Company expects revenues from managed care organizations to
continue to increase. See "Forward Outlook and Risks."
Depreciation. In fiscal 1997, depreciation expense increased to $1.5
million. This represented an increase of $625,000, or 70%, over fiscal 1996.
Of this increase, $581,000 was attributable to fixed assets acquired in
connection with acquisitions with the remainder resulting from capital
expenditures related to vehicles, management information systems and equipment
in support of the Company's internal growth.
Amortization. In fiscal 1997, amortization increased to $2.3 million.
This represented an increase of $1.3 million, or 130%, over fiscal 1996, which
was entirely attributable to amortization of goodwill arising from the
acquisitions in fiscal 1997 and a full year of amortization of goodwill relating
to the acquisitions in fiscal 1996.
Interest, net. In fiscal 1997, interest, net, increased to $3.8 million.
This represented an increase of $2.3 million, or 144%, over fiscal 1996. This
increase was comprised principally of increases of $1.8 million from
indebtedness under the Company's acquisition facility during fiscal 1997 and
$449,000 from increased indebtedness under the Company's working capital credit
facility to fund growth at the existing branch locations.
Merger and other nonrecurring. The Company incurred certain merger and
nonrecurring
30
<PAGE>
expenses during fiscal 1997. During the three months ended December 31, 1996,
$1.6 million was recorded as a result of the HHSI Merger. Such costs were
comprised of transaction fees, legal and accounting costs and other nonrecurring
costs associated with the merger. Additionally, during the three months ended
March 31, 1997, the Company wrote-off deferred costs aggregating $300,000
related to an offering to sell shares of the Company's common stock through a
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on November 1, 1996 and withdrawn on December 30, 1996. Additionally,
during the three months ended June 30, 1997, the Company recorded a $1.1 million
nonrecurring charge reflecting the Company's contractual obligations under
employment agreements to make payments to certain former owners of acquired
businesses, who are no longer involved in operations of the Company.
Nonrecurring expenses of $913,000 in fiscal 1996 were comprised of (i)
$605,000 pertaining to the write-off of deferred financing fees and the
unamortized discount on a bridge financing note payable, (ii) interest expense
of $186,000 and (iii) other costs of $122,000. These expenses were recorded
during the second quarter of fiscal 1996 in connection with the Tampa
Acquisition and the Company's initial public offering (the "Offering").
Provision for income taxes. The Company's effective tax rate increased
slightly to 43.7% of pretax income for the fiscal year ended June 30, 1997 from
42.1% in the fiscal year ended June 30, 1996 due principally to an increase in
non-deductible permanent items, principally goodwill, from 3% to 7% of pretax
income, net of decreases in state income taxes to 3% from 5% of pretax income.
Extraordinary item, net. An extraordinary charge of $1.2 million relating
to the extinguishment of indebtedness with a portion of the Offering net
proceeds was recorded in the second quarter of fiscal 1996, net of an estimated
income tax benefit of $660,000. The charge consisted primarily of a write-off
of deferred financing costs of $294,000 and a write-off of the remaining
unamortized discounts of $1.5 million on the senior subordinated indebtedness
incurred in connection with an acquisition in fiscal 1995.
Fiscal 1996 Compared with Fiscal 1995
Net revenues. In fiscal 1996, net revenues increased to $95.9 million.
This represented an increase of $31.7 million, or 49%, over fiscal 1995. Of
this increase, $22 million, or 69%, was attributable to the acquisitions in
fiscal 1996 and a full year of operations from the acquisitions in fiscal 1995
with the balance of the increase due to internal growth of 19%, resulting from
volume growth at existing branch locations. Net revenues from nursing and
related patient services increased from $42.3 million in fiscal 1995 to $57.5
million in fiscal 1996, a 35.9% increase. Total Medicare nursing visits
increased 11% to 434,000 visits in fiscal 1996. Total non-Medicare nursing
hourly and visit volume increased 17% and 24%, respectively, to 438,000 hours
and 120,000 visits, respectively in fiscal 1996. Acquisitions, effective
cross-selling of other services and increased referrals contributed to these
volume increases. Respiratory therapy, infusion therapy and durable medical
equipment net revenues increased $16.5 million, or 75%, to $38.4 million from
$21.8 million in fiscal 1995 as a result of effective cross-selling of these
services to the Company's nursing patients, increased referrals and
acquisitions. Managed care organizations and other payors accounted for 36.9%
and 37.8% of the Company's net revenues in fiscal 1995 and
31
<PAGE>
1996, respectively. The Company expects revenues from managed care organizations
to continue to increase. See "Forward Outlook and Risks."
Patient care. In fiscal 1996, patient care costs increased to $46.2
million. This represented an increase of $13.8 million, or 43%, over fiscal
1995. This increase was principally related to the increases in net revenues.
Patient care costs decreased as a percentage of net revenues from 50.5% to 48.2%
due to the increase in the portion of net revenues from higher-margin, non-
nursing services, principally due to acquisitions, and improved management of
nursing labor costs.
General and administrative. In fiscal 1996, general and administrative
expenses increased to $36.1 million. This represented an increase of $9.9
million, or 38%, over fiscal 1995. This increase was principally related to the
increases in net revenues. General and administrative expenses decreased as a
percentage of net revenues from 40.9% to 37.7% as certain general and
administrative costs did not increase proportionately to increases in net
revenues.
Provision for doubtful accounts. In fiscal 1996, the provision for doubtful
accounts increased to $3.5 million. This represented an increase of $1.7
million, or 101%, over fiscal 1995. This increase was due principally to the
increases in net revenues. The provision for doubtful accounts increased as a
percentage of net revenues from 2.7% to 3.6% primarily due to an increase in net
revenues from managed care organizations whose approval process for
authorization and payment for services is more complex than other payors
resulting in more coverage and payment denials. In addition, managed care
organizations generally require patients to be responsible for copayments which
are difficult to collect. The Company expects revenues from managed care
organizations to continue to increase. See "Forward Outlook and Risks."
Depreciation. In fiscal 1996, depreciation expense increased to $899,000.
This represented an increase of $346,000, or 63%, over fiscal 1995. Of this
increase, $278,000 was attributable to fixed assets acquired in connection with
acquisitions with the remainder resulting from capital expenditures related to
vehicles, management information systems and equipment in support of the
Company's internal growth.
Amortization. In fiscal 1996, amortization increased to $1.0 million. This
represented an increase of $777,000, over fiscal 1995, which was entirely
attributable to amortization of goodwill arising from the acquisitions in fiscal
1996 and a full year of amortization of goodwill relating to the acquisitions in
fiscal 1995.
Interest, net. In fiscal 1996, interest, net, increased to $1.6 million.
This represented an increase of $128,000, or 9%, over fiscal 1995. This
increase was comprised principally of increases of $251,000 from indebtedness
incurred in connection with acquisitions and $185,000 from increased
indebtedness under the Company's revolving credit facility to fund growth at the
existing branch locations. This increase was offset by a decrease of $447,000
due to the repayment of approximately $10 million in outstanding indebtedness
during November 1995 with a portion of the net proceeds from the Offering.
Merger and other nonrecurring. Nonrecurring expenses of $913,000 in fiscal
1996 were comprised of (i) $605,000 pertaining to the write-off of deferred
financing fees and the unamortized discount on a bridge financing note payable,
(ii) interest expense of $186,000 and (iii) other costs of
32
<PAGE>
$122,000. These expenses were recorded during the second quarter of fiscal 1996
in connection with the Tampa Acquisition and the Offering.
Provision for income taxes. The Company's effective tax rate decreased to
42.1% of pretax income from 51.1%, principally as a result of reduced pretax
income as a percentage of total pretax income relating to states with higher
income tax rates and the utilization of net operating losses in fiscal 1996 by a
subsidiary of the Company.
Extraordinary item, net. An extraordinary charge of $1.2 million relating
to the extinguishment of indebtedness with a portion of the Offering net
proceeds was recorded in the second quarter of fiscal 1996, net of an estimated
income tax benefit of $660,000. The charge consisted primarily of a write-off
of deferred financing costs of $294,000 and a write-off of the remaining
unamortized discounts of $1.5 million on the senior subordinated indebtedness
incurred in connection with an acquisition in fiscal 1995.
Quarterly Results
The following table presents selected unaudited quarterly operating results
for the Company for each of the four quarters in fiscal 1996 and 1997. The
Company believes that the following information includes all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation.
Historically, the Company has experienced and expects to continue to experience
lower same-store net revenues during the first fiscal quarter which ends on
September 30 as compared with that of the immediately preceding quarter due to
fewer referrals during the summer months. However, the results for the first
quarter of fiscal 1997 do not reflect this seasonality because of the growth in
volume following the acquisitions in fiscal 1996, in October 1995 and May 1996.
Net income for the quarter ended September 30, 1996 did not increase
proportionately to net revenues as a result of duplicative costs relating to the
acquisitions which were not yet eliminated. The Company anticipates that the
effects of seasonality will continue for the foreseeable future. Although the
Company's net revenues tend to be affected by seasonality, quarterly revenues
and profitability may also be affected by other factors, including internal
growth. Results of operations for any period are not necessarily indicative of
results of operations for the full fiscal year or predictive of future periods.
See "Forward Outlook and Risks."
<TABLE>
<CAPTION>
Three Months Ended
Sept. 30, Dec. 31, Mar. 31, June 30, Sept.30, Dec. 31, Mar. 31, June 30,
1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of income data:
Net revenues............... $20,840 $23,304 $24,820 $26,913 $27,118 $32,967 $42,267 $47,880
Income (loss) before income
taxes and extraordinary
item..................... 719 625 1,983 2,362 2,217 1,121 2,527 (864)
Income (loss) before
extraordinary item....... 403 341 1,162 1,388 1,354 689 1,567 (796)
Net income (loss).......... $ 403 $ (820) $ 1,162 $ 1,388 $ 1,354 $ 689 $ 1,567 $ (796)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
common and common
equivalent share (1)..... $ 0.10 $ (0.27) $ 0.14 $ 0.16 $ 0.16 $ 0.08 $ 0.18 $ (0.09)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Net income per common and common equivalent share for the quarter ended
December 31,
33
<PAGE>
1995 is after an extraordinary item of $1.2 million. See "Results of
Operations - Extraordinary Item." Net loss per common and common
equivalent share before the extraordinary item was $0.08.
During the quarter ended December 31, 1996, the Company recorded $1.6
million in merger costs as a result of the HHSI Merger. See "Results of
Operations - Merger and Other Nonrecurring."
During the quarter ended March 31, 1997, the Company wrote-off deferred
costs aggregating $300,000 related to an offering to sell shares of the
Company's common stock through a Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on November 1, 1996 and withdrawn on
December 30, 1996. See "Results of Operations - Merger and Other Nonrecurring."
During the quarter ended June 30, 1997, the Company recorded a $1.1 million
nonrecurring charge reflecting the Company's contractual obligations under
employment agreements to make payments to certain former owners of acquired
businesses, who are no longer involved in operations of the Company. See
"Results of Operations - Merger and Other Nonrecurring." Additionally, during
this quarter, the Company recorded a reserve for doubtful accounts, in addition
to amounts historically recorded as a percentage of net revenues, of $3.0
million. See "Results of Operations - Provision for Doubtful Accounts."
Liquidity and Capital Resources
Consistent with its growth strategy, the Company has significantly expanded
its operations over the past three years through a combination of internal
expansion and acquisitions. Historically, this growth has been principally
financed through borrowings under the Credit Facility, installment notes and
stock issued to sellers in connection with acquisitions and through the
Offering.
In November 1995, the Company sold 3.7 million shares of Common Stock in
the Offering raising net proceeds of $24.5 million which were used principally
to repay the bridge financing incurred in connection with the Tampa Acquisition,
certain senior subordinated indebtedness, a portion of the debt incurred under
the Credit Facility and to redeem preferred stock issued in connection with the
Tampa Acquisition and other preferred stock issued in 1992. Additionally, the
Company received proceeds aggregating $300,000 and $31,000 from the exercise of
options and warrants during fiscal 1996 and 1997, respectively.
Working capital increased to $43.2 million at June 30, 1997 from $20.3
million at June 30, 1996, an increase of $22.9 million. Approximately $9.7
million of this increase was due to the acquisitions in fiscal 1997. The
remainder primarily resulted from a $14.2 million increase in accounts
receivable, net of receivables recorded by the companies acquired in fiscal
1997, and a $2.7 million reduction in current liabilities at branch locations
existing prior to the acquisitions in fiscal 1997. The growth in net revenues
during fiscal 1997 was accompanied by an increase in
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accounts receivable. Accounts receivable increased by $28.4 million, or 101%, to
$56.4 million at the end of fiscal 1997 from $28.0 million at the end of fiscal
1996. This increase was principally due to acquisitions and internal growth.
Days net revenues outstanding decreased slightly from 93 to 92 in fiscal 1997.
Cash provided by operating activities was $532,000 for fiscal 1995. Cash used in
operating activities was $2.6 million and $14.3 million for fiscal 1996 and
1997, respectively, and was primarily attributable to the increases in accounts
receivable. The Company expects to continue to acquire home health care
businesses. Cash flow from operations from acquisitions may be adversely
affected if delays are encountered in obtaining required Medicare provider
numbers or licenses or in meeting other payor requirements. In addition, in
acquisitions in which accounts receivable are not purchased, the Company is
required to fund the working capital requirements of the acquired business until
cash collections become adequate for such purpose. See "The Company - Government
Regulations."
Cash expenditures for acquisitions were approximately $5.0 million, $15.7
million and $37.5 million for fiscal 1995, 1996 and 1997, respectively.
Goodwill was $68.2 million at June 30, 1997. The Company recorded goodwill of
$43.9 million with respect to ten acquisitions completed in fiscal 1997.
Annualized amortization of goodwill resulting from these acquisitions is
expected to increase to approximately $3.3 million in fiscal 1998. It is
anticipated that expenditures for acquisitions will increase in fiscal 1998 as
the Company continues to implement its growth strategy. Expenditures for
purchases of capital equipment were $1.7 million, $3.3 million and $3.8 million
for fiscal 1995, 1996 and 1997, respectively, and are expected to increase by
$7.9 million in fiscal 1998 as the Company expands its operations, which
includes continuing investments in equipment held for rental and in management
information systems. The Company typically funds its capital expenditures
through a master lease arrangement.
On March 13, 1997, the Company amended the Credit Facility to increase
available borrowings from $50 to $100 million, to be used for acquisitions,
working capital and other general corporate purposes. Additionally, on September
26, 1997, certain financial covenants under the Credit Facility were amended. On
September 30, 1997, the Company had $27.9 million of unused commitment for
working capital and acquisitions under the Credit Facility.
On September 19, 1997, the Company obtained a commitment from its existing
syndicate of lenders to amend the Credit Facility to increase available
borrowings from $100 million to $125 million, to be used in part to refinance
approximately $14.0 million of debt to be assumed in connection with the USHO
Acquisition and approximately $3.0 million of expenses to be incurred in
connection with the acquisition. The amendment will require that $40 million of
existing indebtedness under the Credit Facility convert to a six-year amortizing
term loan with increasing amortization beginning in the fourth quarter of fiscal
1998. The amendment will also (i) require that 50% of excess cash flow, as
defined, be used to reduce the term loan, (ii) amend certain financial covenants
and (iii) increase the maximum interest rate on borrowings under the Credit
Facility by 12.5 basis points.
Management anticipates the Company's available lines of credit and cash
flow generated from operations will be adequate to enable the Company to fund
its operations, capital expenditures and anticipated internal growth for at
least the next twelve months. Despite the amount of unused commitment under the
Credit Facility, there is no assurance the Company can continue to acquire
businesses consistent with the size and number of acquisitions completed
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through May of fiscal 1997, due to, among other factors, limitations on access
to additional funds which may be imposed by the Credit Facility financial
covenants.
Impact of Inflation
A substantial portion of the Company's net revenues is subject to
reimbursement rates which are regulated by the federal and state governments or
through contractual arrangements and do not automatically adjust for inflation.
These reimbursement rates are adjusted periodically based upon certain factors,
including legislation and executive and congressional budget reduction and
control processes, inflation and costs incurred in rendering the services, but
in the past have had little relationship to the actual cost of doing business.
Additionally, the Company continues to experience pricing pressure from managed
care and other payors. See "Forward Outlook and Risks." As a result, to the
extent that inflation occurs in the future, the Company will unlikely be able to
pass on all of the increased costs associated with providing home health
services to customers insured by government, managed care or other payors.
New Accounting Pronouncements
See the Company's consolidated financial statements and notes thereto for
information relating to the impact on the Company of new accounting
pronouncements.
Forward Outlook and Risks
The Company provides the following information regarding important factors
which, among others, could cause future results to differ materially from (i)
historical trends, or (ii) any forward-looking statements, expectations and
assumptions expressed or implied herein.
Medicare Reimbursement. Currently, Medicare reimburses participating
Medicare-certified home health agencies for the reasonable costs incurred to
provide covered visits to eligible beneficiaries, subject to certain cost limits
which vary according to geographic regions of the country.
The Company operates eleven Medicare-certified home health agencies, of
which seven receive PIPs from the Medicare program for services provided. PIPs
are biweekly payments, the amounts of which are reviewed quarterly to reflect
increases or decreases in the volume of nursing services provided. Because PIPs
are paid biweekly, the arrangement has a substantially more favorable effect on
the Company's cash flow than other payment arrangements. The Medicare program is
scheduled to discontinue PIPs effective for the Company's cost reporting period
beginning July 1, 2000. This change could result in a material adverse effect on
the Company's cash flow.
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The Budget Act requires HCFA to implement the PPS for home health agencies
by October 1, 1999, with up to a four-year phase-in period. Prospective rates
determined by HHS would reflect a 15% reduction to the cost limits and per-
patient limits in place as of September 30, 1999. In the event the
implementation deadline is not met, the reduction will be applied to the
reimbursement system then in place. The impact of such a change, if implemented,
on the Company's results of operations cannot be predicted with any level of
certainty at this time and would depend, to a large extent, on the reimbursement
rates for home nursing established on an interim basis and under the PPS. There
can be no assurances that such reimbursement rates would cover the costs
incurred by the Company to provide home nursing services.
Until PPS takes effect on October 1, 1999, the Budget Act establishes the
IPS that provides for the lowering of reimbursement limits for home health
visits. As amended, cost limit increases for fiscal 1995 and 1996 will be
eliminated. In addition, for cost reporting periods beginning on October 1,
1997, home health agencies cost limits will be determined as the lesser of (i)
their actual costs, (ii) cost limits based on 105% of median costs of
freestanding home health agencies, or (iii) an agency-specific per-patient cost
limit, based on 98% of 1994 costs adjusted for inflation. The new cost limits
will apply to the Company for the cost reporting period beginning July 1, 1998,
except for the Company's Medicare-certified home health agency located in Texas,
for which the new cost limits will apply for the cost reporting period beginning
January 1, 1998. For cost reporting periods beginning after October 1, 1997, the
Budget Act requires a home health agency to submit claims for payment for home
health services only on the basis of the geographic location at which the
service was furnished. HCFA has publicly expressed concern that some home health
agencies are billing for services from administrative offices in locations with
higher per-visit cost limitations than the cost limitations in effect in the
geographic location of the home health agency furnishing the service. The
Company is unable to determine the effect of the IPS or the reimbursement impact
resulting from payments for services based upon geographic location until HCFA
finalizes related regulatory guidance. Any resultant reduction in the Company's
cost limits could have a material adverse effect on the Company's financial
condition or results of operations. However, until regulatory guidance is
issued, the effect of such reductions cannot be predicted with any level of
certainty.
The Budget Act provides for a 25% reduction in home oxygen reimbursement
from the 1997 fee schedule effective January 1, 1998 and a further reduction of
5% effective January 1, 1999. Compounding these reductions is a freeze on
consumer price index updates for the next five years. Approximately 5.8% of the
Company's current net revenues are derived from reimbursement of oxygen
services. This reduction in oxygen reimbursement could have a material adverse
effect on the Company's financial condition or results of operations.
Various other provisions of the Budget Act may have an impact on the
Company's business and results of operations. Venipuncture will no longer be a
covered skilled nursing home care service unless it is performed in connection
with other skilled nursing services. The Company is currently assessing the
potential impact of this provision, however, the effect of such reductions
cannot be predicted with any level of certainty at this time. Additionally, the
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Company will be required to have surety bonds of at least $50,000 for each
Medicare-certified nursing agency and medical equipment company. Additionally,
payments will be frozen for durable medical equipment, excluding orthotic and
prosthetic equipment, and payments for certain reimbursable drugs and
biologicals will be reduced. The impact of these reimbursement changes could
have a material adverse effect on the Company's financial condition or results
of operations. However, this impact cannot be predicted with any level of
certainty at this time.
In addition to the impact on health care reimbursement resulting from the
Budget Act, other changes have been announced in a federal policy which may
adversely impact the Company's operations. HCFA has recently required branch
offices to be redesignated as separate providers and to obtain separate
licensure and separate provider agreements. Such redesignation generally results
in additional costs to the Medicare home health agency which are necessary to
comply with the related licensure requirements. On September 15, 1997, President
Clinton related in a speech before the Service Employees International Union
that there will be a six-month waiting period on certifying new home health
agencies. It is unclear what effect this six-month waiting period would have on
redesignated branch offices or on the Company's business, generally.
Pricing Pressures. Medicare, Medicaid and other payors, including managed
care organizations and traditional indemnity insurers, are attempting to control
and limit increases in health care costs and, in some cases, are decreasing
reimbursement rates. While the Company's net revenues from managed care
organizations have increased and are expected to continue to increase, payments
per visit from managed care organizations typically have been lower than cost-
based reimbursement from Medicare and reimbursement from other payors for
nursing and related patient services, resulting in reduced profitability on such
services. In addition, payors and employer groups are exerting pricing pressure
on home health care providers, resulting in reduced profitability. Such pricing
pressures could have a material adverse effect on the Company's financial
condition or results of operations.
Reimbursement Payments. The Company is paid for its services by Medicare,
Medicaid, managed care organizations and other third-party payors. Reimbursement
from Medicare and Medicaid for certain services is subject to audit and
retroactive adjustment. Retroactive adjustments made to prior-year cost reports
could have a material adverse effect on the Company's financial condition or
results of operations. In addition, the home health care industry is generally
characterized by long collection cycles for accounts receivable due to the
complex and time consuming requirements for obtaining reimbursement from private
and governmental third party payors. The Company has recently experienced an
increase in the length of time required to collect receivables owed by managed
care organizations. In the fourth quarter of fiscal 1997, the Company added
approximately $3.0 million to its account receivable reserve in addition to
amounts historically reported as a percentage of net revenues. See "Results of
Operations - Provision For Doubtful Accounts." While management of the Company
believes that ongoing implementation of stronger controls in the distribution of
products and services and devoting increased resources to collection activities
will allow for a reduction of the Company's provision for doubtful accounts to
historical levels, there can be no assurance that management's efforts to obtain
timely payment for the Company's products and services will be successful. A
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continuation of the lengthening of the amount of time required to collect
accounts receivables from managed care organizations could have a material
adverse effect on the Company's financial condition or results of operations.
Regulatory Change. Political, economic and regulatory influences are
subjecting the health care industry in the United States to fundamental change.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery and payment systems and will
continue to propose and adopt legislation effecting fundamental changes in the
health care delivery system. Legislative debate regarding changes to the health
care delivery system and payment systems is expected to continue in the future.
Although the recently passed Budget Act contains numerous changes in
reimbursement to health care providers and is expected to have a significant
impact on the health care industry, additional changes may occur in the future.
The level of net revenues and profitability of the Company, like those of other
health care providers, will also be affected by the continuing efforts of other
payors to contain or reduce the costs of health care by lowering reimbursement
rates, slowing payment for services provided, increasing case management review
of services and negotiating reduced contract pricing and capitation
arrangements.
Potential Risks Associated with Acquisitions. The Company seeks to
establish and increase market share through acquisitions in existing and new
markets. The Company evaluates potential acquisition candidates that would
complement or expand its current services. In attempting to make acquisitions,
the Company competes with other providers, some of which have greater financial
resources than the Company. In addition, since the consideration for acquired
businesses may involve cash, notes or the issuance of shares of common stock,
options or warrants, existing stockholders may experience dilution in the value
of their shares of common stock in connection with such acquisitions. There can
be no assurance that the Company will be able to successfully negotiate, finance
or integrate any such acquisitions. Acquisitions involve numerous short- and
long-term risks, including loss of referral sources, diversion of management's
attention, failure to retain key personnel, loss of net revenues of the acquired
companies, inability to integrate acquisitions (particularly management
information systems) without material disruptions and unexpected expenses, the
possibility of the acquired businesses becoming subject to regulatory sanctions,
potential undisclosed liabilities and the continuing value of acquired
intangible assets. Management currently believes that acquisition candidates
meeting the criteria of its acquisition strategy will continue to be identified
in fiscal 1998 and certain of these candidates will be acquired by the Company.
On September 26, 1997, the Company entered into a definitive agreement for the
acquisition through merger of USHO, a provider of paraprofessional and
professional home health care services, including nursing care, personal care
and other specialized therapies. The USHO Acquisition is expected to be
accounted for as a pooling of interests and is expected to close by December 31,
1997. However, there can be no assurance that any given acquisition will be
consummated, or if consummated, will not materially adversly affect the
Company's financial condition or results of operations. Additionally, because of
matters discussed herein that may be beyond the control of the Company and the
emerging trend of other health care providers, such as long-term care providers,
seeking to acquire home health care businesses, there can be no assurance that
suitable acquisitions will continue to be identified or that acquisitions can be
consummated on acceptable terms.
USHO Acquisition. The USHO Acquisition involves the integration of two
companies that have previously operated independently. There can be no assurance
that the Company will not experience difficulties in integrating the operations
of the Company and USHO or that any benefits expected to result from such
integration will be realized. The New York State Department of Health requires
that its approval be obtained prior to a change of ownership such as the change
in ownership of USHO which will occur upon consummation of the USHO Acquisition.
While the Company has submitted an application to obtain the required licenses
and approvals to acquire USHO, the Company is required to consummate the USHO
Acquisition regardless of whether it has obtained such licenses and approvals
prior to closing if all other conditions to the Company's obligations to
consummate the USHO Acquisition have been satisfied as of such time. Although
the Company has no reason to believe that its application for the required
licenses and approvals from the New York regulatory authorities will be denied,
the failure of the Company to obtain such licenses and approvals could
materially adversely affect the Company's financial condition or results of
operations. Additionally, there can be no assurance that the USHO Acquisition
will ultimately be consummated. Any delays or unexpected costs incurred in
connection with consummation of the USHO Acquisition or integration of the two
companies could have a material adverse effect on the Company's financial
condition or results of operations.
Potential Risks Associated with Geographic Expansion. In pursuing its
growth strategy,
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the Company intends to expand its operations into new geographic markets. For
example, upon consummation of the USHO Acquisition, the Company will acquire
operations in New York City, upstate New York and Connecticut. When entering new
geographic markets, the Company generally seeks to increase its net revenues by
establishing relationships with new referral sources or increasing business with
existing referral sources and will be reliant to a large extent on local
management, who have important relationships with local referral sources. In
addition, the Company will be required to comply with laws and regulations of
states that differ from those in which the Company currently operates, and may
face competitors with greater knowledge of such local markets. There can be no
assurance that, if the USHO Acquisition or other acquisitions are consummated,
the Company will be able to increase its net revenues through new or existing
referral sources or otherwise effectively compete in new geographic markets in
which these companies operate.
Risks Related to Goodwill. At June 30, 1997, the Company's total assets
were approximately $153.3 million, of which approximately $68.2 million, or
approximately 44.5% of total assets, was goodwill resulting from acquisitions.
Goodwill is the excess of cost over the fair value of the net assets of
businesses acquired. There can be no assurance that the value of such goodwill
will be realized by the Company. This goodwill is being amortized on a straight-
line basis over 20 to 25 years. The Company evaluates on a regular basis whether
events and circumstances have occurred that indicate all or a portion of the
carrying amount of goodwill may no longer be recoverable, in which case an
additional charge to earnings would become necessary. Although at June 30, 1997
the net unamortized balance of goodwill is not considered to be impaired under
generally accepted accounting principles, any such future determination
requiring the write-off of a significant portion of unamortized goodwill could
have a material adverse effect on the Company's financial condition or results
of operations.
Internal Growth Rates. The Company is a leading provider of comprehensive
home health care services, delivering nursing and related patient services,
respiratory therapy, infusion therapy and durable medical equipment from 61
current branch locations in ten states. Since fiscal 1994, the Company
generated a compound annual growth rate in net revenues of 47.6% through a
combination of acquisitions and internal growth. The Company experienced
internal growth rates in net revenues of 29%, 19% and 16% for fiscal years 1995,
1996 and 1997, respectively. The Company's internal growth in net revenues was
primarily the result of cross-selling its services and products, expanding the
range of services and products offered, increasing patient referrals,
particularly from managed care organizations, and increasing cost-based Medicare
reimbursement resulting primarily from increased costs. However, because of
matters discussed herein that may be beyond the control of the Company, there
can be no assurance that the Company can increase or maintain the internal
growth rates at levels experienced in previous years.
Management of Rapid Growth. The Company has experienced rapid growth in
its business and number of employees through acquisition and internal growth.
Continued rapid growth may impair the Company's ability to efficiently provide
its home health care services and products and to adequately manage its
employees. While the Company is taking steps to manage
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its rapid growth, future results of operations could be materially adversely
affected if it is unable to do so effectively.
Competition. The home health care industry is highly competitive and
includes national, regional and local providers. The Company competes with a
large number of companies in all areas in which its operations are located. The
Company's competitors include major national and regional companies, hospital-
based programs, numerous local providers and nursing agencies. Some current and
potential competitors have or may obtain significantly greater financial and
marketing resources than the Company. Accordingly, other companies, including
managed care organizations, hospitals, long-term care providers and health care
providers that currently are not serving the home health care market, may become
competitors. As a result, the Company could encounter increased competition in
the future that may limit its ability to maintain or increase its market share
or otherwise materially adversely affect the Company's financial condition or
results of operations.
Regulatory Environment. As a provider of services under Medicare and
Medicaid, the Company is subject to extensive regulation at both the federal and
state level. At the federal level, such laws include (i) the Anti-Kickback
Statute, which generally prohibits the offer, payment, solicitation or receipt
of any remuneration in return for the referral of items or services paid for in
whole or in part under the Medicare or Medicaid programs, (ii) the Federal False
Claims Act which prohibits the submission for payment to the federal government
of fraudulent claims, and (iii) the law known as "Stark II," which generally
prohibits referrals by a physician to providers of "designated health services"
where the physician has a financial relationship with the provider. "Designated
health services" under Stark II include home health care services and products
provided by the Company. Violations of theses provisions may result in civil and
criminal penalties, loss of licensure and exclusion from participation in the
Medicare and Medicaid programs. Many states have also adopted statutes and
regulations in various forms which prohibit provider referrals to an entity in
which the provider has a financial interest, remuneration or fee-splitting
arrangements between health care providers for patient referrals and other types
of financial arrangements with health care providers. Sanctions for violations
of these state regulations include loss of licensure and civil and criminal
penalties. See "The Company-Governmental Regulations-Fraud and Abuse Laws."
The federal government, private insurers and various state enforcement
agencies have increased their scrutiny of provider business practices and
claims, particularly in the areas of home health care services and products in
an effort to identify and prosecute parties engaged in fraudulent and abusive
practices. In May 1995, the Clinton Administration instituted ORT, a health care
fraud and abuse initiative focusing on nursing homes, home health care agencies
and durable medical equipment companies. ORT, which initially focused on
companies located in California, Florida, Illinois, New York and Texas, the
states with the largest Medicare populations, has been expanded to all fifty
states. While the Company believes that it is in material compliance with such
laws, there can be no assurance that the practices of the Company, if reviewed,
would be found to be in full compliance with such laws, as such laws ultimately
may be interpreted.
Additionally, HCFA has implemented "Wedge Surveys" in at least 13 states,
including Connecticut, Florida,
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Tennessee, Illinois, Indiana, Massachusetts, Minnesota, Ohio, Oklahoma, Texas,
Utah, Virginia and Wyoming. In these surveys, HCFA completes ORT-type surveys on
a much smaller scale. Generally, HCFA reviews a small, limited number of claims
over a two-month period and extrapolates the percentage which was paid in error
to all claims paid for the period under review. Assuming the reviewer uncovered
nothing significant, the home health agency then has the option to repay the
amount determined by HCFA or undergo a broader review of its claims. If the
survey uncovers significant problems, the matter may be referred for further
review.
While the Company believes that it is in material compliance with the fraud
and abuse laws, there can be no assurance that the practices of the Company, if
reviewed, would be found to be in full compliance with such requirements, as
such requirements ultimately may be interpreted. Although the Company does not
believe it has violated any fraud and abuse laws, there can be no assurance that
future related legislation, either health care or budgetary, related regulatory
changes or interpretations of such regulations, will not have a material adverse
effect on the future operations of the Company.
Permits and Licensure. The federal government and all states regulate
various aspects of the home health care industry. Such regulations include
federal and state laws covering the dispensing of drugs and the operation of
pharmacies, as well as state laws which may impose licensure requirements on
home health care agencies and on certain types of health care practitioners
employed by the Company. The failure to obtain, renew or maintain any of the
required regulatory approvals or licenses could materially adversely affect the
Company's financial condition or results of operations. There can be no
assurance that either the states or the federal government will not change
current interpretations of existing regulations or impose additional regulations
upon the Company's activities which might adversely affect its financial
condition or results of operations.
Dependence on Relationships with Referral Sources. The growth and
profitability of the Company depends on its ability to establish and maintain
close working relationships with referral sources, including payors, hospitals,
physicians and other health care professionals. Managed care organizations,
which are exerting an increasing amount of influence over the health care
industry, have been consolidating to enhance their ability to impact the
delivery of health care services. As managed care organizations have increased
and continue to increase their market share in regions in which the Company
operates, these organizations have become and will continue to become
increasingly important to the Company as referral sources. From
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fiscal 1995 to fiscal 1997, the Company's net revenues derived from managed care
organizations increased from 36.9% to 38.7%. There can be no assurance that the
Company will be able to successfully maintain existing referral sources or
develop and maintain new referral sources. The loss of any significant existing
referral sources or the failure to develop any new referral sources could have a
material adverse effect on the Company's financial condition or results of
operations.
Geographic Concentration. Approximately $57.5 million, or 38.3%, of the
Company's net revenues in fiscal 1997 were derived from the Company's operations
in Florida and approximately $95.4 million, or 63.5%, of the Company's net
revenues in fiscal 1997 were derived from the Company's operations in Florida
and Pennsylvania. Unless and until the Company's operations become more
diversified geographically (as a result of acquisitions or internal expansion),
adverse economic, regulatory, or other developments in Florida, Pennsylvania or,
if the USHO Acquisition is consummated, New York, could have a material adverse
effect on the Company's financial condition or results of operations.
Potential Volatility in Stock Price. Over the past year, the Company's
stock price has been subject to some volatility. If net revenues or earnings
fail to meet expectations of the investment community, or if the Company
announces other information that may be deemed to be negative by the investment
community, such as the issuance of additional common stock, or other changes in
the Company's capital structure, there could be an immediate and significant
adverse impact on the trading price for the Company's common stock. Regardless
of the Company's performance, broad market fluctuations and general economic or
political conditions as well as health care-related market announcements from
time to time may also adversely affect the price of the Company's stock. As a
result, changes in the Company's stock price can be sudden and unpredictable.
Quarterly Fluctuations in Operating Results. Results of operations for any
quarter are not necessarily indicative of results of operations for any future
period or for a full fiscal year. The Company has experienced and expects to
continue to experience lower same-store net revenues during the first fiscal
quarter which ends on September 30 as compared to the immediate preceding
quarter due to fewer referrals during the summer months. However, the results
for the first quarter of fiscal 1997 do not reflect this seasonality due to the
growth in volume following the acquisitions in fiscal 1996, October 1995 and May
1996. Net income for the quarter ended September 30, 1997 did not increase
proportionately to net revenues as a result of duplicative costs relating to the
acquisitions which were not yet eliminated. The Company anticipates that the
effects of seasonality will continue for the foreseeable future. See "Quarterly
Results."
Dependence on Key Personnel. The Company's success is highly dependent on
its President, Chief Executive Officer and Chairman of the Board, Bruce J.
Feldman and a number of its other key management and professional personnel.
The loss of one or more of these personnel could have a material adverse effect
on the Company's financial condition or results of operations. The Company's
success will also depend in part on its ability to attract and retain additional
qualified management and professional personnel. Competition for such personnel
in the home health care industry is strong. There can be no assurance that the
Company will be
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successful in attracting or retaining the personnel it requires.
Potential Liability. The Company maintains a commercial general liability
policy which includes product liability coverage on the medical equipment that
it sells or rents with both per-occurrence and annual aggregate coverage limits
of $1.0 million and $2.0 million, respectively. In addition, the Company has an
umbrella liability or "excess" policy with a single limit of $10.0 million for
any one occurrence in excess of certain minimum amounts. The umbrella policy
excludes professional liability. The Company maintains a health care agency
professional liability insurance policy with limits of $4.0 million per claim
and an annual aggregate limit of $6.0 million. Health care professionals with
whom the Company has contracted must provide evidence that they carry at least
$1.0 million of insurance coverage, although there is no assurance that such
providers will continue to do so, or that such insurance is, or will continue to
be, adequate or available to protect the Company, or that the Company will not
have liability independent of that of such providers and/or their insurance
coverage. While the Company believes that it has adequate insurance coverage,
there can be no assurance that any such insurance will be sufficient to cover
any judgments, settlements or costs relating to any pending or future legal
proceedings (including any related judgments, settlements or costs) or that any
such insurance will be available to the Company in the future on satisfactory
terms, if at all. Any judgments, settlements or costs relating to pending or
future legal proceedings which are not covered by insurance could have a
material adverse effect on the Company's results of operations or financial
condition.
Potential Effect of Anti-Takeover Provisions; Issuance of Preferred Stock.
Certain provisions of the Pennsylvania Business Corporation Law, the Company's
Amended Articles of Incorporation and the Company's Restated Bylaws, such as a
staggered board of directors and limitations on stockholder actions and
proposals, may have the effect of discouraging, delaying or preventing a change
of control of the Company which could adversely affect the market price of the
Company's common stock. In addition, the Company's board of directors has the
authority to issue shares of preferred stock without shareholder approval and
upon such terms as the board of directors may determine. While the Company has
no present plans to issue any shares of preferred stock, the rights of the
holders of the Company's common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Home Health Corporation of America, Inc. and Subsidiaries Page
----
<S> <C>
Report of Independent Accountants 46
Financial Statements:
Consolidated Balance Sheets as of June 30, 1996 and 1997 47
Consolidated Statements of Income for the fiscal years ended June 30,
1995, 1996 and 1997 48
Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 1995, 1996 and 1997 49
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1995, 1996 and 1997 50
Notes to Consolidated Financial Statements 52
</TABLE>
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Home Health Corporation of America, Inc.
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Home Health
Corporation of America, Inc. and subsidiaries as of June 30, 1996 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Home Health
Corporation of America, Inc. and subsidiaries as of June 30, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 29, 1997, except for Note 13, for
which the date is September 26, 1997
46
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 1996 1997
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 1,695 $ 464
Accounts receivable, net of allowance for doubtful
accounts of $5,656 and $10,847, respectively...... 28,042 56,410
Inventories........................................ 1,583 3,262
Prepaid expenses and other......................... 1,183 2,018
Income taxes receivable............................ - 593
Deferred income taxes.............................. 925 1,973
------- --------
Total current assets........................... 33,428 64,720
Property and equipment, net......................... 8,945 18,261
Goodwill, net of accumulated amortization of $1,123
and $3,347, respectively........................... 26,540 68,202
Other assets, net................................... 1,062 2,080
------- --------
Total assets................................... $69,975 $153,263
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt............... $ 3,688 $ 6,263
Accounts payable................................... 3,135 5,705
Accrued salaries and related employee benefits..... 2,418 4,788
Other current liabilities.......................... 3,181 4,760
Income taxes payable............................... 660 -
------- --------
Total current liabilities...................... 13,082 21,516
Long-term debt, net of current portion.............. 16,287 78,793
Other liabilities................................... 1,054 1,109
Deferred income taxes............................... 160 1,273
Common stock, redeemable, no par value, 100 shares
issued and outstanding, stated at redemption value
of $5.00 per share................................. 500 -
Preferred stock, $.01 par value, 10 shares
authorized, 10 shares issued and outstanding,
convertible into 10 shares of common stock or
$1,250 upon mandatory redemption on July 13, 1996.. 1,244 -
Stockholders' equity:
Preferred stock (undesignated), no par value,
10,000 shares authorized; no shares issued
and outstanding................................... - -
Common stock, no par value, 20,000 shares
authorized; 8,075 and 9,221 shares issued, 8,075
and 9,129 outstanding at 1996 and 1997,
respectively...................................... 33,725 43,927
Additional paid-in capital......................... 104 -
Retained earnings.................................. 3,837 6,645
------- --------
37,666 50,572
Stock subscriptions receivable..................... (18) -
------- --------
Total stockholders' equity..................... 37,648 50,572
------- --------
Total liabilities and stockholders' equity... $69,975 $153,263
======= ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
47
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues........................................ $ 64,149 $ 95,878 $ 150,232
Operating costs and expenses:
Patient care...................................... 32,378 46,212 71,818
General and administrative........................ 26,245 36,100 54,254
Provision for doubtful accounts................... 1,727 3,464 8,431
Depreciation...................................... 553 899 1,524
Amortization...................................... 244 1,021 2,346
Interest, net..................................... 1,451 1,579 3,849
Merger and other nonrecurring..................... - 913 3,009
--------- -------- ---------
Total operating costs and expenses.............. 62,598 90,188 145,231
--------- -------- ---------
Income before income taxes and extraordinary item... 1,551 5,690 5,001
Provision for income taxes.......................... 793 2,396 2,187
--------- -------- ---------
Income before extraordinary item.................... 758 3,294 2,814
Extraordinary loss on debt redemption, net........ - 1,161 -
--------- -------- ---------
Net income...................................... $ 758 $ 2,133 $ 2,814
========= ======== =========
Other data, including per share data:
Income available to common stockholders,
before extraordinary item........................ $ 635 $ 2,390 $ 2,808
========= ======== =========
Income per common and common equivalent
share, before extraordinary item................. $ 0.17 $ 0.36 $ 0.32
========= ======== =========
Net income available to common stockholders,
after extraordinary item......................... $ 635 $ 1,229 $ 2,808
========= ======== =========
Net income per common and common equivalent
share, after extraordinary item.................. $ 0.17 $ 0.18 $ 0.32
========= ======== =========
Weighted average shares used in computing net
income per common and common equivalent share.... 3,676 6,653 8,673
========= ======== =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
48
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income .......................................................... $ 758 $ 2,133 $ 2,814
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other .............................. 1,431 3,195 6,210
Provision for doubtful accounts ................................... 1,727 3,464 8,431
Write-off of bridge financing note payable discount ............... -- 405 --
Write-off of deferred financing fees .............................. -- 200 --
Loss on debt redemption ........................................... -- 1,161 --
Forgiveness of management loan .................................... 19 18 18
Deferred income taxes ............................................. (523) (28) 65
Distributed earnings from joint venture ........................... 195 -- --
Write-off of deferred offering costs .............................. -- -- 300
Net changes in certain assets and liabilities, net of acquisitions:
Accounts receivable ............................................... (6,518) (12,085) (27,550)
Inventories ....................................................... 372 (452) (438)
Prepaid expenses and other ........................................ (206) (221) (216)
Accounts payable, accrued expenses and other ...................... 2,210 (712) (2,801)
Income taxes payable .............................................. 1,067 276 (1,173)
-------- -------- --------
Net cash flows provided by (used in) operating activities ...... 532 (2,646) (14,340)
-------- -------- --------
Cash flows used in investing activities:
Purchases of property and equipment ................................. (1,749) (3,346) (3,789)
Cash paid for acquisitions, net of cash acquired .................... (4,993) (15,693) (37,542)
Increase in other, net .............................................. 126 (399) (979)
-------- -------- --------
Net cash flows used in investing activities .................... (6,616) (19,438) (42,310)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from long-term debt ........................................ 22,804 23,730 60,277
Repayments of long-term debt ........................................ (17,268) (15,591) (4,602)
Proceeds from bridge financing ...................................... -- 13,000 --
Repayment of bridge financing ....................................... -- (13,000) --
Repayment of debt with Offering proceeds ............................ -- (9,984) --
Payment of deferred financing fees .................................. (196) (200) (287)
Repayment of preferred stock and preferred stock dividends ......... (60) (607) --
Repurchase of common stock warrant .................................. (200) -- --
Proceeds from issuance of common stock .............................. 2 24,778 31
-------- -------- --------
Net cash flows provided by financing activities ................ 5,082 22,126 55,419
-------- --------
Net increase (decrease) in cash and cash equivalents ................... (1,002) 42 (1,231)
Cash and cash equivalents, beginning of year ........................... 2,655 1,653 1,695
-------- -------- --------
Cash and cash equivalents, end of year ................................. $ 1,653 $ 1,695 $ 464
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
49
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional
Class A Class B Common Stock, Paid-in
Common Stock Common Stock no par Capital
-------------------- -------------------- -------------------- ------------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1994 ........... 1,098 $ 110 1,459 $ 146 185 -- $ 1,392
Preferred stock
dividends ...................... -- -- -- -- -- -- --
Issuance of Class B
common stock ................... -- -- 67 7 -- -- 267
Repurchase of
warrants ....................... -- -- -- -- -- -- (200)
Exercise of stock
options ........................ -- -- 10 1 -- -- 1
Forgiveness of
shareholder loan ............... -- -- -- -- -- -- --
Issuance of warrants in
connection with
subordinated note
payable ........................ -- -- -- -- -- -- 934
Net income ...................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance June 30,
1995 ........................... 1,098 110 1,536 154 185 -- 2,394
Exercise of warrants ............ 194 19 22
Issuance of warrants
in connection with
Bridge financing ............... -- -- -- -- -- -- 1,192
Recapitalization ................ (1,098) (110) (1,730) (173) 3,465 4,713 (3,504)
Issuance of common
stock in Offering .............. -- -- -- -- 3,693 24,547 --
Conversion of
subordinated note to
common stock ................... -- -- -- -- 400 3,000 --
Write-off of Series C
preferred stock
discount ....................... -- -- -- -- -- -- --
Exercise of warrants ............ -- -- -- -- 204 125 --
<CAPTION>
Stock
Retained Treasury Subscriptions
Earnings Stock Receivable Total
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Balance July 1, 1994 ........... $ 1,972 $ (291) $ (55) $ 3,274
Preferred stock
dividends ...................... (123) -- -- (123)
Issuance of Class B
common stock ................... -- -- -- 274
Repurchase of
warrants ....................... -- -- -- (200)
Exercise of stock
options ........................ -- -- -- 2
Forgiveness of
shareholder loan ............... -- -- 19 19
Issuance of warrants
in connection with
subordinated note
payable ........................ -- -- -- 934
Net income ...................... 758 -- -- 758
---------- ---------- -------------- ---------
Balance June 30,
1995 ........................... 2,607 (291) (36) 4,938
Exercise of warrants ............ 41
Issuance of warrants
in connection with
Bridge financing ............... -- -- -- 1,192
Recapitalization ................ -- 291 -- 1,217
Issuance of common
stock in Offering .............. -- -- -- 24,547
Conversion of
subordinated note to
common stock ................... -- -- -- 3,000
Write-off of Series C
preferred stock
discount ....................... (786) -- -- (786)
Exercise of warrants ............ -- -- -- 125
</TABLE>
Continued
50
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
(in thousands)
<TABLE>
<CAPTION>
Additional
Class A Class B Common Stock, Paid-in
Common Stock Common Stock no par Capital
--------------------- ---------------------- --------------------- -----------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred stock
dividends ...... - - - - - - -
Exercise of
stock options .. - - - - 27 65 -
Issuance of
common stock
for acquisitions - - - - 101 1,275 -
Forgiveness of
shareholder
loan ........... - - - - - - -
Net income ...... - - - - - - -
------ ------ ------ ------- ----- ------- -------
Balance June 30,
1996 ........... - - - - 8,075 33,725 104
Preferred stock
dividends ...... - - - - - - -
Exercise of
stock options .. - - - - 23 31 -
Issuance of
common stock
for acquisitions - - - - 661 6,379 -
Forgiveness of
shareholder
loan ........... - - - - - - -
Exchange of
preferred shares
for common
stock .......... - - - - 81 1,250 -
Conversion of
notes to common
stock .......... - - - - 189 2,042 (104)
Expiration of
redemption
requirement .... - - - - 100 500 -
Net income ...... - - - - - - -
------ ------ ------ ------- ----- ------- -------
Balance June 30,
1997 ........... - - - - 9,129 $43,927 -
====== ====== ====== ======= ===== ======= =======
<CAPTION>
Stock
Retained Treasury Subscriptions
Earnings Stock Receivable Total
---------- -------- ------------- --------
<S> <C> <C> <C> <C>
Preferred stock
dividends ...... (117) - - (117)
Exercise of
stock options .. - - - 65
Issuance of
common stock
for acquisitions - - - 1,275
Forgiveness of
shareholder
loan ........... - - 18 18
Net income ...... 2,133 - - 2,133
------- ----- ---------- -------
Balance June 30,
1996 ........... 3,837 - (18) 37,648
Preferred stock
dividends ...... (6) - - (6)
Exercise of
stock options .. - - - 31
Issuance of
common stock
for acquisitions - - - 6,379
Forgiveness of
shareholder
loan ........... - - 18 18
Exchange of
preferred shares
for common
stock .......... - - - 1,250
Conversion of
notes to common
stock .......... - - - 1,938
Expiration of
redemption
requirement .... - - - 500
Net income ...... 2,814 - - 2,814
------- ----- ---------- -------
Balance June 30,
1997 ........... $ 6,645 - - $50,572
======= ===== ========== =======
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
51
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Home Health
Corporation of America, Inc. and subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated. The Company's
financial reporting year represents a fiscal year of twelve calendar months
ending on June 30. Information included in these notes represents fiscal years
unless otherwise noted.
Pooling of Interests
On November 12, 1996, the Company acquired, in a merger transaction, Home
Health Systems, Inc. ("HHSI"), a provider of durable medical equipment and
infusion and respiratory therapy services (the "HHSI Merger"). The HHSI Merger
was accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements and related notes thereto have been restated
to combine the accounts and operations of HHSI with those of the Company for all
periods presented.
Initial Public Offering
On November 13, 1995, the Company completed the initial public offering
of its stock (the "Offering"), pursuant to which the Company sold 3.5 million
shares of common stock, no par value. The Offering resulted in net proceeds of
$24.4 million to the Company before deduction of certain expenses payable by the
Company. The Company used the net proceeds to repay the bridge financing
incurred in connection with an acquisition in Tampa, Florida (the "Tampa
Acquisition"), senior subordinated indebtedness, a portion of the Company's
senior credit facilities and to redeem preferred stock. The Company recorded an
extraordinary loss in connection with this early extinguishment of indebtedness
(see Note 5, Senior Subordinated Debt).
On December 12, 1995, the underwriters in the Offering exercised their
option to purchase additional shares of common stock, pursuant to which the
Company sold 193,000 shares of common stock, no par value, resulting in net
proceeds of approximately $1.3 million to the Company. These net proceeds were
used for working capital purposes.
Net Revenues
The Company is paid for its services primarily by Medicare, managed care
companies, commercial insurance companies, state Medicaid programs and patients.
Revenues are recorded at established rates in the period during which the
services are rendered. Appropriate allowances to give recognition to third-
party payment arrangements are recorded when the services are rendered. Payments
received by the Company under Medicare and Medicaid programs are based upon
reimbursement of reasonable cost or a predetermined specific fee structure.
Reimbursable costs
52
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
differing from the Company's preliminary authorized payment rates for nursing
services under the Medicare and Medicaid programs are recognized as receivables
or payables in the period in which the costs are incurred. Adjustments to
reimbursable costs resulting from settlements of third-party payor cost reports
are recognized in the period of settlement. Approximately 63%, 62% and 61% of
the Company's net revenues in fiscal 1995, 1996 and 1997, respectively, are from
participation in Medicare and state Medicaid programs.
At June 30, 1996 and 1997, respectively, 45% and 55% of net accounts
receivable was due from Medicare and Medicaid. The ability of payors to meet
their obligations depends upon their financial stability, future legislation and
regulatory actions. The Company does not believe there are any significant
credit risks associated with receivables from Medicare and Medicaid. The
allowance for doubtful accounts principally consists of management's estimate of
amounts that may prove uncollectible from non-governmental payors.
Cash and Cash Equivalents
All investments purchased with original maturities of three months or
less are considered cash equivalents.
Inventories
Inventories are carried at the lower of cost or market, with cost
determined using the average cost method, and is principally comprised of
medical supplies.
Property and Equipment
Property and equipment, which includes equipment held for rental, are
recorded at cost or respective fair market value at the time of acquisition and
include expenditures for major renewals and betterments. Equipment under
capital leases are stated at net present value of the minimum lease payments at
the inception of the lease. Maintenance and repairs which do not improve or
extend the life of the respective assets are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets or lease terms for leasehold improvements and
equipment under capital leases. Upon retirement or other disposition, the cost
and the related accumulated depreciation are removed from the accounts and any
gain or loss is included in the results of operations.
Goodwill and Other Assets
Goodwill arises from acquisitions and represents the excess of purchase
price over net identifiable acquired assets, and is amortized on a straight-line
basis over 20 to 25 years.
Other assets principally consist of amounts relating to deferred
financing costs, the noncurrent portion of the workers compensation trust
assets, deposits and other intangibles arising
53
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
from acquisitions. Deferred financing costs are amortized on a straight-line
basis over the life of the financing agreement, generally three years. Other
intangibles are amortized on a straight-line basis over 20 years.
Upon occurrence of a possible impairment event, management evaluates the
recoverability of intangible assets using certain financial indicators such as
historical and future ability to generate income from operations. The Company's
policy is to record an impairment loss against the net unamortized cost of the
asset in the period when it is determined that the carrying amount of the asset
may not be recoverable. Some indications of possible impairment events include
factors such as the occurrence of a significant event, a significant change in
the environment in which the business operates or if the expected future net
cash flows would become less than the carrying amount of the asset.
Patient Care Costs
Patient care costs are comprised of salaries and related benefits of
patient care personnel, cost of sales of durable medical equipment and supplies
and depreciation on equipment held for rental.
General and Administrative Expenses
General and administrative expenses are comprised of administrative and
support staff salaries and benefits, occupancy and other operating costs.
Income Taxes
The Company files a consolidated tax return with its subsidiaries for
federal tax purposes and on a separate Company basis for state tax purposes. The
Company uses the asset and liability method of accounting proscribed by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Under this method, deferred income taxes are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Net Income Per Common and Common Equivalent Share
Net income available to common stockholders is computed by deducting
preferred dividends from net income to determine net income available to common
stockholders. Additionally, in fiscal 1996, net income available to common
stockholders reflects a reduction for the write-off of the discount on
redeemable preferred stock issued in connection with the Tampa Acquisition (see
Note 2). Net income available to common stockholders is then divided by the
weighted average number of common and common equivalent shares outstanding or
assumed
54
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
outstanding for all classes of the Company's common stock. Common stock and
common stock equivalents issued by the Company during the 12 month period
immediately preceding the initial filing of the Offering registration statement
at less than fair value at date of issuance, have been included in the
calculation of the weighted average number of common and common equivalent
shares outstanding for 1995, using the treasury stock method and the Offering
price of $7.50 per share.
Pro Forma Earnings Per Share
The following supplementary pro forma earnings per share information has
been included to indicate the dilution on fiscal 1996 primary earnings per share
of the Company resulting from the Offering.
Pro forma net income used to calculate pro forma net income per common
and common equivalent share reflects adjustments to net income for fiscal 1996
to give effect to the reduction of $1.3 million in interest and bridge financing
expenses resulting from the assumed redemption of certain outstanding
indebtedness with a portion of the net proceeds from the Offering, net of the
corresponding increase in income tax expense of $536,000, as if such
transactions occurred as of July 1, 1995. Additionally, pro forma net income
does not reflect the extraordinary loss, an adjustment for preferred stock
dividends or the write-off of the discount on redeemable preferred stock issued
in connection with the Tampa Acquisition (see Note 2), as the corresponding debt
and preferred stock is assumed to be redeemed as of July 1, 1995.
Pro forma weighted average common and common equivalent shares used in
computing pro forma net income per common and common equivalent share reflects
adjustments to the fiscal 1996 fully-diluted weighted average common and common
equivalent shares outstanding to give effect to the issuance of 3.0 million
shares of common stock, as of July 1, 1995, in connection with the Offering, to
redeem debt assumed outstanding at July 1, 1995 and debt issued on September 29,
1995 in connection with the Tampa Acquisition (see Note 2), respectively.
<TABLE>
<CAPTION>
Fiscal 1996
-----------
(Amounts in thousands, except per share data)
(unaudited)
<S> <C>
Pro forma net income............ $4,068
======
Pro forma weighted average
shares used in computing pro
forma net income per common and
common equivalent share......... 7,767
======
Pro forma net income per common
and common equivalent share..... $ 0.52
======
</TABLE>
55
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Workers Compensation
The Company has self-insurance trusts for Pennsylvania, Delaware and
Florida workers compensation claims. The Company establishes reserves for
claims incurred during the fiscal year but not reported until subsequent fiscal
periods.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") 128, "Earnings Per
Share" which is effective for periods ending after December 15, 1997. The
overall objective of SFAS 128 is to simplify the calculation of earnings per
share and achieve comparability with International Accounting Standards. The
Company will be required to adopt SFAS 128 in the second quarter of fiscal 1998,
but does not expect that the adoption will have a material effect on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which requires changes in comprehensive income be shown in a financial statement
that is displayed with the same prominence as other financial statements.
Additionally, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires disclosures in financial
statements based on management's approach to segment reporting and industry
requirements to report selected segment information, disclosures about products
and services and major customers, on a quarterly basis. The Company will be
required to adopt SFAS 130 and 131 during fiscal 1998. The impact of these new
standards on the Company's future financial statements and disclosures has not
been determined.
Adoption of Recent Accounting Pronouncements
The FASB issued SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed of." SFAS 121, which was
adopted in fiscal 1997, establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS 121 requires that such assets
and intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 did not
56
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
have a significant impact on the Company's results of operations, financial
condition or liquidity.
In October 1996, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 allows companies adopting the pronouncement to either
change the actual accounting methods for stock based compensation in the
financial statements or to disclose certain pro forma results of operations as
if the pronouncement had been adopted in the financial statements. The Company
elected to adopt the disclosure-only provisions of SFAS 123 during fiscal 1997
and has disclosed the pro forma information in the footnotes to the financial
statements (see Note 7). The adoption of SFAS 123 had no effect on the
consolidated financial statements.
2. Acquisitions
The purchase prices for the acquisitions accounted for as purchases have
been allocated to identifiable assets, principally accounts receivable,
equipment and inventory. The results of operations for these acquisitions have
been included from their respective acquisition dates. The excess of the
purchase prices over the fair value of the net assets acquired of $43.9 million
was recorded as goodwill during fiscal 1997 and is being amortized on a
straight-line basis over 20 to 25 years. The Company's consolidated financial
statements and related notes thereto have been restated to combine the accounts
and operations of acquisitions accounted for as poolings with those of the
Company for all periods presented.
Fiscal 1997 Acquisitions
Pooling Transaction
On November 12, 1996, the Company acquired HHSI in a merger transaction.
HHSI, a provider of durable medical equipment and infusion and respiratory
therapy services, had $8.2 million in net revenues for the twelve month period
ended June 30, 1996 and operations in New Jersey, Pennsylvania, Maryland and
Illinois. The Company issued 455,000 shares of its Common Stock, net of shares
that are treated similarly to treasury shares for accounting purposes, in
exchange for all the issued and outstanding shares of HHSI. Merger costs of
$1.6 million resulting from this acquisition were recorded during the three
months ended December 31, 1996 and are reflected in merger and other
nonrecurring costs and expenses in the accompanying 1997 consolidated statement
of income.
57
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Net revenues and net income attributable to the operations of HHSI prior
to the HHSI Merger are as follows:
<TABLE>
<CAPTION>
Year Ended July 1, 1996 to
June 30, November 12,
1996 1996
----------- -----------------
(amounts in thousands)
<S> <C> <C>
Net revenues.......... $8,183 $3,330
Net income (loss)..... $ (93) $ 76
</TABLE>
Purchase Acquisitions
In the first quarter of fiscal 1997, the Company acquired the assets of
(i) Dailey Resources, Ltd., a provider of durable medical equipment and
respiratory therapy services with $1.8 million in aggregate net revenues for the
twelve month period ended December 31, 1995, and operations in Scranton,
Pennsylvania, (ii) National Home Infusion, Inc., a provider of infusion therapy
services with $1.3 million in aggregate net revenues for the twelve month period
ended September 30, 1995, and operations in Sarasota, Florida, and (iii) Eastern
Shore Health Services, Inc., a provider of home nursing services with $3.6
million in aggregate net revenues for the twelve month period ended June 30,
1996, and operations in Berlin and Salisbury, Maryland. The aggregate
consideration paid and debt assumed for these acquisitions was $5.3 million, the
cash portion of which was funded through the Company's senior credit facility.
On October 1, 1996, the Company acquired certain assets and assumed
certain liabilities of Medical Express, Inc., a durable medical equipment and
respiratory therapy company located in Bristol, Pennsylvania with $2.5 million
in net revenues for the twelve month period ended June 30, 1996. The aggregate
purchase price for this acquisition was $3.2 million. The cash portion of this
consideration was funded through borrowings under the senior credit facility.
Effective December 1, 1996, the Company acquired all of the outstanding
capital stock of R.S.D. Management Services, Inc., a provider of primarily
Medicare cost-reimbursed nursing and related patient services with approximately
$18.3 million of net revenues for the twelve month period ended June 30, 1996
and operations in Massachusetts and New Hampshire (the "RSD Acquisition"). The
consideration paid for the RSD Acquisition was approximately $11.1 million. The
cash portion of this consideration was funded through borrowings under the
senior credit facility.
Effective January 1, 1997, the Company acquired certain assets of LHS
Holdings, Inc. ("LHS") and certain assets of two of its subsidiaries, which
provide primarily Medicare cost-reimbursed nursing and related patient services.
The Company also purchased certain assets of two LHS affiliated companies on
April 9, 1997, which provide primarily pediatric nursing and
58
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
infusion therapy services (collectively, the purchases, including the
affiliates, are hereafter referred to as the "LHS Acquisition"). The operations
of the companies acquired in the LHS Acquisition had net revenues of $16.0
million for the twelve month period ended June 30, 1996. The aggregate
preliminary consideration payable for the LHS Acquisition is $8.2 million,
including an estimated earnout amount of $1.6 million, which will be adjusted as
of December 31, 1997. Of this amount, $2.0 million and $6.2 million were paid on
January 10, 1997 and April 9, 1997, respectively, which included $6.2 million
funded through borrowings under the senior credit facility with the remainder
comprised of subordinated notes and common stock.
Effective February 1, 1997, the Company acquired the assets of Medical
Air Supply, Inc. and Cambridge Medical Company, durable medical equipment
providers located in Texas with $6.5 million of net revenues for the twelve
month period ended December 31, 1995. Additionally, effective March 1, 1997, the
Company acquired the stock of Nahatan Drug, Inc. ("Nahatan"), a durable medical
equipment provider located in Massachusetts, New Hampshire and Maine with $7.2
million of net revenues for the twelve month period ended February 29, 1996.
The aggregate consideration paid and debt assumed for these two acquisitions was
$23.8 million, the cash portion of which was funded through the senior credit
facility. In the event the Company files a registration statement to register
and sell shares of its stock, the Company may be required to issue additional
shares to the sellers of Nahatan if the fair market value, as defined in the
purchase agreement, of the stock is below $11.00 per share. This commitment
expires after 20 days of the effectiveness of a shelf registration filed to
register these shares, or immediately, should the sellers decline the
registration of their shares under a registration of shares being offered by the
Company. The Company is required to file a shelf registration for these shares
by October 31, 1997 if it does not otherwise file to register shares prior to
such date. Issuance of additional shares would be recorded as additional
consideration for this acquisition.
Effective May 14, 1997, the Company acquired certain assets of Diamond
Home Care, Inc., a provider of primarily Medicare cost-reimbursed nursing and
related patient services located in Northeastern Pennsylvania with $1.3 million
of net revenues for the twelve month period ended December 31, 1996. The
consideration paid for this acquisition was $400,000 and was funded through the
senior credit facility.
Fiscal 1996 Acquisitions
Tampa Acquisition
On September 29, 1995, the Company acquired substantially all of the
assets and assumed certain liabilities of a company located in Tampa, Florida
(the "Tampa Acquisition") for an aggregate purchase price of $17.5 million. This
acquisition provided the Company with respiratory therapy, durable medical
equipment and mobile diagnostic services. The purchase price was comprised of
$13.0 million in cash plus $3.0 million in subordinated convertible notes and
$1.5 million in seller notes payable. The subordinated convertible notes were
converted into 400,000 shares of common stock upon consummation of the Offering.
This acquisition was
59
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
accounted for as a purchase.
The cash paid to effect the Tampa Acquisition was financed through bridge
financing which consisted of (i) a $10.0 million term loan from the Company's
senior lending institution (the "bridge term loan"), (ii) the issuance of $2.0
million of 10% cumulative redeemable Series C preferred stock (the "redeemable
preferred stock"), (iii) a $1.0 million subordinated note and (iv) warrants to
purchase 155,000 shares of common stock at $0.01 per share. The redeemable
preferred stock and subordinated note were recorded net of a discount of
approximately $1.2 million, representing proceeds ascribed to the warrants. The
bridge term loan, redeemable preferred stock and subordinated note were redeemed
in full on November 15, 1995, with a portion of the net proceeds from the
Offering, and the remaining discount on the redeemable preferred stock and
subordinated note of approximately $787,000 and $405,000, respectively, were
charged to retained earnings and bridge financing expenses, respectively, in the
accompanying 1996 consolidated balance sheet and income statement, respectively.
May 1996 Acquisitions
In May 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of three companies acquired in three separate
transactions for an aggregate purchase price of $5.2 million, the cash portion
of which was funded through the senior credit facility. Two of these
acquisitions provided the Company with nursing services in the Tampa/St.
Petersburg, Florida market and one provided mobile diagnostic services in the
Tampa and Palm Harbor, Florida areas. These acquisitions were accounted for as
purchases.
Pro forma information
The following unaudited pro forma summary information combines the
consolidated results of operations of the Company, the LHS Acquisition, the RSD
Acquisition and the Tampa Acquisition, assuming the acquisitions had occurred at
the beginning of each of the following fiscal years. The other acquisitions are
not significant for pro forma disclosure.
<TABLE>
<CAPTION>
1996 1997
------------ ------------
(amounts in thousands,
except per share data)
(Unaudited)
<S> <C> <C>
Net revenues................................................. $133,960 $173,565
Income before income taxes and extraordinary item............ 4,342 2,955
Income before extraordinary item............................. 2,498 768
Income per share before extraordinary item................... $0.23 $0.09
Net income................................................... 1,337 768
Net income per share......................................... $0.06 $0.09
</TABLE>
The pro forma results presented above do not necessarily represent
results which would
60
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
have occurred if the respective acquisitions had taken place at the beginning of
each period, nor are they indicative of the results of future combined
operations.
3. Property and Equipment
At June 30, 1996 and 1997, property and equipment consisted of:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(amounts in thousands)
<S> <C> <C>
Equipment held for rental............. $ 7,552 $16,221
Capitalized leases.................... 2,070 5,279
Furniture, fixtures and equipment..... 3,939 6,616
Leasehold improvements................ 342 756
---------- ----------
13,903 28,872
Less accumulated depreciation......... 4,958 10,611
---------- ----------
$ 8,945 $18,261
========== ==========
</TABLE>
Depreciation on equipment held for rental, which was included in patient
care costs, was $429,000, $1.1 million and $2.3 million for fiscal 1995, 1996
and 1997, respectively.
4. Other Assets
At June 30, 1996 and 1997, other assets consisted of:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(amounts in thousands)
<S> <C> <C>
Deferred financing costs.............. $ 502 $1,292
Other intangibles..................... 445 364
Workers compensation trust assets..... 273 539
Deposits.............................. 254 324
---------- ----------
1,474 2,519
Less accumulated amortization......... 412 439
---------- ----------
$1,062 $2,080
========== ==========
</TABLE>
61
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
5. Long-term Debt
At June 30, 1996 and 1997, long-term debt consisted of:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(amounts in thousands)
<S> <C> <C>
Senior Credit Facility:
Working Capital Facility............. $ 9,920 $29,668
Acquisition Facility................. 2,975 42,458
Sellers notes with interest rates of
approximately 8%, principal and
interest due monthly through fiscal
year 2000............................ 3,872 7,273
Convertible notes payable with interest
at 8%, principal and interest due
semi-annually through 1999........... 1,819 -
Other debt, including capital leases,
rates generally fixed from 8.5% to
18% through fiscal year 2001......... 1,389 5,657
---------- ----------
19,975 85,056
Less current maturities................. 3,688 6,263
---------- ----------
$16,287 $78,793
========== ==========
</TABLE>
Senior Credit Facility
On March 13, 1997, the Company entered into a Third Amended and Restated
Credit Agreement (the "Credit Facility"), maturing March 13, 2000, with a
syndicate of lenders to borrow up to $100 million. The Credit Facility consists
of (i) a working capital facility with a commitment of up to $40 million for
general corporate purposes, which includes a commitment to issue up to $10
million of letters of credit and (ii) an acquisition facility with a commitment
of up to $60 million for permitted acquisitions, as defined in the agreement.
The Company may exchange available commitments between the facilities.
Funds advanced under the Credit Facility bear interest on the outstanding
principal at a fluctuating rate based on either (i) the announced prime rate of
the agent bank (the "Prime Rate") or (ii) the London Interbank Borrowing Rate
("LIBOR") as elected from time to time by the Company. Interest is payable
monthly if a rate based on the Prime Rate is elected or at the end of the LIBOR
period (but in any event not to exceed 180 days) if a rate based on LIBOR is
elected. As of June 30, 1997, $2.5 million and $69.6 million in borrowings
outstanding under the Credit Facility bore interest at the Prime Rate (9.25%)
and the weighted average LIBOR rate of 8.06%, respectively. The Company must
pay an annual commitment fee equal to 0.375% of the unused portion of the
facilities. Unused borrowings under the Credit Facility aggregated $27.9 million
at June 30, 1997. Despite the amount of unused commitment under the Credit
Facility, additional borrowings may be limited by, among other factors,
limitations on access to additional funds
62
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
imposed by the Credit Facility financial covenants.
The Company is required to make principal repayments on the facilities
under the Credit Facility upon the permitted sale of certain assets. The Credit
Facility limits, under certain circumstances, the Company's ability to incur
additional indebtedness, sell material assets or acquire the capital stock or
assets of another business, and prohibits payment of dividends. The Credit
Facility also requires the Company to meet or exceed certain coverage, leverage
and indebtedness ratios. Indebtedness under the Credit Facility is
collateralized by a pledge of 100% of the stock of all existing and future
subsidiaries of the Company.
Convertible Notes Payable
The convertible notes payable represented amounts payable to certain
limited partnerships whose net assets and business operations were acquired by
HHSI in 1994. These notes were converted into shares of HHSI common stock
immediately prior to the HHSI Merger.
Senior Subordinated Debt
In November 1995, the Company repaid senior subordinated indebtedness
aggregating $4.5 million with a portion of the net proceeds of the Offering. The
Company recorded an extraordinary loss of $1.2 million, net of estimated income
taxes of approximately $660,000, related to the write-off of deferred financing
costs and the remaining unamortized discounts on these notes at the time of
repayment.
Capital Lease Line of Credit
The Company has a commitment from a financing institution to borrow up to
$4 million under a capital lease line of credit. The lease line is
collateralized by the equipment underlying the borrowings. The lease line bears
interest ranging from 8.5% to 10.0% per annum. Amounts outstanding under this
lease line were $3.1 million at June 30, 1997.
Maturities of long-term debt, including capitalized lease obligations, for the
next five fiscal years are as follows:
<TABLE>
<CAPTION>
Fiscal year
ended June 30
---------------
(amounts in thousands)
<S> <C>
1998........... $ 6,263
1999........... 3,378
2000........... 73,963
2001........... 970
2002........... 482
</TABLE>
In April 1997, the Company entered into a two year convertible interest
rate cap agreement
63
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(the "Cap Agreement") with a financing institution. The Cap Agreement requires
the financing institution to reimburse the Company for the amount by which the
published three-month LIBOR rate exceeds 7.5% per annum, on a notional amount of
$11.0 million (the "Notional Amount"). After the first year of the Cap
Agreement, the financing institution has the option to convert the Cap Agreement
to a swap agreement, effectively fixing the Company's annual interest expense at
6.2% on the Notional Amount, and extend the term of the agreement through April
2000. No costs were required to be paid in obtaining the Cap Agreement.
6. Capital Stock
Deferred Offering Costs
During the three months ended March 31, 1997, the Company wrote-off
deferred costs aggregating $300,000 related to an offering to sell shares of the
Company's common stock through a Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on November 1, 1996 and withdrawn on
December 30, 1996. The write-off of the deferred costs is included in merger and
other nonrecurring costs and expenses in the accompanying 1997 consolidated
statement of income.
Recapitalization
Upon consummation of the Offering in November 1995, the Company
implemented a plan of recapitalization (the "Recapitalization") and amended its
Articles of Incorporation to authorize the issuance of up to 20 million shares
of no par value common stock and up to 10 million shares of preferred stock of
such classes and series and with such voting powers, designations, preferences,
rights and restrictions as may be established by the Board of Directors.
Additionally, each share of the Company's Class A common stock (five
votes per share), Class B common stock (one vote per share) and Class C common
stock (2.36 votes per share) outstanding prior to the Offering was canceled and
exchanged for one share each of the Company's new no par value common stock.
Holders of the no par value common stock are entitled to one vote per share.
The Recapitalization also caused each share of the Company's Series A
Preferred Stock held in the treasury before the Offering to be canceled, and
provided for the redemption and cancellation of the Company's Series B and
Series C Preferred Stock at their par values of $10 per share plus accrued and
unpaid dividends, aggregating approximately $2.7 million. The Series C Preferred
Stock was issued in connection with the Tampa Acquisition (see Note 2).
Redemption Rights
In connection with an acquisition in March 1995, the Company was required
to repurchase the stock issued in connection with this acquisition for $5 per
share upon the occurrence of certain events. This stock was reflected as
redeemable stock in the accompanying 1996
64
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
consolidated balance sheet at its redemption value of $500,000. The redemption
provision expired in April, 1997 and the related amounts were reclassified to
common stock in the accompanying 1997 consolidated balance sheet.
Stock Subscriptions Receivable
During fiscal 1993 and 1994, a total of 191,000 shares of Class B common
stock were issued to certain management shareholders for $1.00 a share and were
financed by the Company through notes bearing interest at 8% per annum, and were
classified as stock subscriptions receivable in the accompanying consolidated
statements of stockholders' equity. These notes may be forgiven contingent upon
certain five-year performance criteria. The performance criteria were met for
each subsequent fiscal year, with the remaining balance of the notes being
forgiven during fiscal 1997.
Preferred Stock Transactions
The following is a summary of the preferred stock transactions for the
periods presented:
<TABLE>
<CAPTION>
HHSI Redeemable Series B Series C
------------------ ----------------- -----------------
Shares Amount Shares Amount Shares Amount
--------- -------- -------- -------- -------- --------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance outstanding, July 1,
1994........................ 10 1,117 60 $ 656 - -
Payment of preferred
dividends................... - - - (60) - -
Accrued dividends............ - 60 - 63 - -
--------- -------- -------- -------- -------- --------
Balance outstanding, June 30,
1995........................ 10 1,177 60 659 - -
Issuance of series C
preferred stock............. - - - - 200 2,000
Accrued dividends............ - 67 - 25 - 25
Redemption of preferred
shares and dividends........ - - (60) (684) (200) (2,025)
--------- -------- -------- -------- -------- --------
Balance outstanding, June 30,
1996........................ 10 1,244 - - - -
Accrued dividends............ - 6 - - - -
Conversion to common stock... (10) (1,250) - - - -
--------- -------- -------- -------- -------- --------
Balance outstanding, June 30,
1997........................ - - - - - -
========= ======== ======== ======== ======== ========
</TABLE>
65
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
7. Warrants and Options
Warrants
In June 1992, the Company issued 89,000 warrants to a financing
institution to purchase Class B common stock at an exercise price of $.20 per
share. In March 1995, the Company redeemed these warrants for $200,000, in
connection with the signing of a subordinated note, and issued warrants to
purchase an aggregate of 182,000 shares of Class B Common Stock at an exercise
price of $0.20 per share (see Note 5, Senior Subordinated Debt). These warrants
were exercised during fiscal 1996.
Warrants to purchase 155,000 shares of Class C Common Stock at an
exercise price of $0.01 were issued in September 1995, in connection with the
Tampa Acquisition (see Note 2, Tampa Acquisition). These warrants were
exercised during fiscal 1996. Additionally, during fiscal 1996, warrants to
purchase an aggregate of 61,000 shares of Class B Common Stock were exercised.
Warrants remaining outstanding at June 30, 1997 permit the holders to purchase
an aggregate of 25,000 shares of common stock for an exercise price of $2.54 per
share. These warrants expire June 30, 2002.
Stock Option Plan
In September 1995, the Company's stockholders approved the 1995 Employee and
Consultant Equity Plan (the "Option Plan") and authorized the reservation of up
to 600,000 shares of the Company's common stock for issuance under this plan.
The stockholders will be asked to authorize an increase of 750,000 additional
shares for issuance under the Option Plan during the fiscal 1997 annual
stockholder meeting. The Option Plan replaced the amended and restated 1985
Incentive Compensation Plan (the "1985 Plan"). The Option Plan provides for the
granting of options to purchase shares of the Company's common stock to
officers, directors, employees and consultants of the Company. Options issued
under the Option Plan may be qualified or non-qualified grants. The exercise
price of qualified option grants cannot be less than 100% of the fair market
value of the shares on the date of grant. Options generally vest over a three-
year period and generally expire between five to ten years from the date of
grant.
66
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following is a summary of option transactions and exercise prices for the
periods presented:
<TABLE>
<CAPTION>
Price per share
---------------------------
Weighted
Options Average Range
----------- ------------ ----------
(amounts in thousands, except per share data)
<S> <C> <C> <C>
Outstanding at July 1, 1994........................ 49 $1.59 $0.20 to $3.00
Granted............................................ 23 $1.08 $1.00 to $2.75
Exercised.......................................... (10) $0.20 $0.20
---------
Outstanding at June 30, 1995....................... 62 $1.63 $1.00 to $3.00
Granted............................................ 294 $7.84 $7.50 to $10.00
Exercised.......................................... (27) $2.45 $1.00 to $3.00
---------
Outstanding at June 30, 1996....................... 329 $7.11 $1.00 to $10.00
Granted............................................ 349 $11.18 $9.50 to $13.00
Exercised.......................................... (23) $1.33 $1.00 to $7.50
Canceled........................................... (43) $9.67 $7.50 to $11.00
---------
Outstanding at June 30, 1997....................... 612 $9.47 $1.00 to $13.00
=========
Exercisable at June 30, 1997....................... 278 $8.84 $1.00 to $11.00
=========
</TABLE>
Options exercisable at June 30, 1997 include 7,000 options issued under
the 1985 Plan exercisable at $1.00 per share and which expire in June 1998. The
remaining options exercisable at June 30, 1997 are exercisable at a weighted
average price of $9.04 per share and expire from June 1998 through June 2007.
Effective July 1, 1996, the Company adopted the disclosure-only
provisions of SFAS 123. Accordingly, no compensation cost has been recognized
for options granted under the Option Plan. Under SFAS 123, compensation cost of
$915,000 would have been recorded in fiscal 1997 for the Company's Option Plan
based upon the fair value of the option awards. Earnings per share would have
been $0.22 in fiscal 1997 under SFAS 123. No compensation cost would have
resulted in fiscal 1996. The fair value determination was calculated using the
Black-Scholes option pricing model to value all stock options granted since July
1, 1994, using the following assumptions, and assuming no dividends:
<TABLE>
<CAPTION>
Weighted
average risk
free interest Expected Expected life
Fiscal Year Issued rate volatility of options
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1994 4.6% - % 3
1995 6.2 - 3
1996 5.7 60.8 5
1997 6.6 59.6 5
</TABLE>
67
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
8. Commitments and Contingencies
The Company leases certain office facilities and other equipment under
noncancelable leases for terms ranging from one to six years with certain
renewal options. Future minimum lease payments under these leases for the next
five years are as follows:
<TABLE>
<CAPTION>
Capital Noncancelable
Leases Operating Leases
--------- ------------------
(amounts in thousands)
<S> <C> <C>
1998........................................ $1,612 $2,293
1999........................................ 1,458 1,325
2000........................................ 1,284 860
2001........................................ 1,031 491
2002........................................ 442 29
--------- ------------------
Total minimum lease payments................ 5,827 $4,998
==================
Less amount representing interest........... 717
Present value of net minimum future......... $5,110
=========
</TABLE>
Total rent expense under cancelable and noncancelable operating leases
amounted to $2.0 million, $3.4 million and $4.7 million for fiscal 1995, 1996
and 1997, respectively, including rent expense on equipment which is subleased
to patients and included in patient care costs of $563,000, $1.5 million and
$1.8 million, respectively.
The Company maintains medical malpractice and general liability insurance
coverage through non-captive insurance companies.
The Company is a party to certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
insurance coverage for these actions and that the ultimate outcome of these
actions will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
The Company has employment agreements with four officers which expire
through April 2000. These agreements provide for, among other things, total
annual base compensation of $740,000.
The Company is required to make certain payments to former owners of
businesses acquired, as part of the consideration paid for these acquisitions.
These payments aggregate $1.2 million, of which $632,000 is payable during
fiscal 1998 and included in other current liabilities, with the remaining
balance included in other noncurrent liabilities.
9. Employee Benefit Plans
The Company has a profit-sharing plan that covers substantially all
employees who
68
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
become eligible to participate, upon completion of six months of
continuous service. Vesting occurs over a three- to seven-year schedule.
Benefits become fully vested upon reaching normal retirement age, or the
participants' permanent disability or death. Contributions to the plan are made
at the Company's discretion, not to exceed the maximum amount deductible under
the Internal Revenue Code. Expense under the profit sharing plan amounted to
$450,000 for fiscal 1995. The Company made no contributions to this plan in
fiscal 1996 or 1997. The Company also provides a defined contribution 401(k)
plan available to substantially all employees who become eligible to participate
in the plan. The Company does not make contributions under this plan.
10. Income Taxes
The provision (benefit) for income taxes for the following fiscal years
consisted of:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(amounts in thousands)
Currently payable:
Federal................................. $ 875 $ 2,084 $ 2,274
State................................... 441 341 132
1,316 2,425 2,406
---------- ---------- ----------
Deferred:
Federal................................. (414) (78) (202)
State................................... (109) 49 (17)
(523) (29) (219)
---------- ---------- ----------
$ 793 $ 2,396 $ 2,187
========== ========== ==========
</TABLE>
A reconciliation of the U.S. Federal income tax rate to the effective tax
rate were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal income tax rate....................... 34 % 34 % 34 %
State income taxes, net of Federal income tax
benefit.......................................... 14 5 3
Other, including nondeductible goodwill............ 3 3 7
-------- -------- --------
Effective income tax rate.......................... 51 % 42 % 44 %
======== ======== ========
</TABLE>
69
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Deferred tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(amounts in thousands)
<S> <C> <C>
Accounts receivable....................... $ 726 $ 1,786
Inventory................................. 31 77
Vacation reserve.......................... 194 136
Self-insurance reserves................... 31 31
Other..................................... 13 12
---------- ----------
Gross deferred tax assets............... 995 2,042
---------- ----------
Depreciation and amortization............. (157) (1,269)
Other..................................... (73) (73)
---------- ----------
Gross deferred tax liabilities.......... (230) (1,342)
---------- ----------
Net deferred tax asset................ $ 765 $ 700
========== ==========
</TABLE>
11. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(amounts in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................ $ 1,250 $ 1,646 $ 3,274
========== ========== ==========
Income taxes............................ $ 425 $ 1,433 $ 2,135
========== ========== ==========
Noncash investing and financing activities:
Accrued and unpaid dividends on preferred
stock................................... $ 120 $ 67 $ 6
========== ========== ==========
Capital lease obligations incurred........ $ 375 $ 895 $ 1,433
Issuance of warrants in connection with
subordinated notes payable.............. $ 934 - -
Issuance of warrants in connection with
Tampa Acquisition bridge financing...... - $ 1,192 -
Conversion of subordinated note to 400
shares of common stock, no par value.... - $ 3,000 -
Write-off of Series C preferred stock
discount................................ - $ 787 -
========== ========== ==========
</TABLE>
70
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(amounts in thousands)
<S> <C> <C> <C>
Acquisitions:
Assets acquired.............................. $ 8,776 $ 24,828 $ 61,457
Less:
Liabilities assumed and acquisition costs.. 378 2,391 11,335
Issuance of subordinated seller notes and
subordinated convertible note............ 2,550 5,400 6,201
Issuance of common stock................... 774 1,275 6,379
Capital lease obligations assumed.......... 81 69 -
---------- ---------- ----------
Cash paid, net of cash acquired.......... $ 4,993 $ 15,693 $ 37,542
========== ========== ==========
Conversion of HHSI convertible notes into the
Company's common stock:
Common stock, no par......................... - - 2,042
Additional paid-in capital................... - - (104)
---------- ---------- ----------
- - $ 1,938
========== ========== ==========
Exchange of HHSI preferred stock for the
Company's common stock....................... - - $ 1,250
========== ========== ==========
Recapitalization:
Class A common stock......................... - $ (110) -
Class B common stock......................... - (173) -
Class C common stock......................... - (1,217) -
Redeemable Class B common stock.............. - (500) -
Additional paid-in capital................... - (3,504) -
Treasury stock............................... - 291 -
Redeemable common stock, no par value........ - 500 -
Common stock, no par value................... - 4,713 -
---------- ---------- ----------
- - -
========== ========== ==========
Reclassification of redeemable stock to
stockholders equity resulting from
expiration of redemption requirements........ - - $ 500
========== ========== ==========
</TABLE>
12. Fourth Quarter Adjustments
During the fourth quarter of 1997, the Company recorded a $1.1 million
nonrecurring charge reflecting the Company's contractual obligations under
employment agreements to make payments to certain former owners of acquired
businesses, who are no longer involved in operations of the Company. This amount
is included in merger and other nonrecurring costs in the accompanying 1997
consolidated statement of income.
71
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Additionally, the Company recorded a reserve for doubtful accounts, in
addition to amounts historically recorded as a percentage of net revenues, of
$3.0 million in order to (i) comply with its reserve policy and (ii) reflect
managements' estimate of potential further exposure due to trends in third-party
payment terms, which became apparent during the fourth quarter of fiscal 1997.
This amount is included in provision for doubtful accounts in the accompanying
1997 consolidated statement of income.
13. Subsequent Event
On September 26, 1997, the Company entered into a definitive agreement for
the acquisition through merger of U.S. HomeCare Corporation, a provider of
paraprofessional and professional home health care services, including nursing
care, personal care and other specialized therapies, with approximately $56
million in annualized net revenues, based upon the quarter ended June 30, 1997,
and operations in New York, Connecticut and Pennsylvania (the "USHO
Acquisition"). The Company expects to issue approximately 2.7 million shares of
Common Stock in connection with the USHO Acquisition, which is expected to be
accounted for as a pooling of interests.
Additionally, on September 19, 1997, the Company obtained a commitment from
its existing syndicate of lenders to amend the Credit Facility to increase
available borrowings from $100 million to $125 million, to be used in part to
refinance approximately $14.0 million of debt to be assumed in connection with
the USHO Acquisition and approximately $3 million in expenses to be incurred in
connection with the acquisition. The amendment will require that $40 million of
existing indebtedness under the Credit Facility convert to a six-year amortizing
term loan with increasing amortization beginning in the fourth quarter of fiscal
1998. The amendment will also (i) require that 50% of excess cash flow, as
defined, be used to reduce the term loan, (ii) amend certain financial covenants
and (iii) increase the maximum interest rate on borrowings under the Credit
Facility by 12.5 basis points. On September 26, 1997, certain financial
covenants under the Credit Facility were amended.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company had no changes in or disagreements with accountants on
accounting and financial disclosure of the type referred to in Item 304 of
Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are currently as
follows:
<TABLE>
<CAPTION>
Name Age Position
-------------------- --- -------------------------------------------------
<S> <C> <C>
Bruce J. Feldman 48 President, Chief Executive Officer and
Chairman of the Board
Bruce J. Colburn 42 Chief Financial Officer
Fred J. Nicholas 52 Chief Operating Officer
Colleen M. Lederer 41 Corporate Vice President of Professional Services
Augustus Robbins, IV 42 Corporate Vice President of Product Services
Wanda Monical 43 Corporate Vice President - Women's and Children's
Health Services
Susan V. Juris 41 Corporate Vice President - Managed Care Services
Joseph J. Grilli 46 Area Vice President, Northeast Region
James Weinstein 43 Area Vice President, Mid-Atlantic Region
Joseph Sterensis 45 Area Vice President, Florida Region
Victor Kingsley 40 Area Vice President, New England Region
April Anthony 30 Area Vice President, Texas Region
G. Michael Bellenghi 49 Director
Harvey Machaver 72 Director
Joseph F. Trustey 35 Director
</TABLE>
Bruce J. Feldman, the founder of the Company, has served as President,
Chief Executive Officer and Chairman of the Board of the Company since it was
founded in December 1982. Prior to founding the Company, Mr. Feldman owned a
Medicare-certified home health agency, which became a subsidiary of the Company
in 1982.
Bruce J. Colburn became Chief Financial Officer in April 1996. From 1995 to
1996, Mr. Colburn was Senior Vice President, Chief Financial Officer and
Treasurer of NovaCare, Inc., a national provider of rehabilitation services.
From 1994 to 1995, Mr. Colburn was Senior Vice President, Chief Financial
Officer and Treasurer of Primary Health Systems, L.P., an acute care hospital
management company. In 1994, Mr. Colburn was Senior Vice President, Finance, of
OrNda Healthcorp, an acute care hospital management company. From 1990 to 1994,
Mr. Colburn held various financial officer positions with American Healthcare
Management, Inc., a hospital
73
<PAGE>
management company acquired by OrNda Healthcorp in 1994.
Fred J. Nicholas became Chief Operating Officer in January 1995. He joined
the Company in April 1992 as Chief Operating Officer of the Florida division.
From April 1990 to June 1992, Mr. Nicholas was President and Chief Operating
Officer of Unity Health Care, Inc., a home health care company.
Colleen M. Lederer became Corporate Vice President of Professional Services
in July 1994. From 1987 to 1994, Ms. Lederer was Director of Professional
Services of the Company.
Augustus Robbins, IV became Corporate Vice President of Product Services in
October 1996. Mr. Robbins joined the Company in October 1996 in connection with
the Company's merger with Home Health Systems, Inc., a provider of durable
medical equipment and respiratory and infusion therapy services. Mr. Robbins was
Executive Vice President of Home Health Systems, Inc. from 1986 to 1996.
Wanda Monical became Corporate Vice President - Women's and Children's
Health Services in June 1997. From March 1995 to March 1997, Ms. Monical was
Vice President for Interim Healthcare, Inc., a regional nursing services
provider. From October 1992 to December 1994, Ms. Monical served in senior
development capacities at Olsten Kimberly Quality Care, a national provider of
nursing services.
Susan V. Juris became Corporate Vice President - Managed Care Services in
February, 1997. From 1994 to 1997, Ms. Juris was a health care consultant for
Alternacare, Inc., which she founded in 1994 to provide specialty consulting to
home health and managed care companies. From 1989 to 1994, Ms. Juris was
Executive Vice President and Chief Operating Officer of SNI Home Care, Inc., a
fully integrated, regional home care system and contract management company.
Joseph J. Grilli became Area Vice President, Northeast Region in March
1997, when the Mid-Atlantic Region was split into the Mid-Atlantic and Northeast
Regions. From July 1996 to April 1997, Mr. Grilli was the Vice President, Mid-
Atlantic Region and has been employed by the Company since 1988 in various
positions.
James Weinstein became Area Vice President, Mid-Atlantic Region in March
1997. From 1991 to 1997, Mr. Weinstein was President of GHS Home Medical
Services, a home care provider owned by Graduate Health System, a vertically
integrated hospital system located in the Metropolitan Philadelphia area.
Joseph Sterensis became Area Vice President, Florida Region in April 1997.
From September 1995 to March 1997, Mr. Sterensis was Director of Operations for
the Company's product locations in the Tampa, Florida area. Prior to September
1995, Mr. Sterensis was Chief Operating Officer of Preferred Diagnostics and
Medical Services, Inc., a provider of durable medical equipment and respiratory
therapy services, which was acquired by the Company in
74
<PAGE>
September 1995.
Victor Kingsley became Area Vice President, New England Region in February
1997. From 1994 to February 1997, Mr. Kingsley was General Manager, Boston Major
Market Homecare Division for National Medical Care, Inc., an international
dialysis and home care products and services company. From 1987 to 1994, Mr.
Kingsley held various positions with Blue Cross Blue Shield of Massachusetts,
including Director of Client Services and Director of Procurement.
April Anthony became Area Vice President, Texas Region in January 1997.
From 1992 to 1996, Ms. Anthony was Chief Operating Officer of LHS Holdings, Inc.
a nursing and related patient services and infusion therapy services company,
which was acquired by the Company in January 1997.
G. Michael Bellenghi has been a director of the Company since October 1994.
Since January 1996, he has been the Chairman and Chief Executive Officer of
Recordex Services, Inc., a medical records retrieval company located in Malvern,
Pennsylvania. Mr. Bellenghi also serves as a director of F.Y.I. Incorporated,
the parent company of Recordex Services, Inc., a company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934. From 1990 to 1996, Mr. Bellenghi was the Chief Executive Officer of
Paragon Management Group, Inc., a health care consulting company located in
Malvern, Pennsylvania.
Harvey Machaver has been a director of the Company since December 1985.
Since 1990, Mr. Machaver has been President of Scopus Evaluation Services
("Scopus"), a health care consulting firm located in New York, New York. Mr.
Machaver is a fellow of the American College of Health Care Executives and a
fellow of the New York Academy of Medicine.
Joseph F. Trustey has been a director of the Company since April 1995. From
1992 to the present, Mr. Trustey has been employed by Summit Partners, L.P., a
venture capital firm, and currently serves as a general partner of that firm.
From 1990 to 1992, Mr. Trustey was employed as a strategy consultant with the
consulting firm of Bain & Company, Inc. Mr. Trustey is a director of Suburban
Ostomy Supply Co., Inc., a company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
75
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain information regarding the
compensation paid to the Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company for services rendered in
all capacities to the Company for fiscal 1997, 1996 and 1995 (collectively the
"named executive officers"):
<TABLE>
<CAPTION>
Long Term
Annual Compensation/(1)/ Compensation
------------------------- ------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation/(2)/
- -------------------------------- ---------- ---------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Bruce J. Feldman, 1997 $300,000 $ - 100,000 $33,792
President and Chief 1996 254,000 43,600 75,000 33,792
Executive Officer 1995 244,869 25,000 - 58,573/(3)/
Fred J. Nicholas 1997 165,000 - 50,000 -
Chief Operating Officer, 1996 155,000 15,500 50,000 -
Corporate 1995 127,728 14,000 5,000 14,000/(4)/
Bruce J. Colburn 1997 150,000 - 150,000 -
Chief Financial Officer/(5)/ 1996 30,850 - - -
Joseph Sterensis 1997 140,000 - 20,000 -
Area Vice President, Florida 1996 92,035 33,333 - -
Region/(6)/
Joseph J. Grilli 1997 125,000 - 15,000 -
Area Vice President, Northeast 1996 110,000 11,000 10,000 -
Region 1995 108,769 10,500 5,000 10,500/(4)/
</TABLE>
- -----------------
/(1)/ Does not include the value of perquisites provided to certain executive
officers which in the aggregate did not exceed the lesser of $50,000 or
10% of such officer's salary and bonus.
/(2)/ Consists of $15,460 of premiums on a split-dollar life insurance policy
and $18,324 relating to indebtedness to the Company that was forgiven
upon the attainment of certain operating results.
/(3)/ Consists of $25,000 contributed to the Company's pension and profit
sharing plan, $15,000 of premiums on a split-dollar life insurance policy
and $18,573 relating to indebtedness to the Company that was forgiven
upon the attainment of certain operating results.
/(4)/ Represents contributions to the Company's pension and profit sharing
plan.
/(5)/ Mr. Colburn became Chief Financial Officer in April 1996.
/(6)/ Mr. Sterensis started with the Company in October 1995 as the Director of
Operations for the Company's product locations in the Tampa, Florida
area. He became Area Vice President, Florida Region, in April 1997.
76
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted during fiscal 1997 to the named executive officers. The following table
also sets forth the potential realizable value over the term of the options (the
period from grant date to the expiration date), based on assumed rates of stock
of 5% and 10%, compounded annually. These amounts do not represent the Company's
estimate of future stock price. Actual realizable values, if any, of stock
options will depend on the future performance of the Company's common stock.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual
Rates of Stock Price
Appreciation For
Individual Grants Option Term (1)
------------------------------------------------------- ----------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees In Exercise Expiration
Name Granted Fiscal Year Price Date 5% 10%
- -------------------------- ---------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Feldman.......... 100,000 28.7% $11.00 7/15/06 $691,784 $1,753,117
Fred S. Nicholas.......... 50,000 14.3% 10.00 7/15/06 314,447 796,871
Bruce Colburn............. 150,000 43.0% 9.00 4/8/06 849,008 2,151,552
Joseph Sterensis.......... 20,000 5.7% 8.94 5/1/07 112,446 284,961
Joseph J. Grilli.......... 15,000 4.3% 10.00 7/15/06 94,334 239,061
</TABLE>
- ----------------------------
(1) Represents the difference between the market value of the Company's common
stock for which the option may be exercised, assuming that the market value
of the common stock appreciates in value from the date of grant to the end
of the option term at annualized rates of 5% and 10%, respectively, and the
exercise price of the option. The rates of appreciation used in this table
are prescribed by regulations of the Securities and Exchange Commission and
are not intended to forecast future appreciation of the market value of the
common stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information concerning the exercise
of stock options during fiscal 1997 and the number and value of unexercised
options held at the end of
77
<PAGE>
fiscal 1997 by the named executive officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Year-End Fiscal Year-End(2)
--------------------------- ---------------------------
Shares
Acquired on Value
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Feldman...... - - 156,250 18,750 $112,500 $37,500
Fred J. Nicholas...... 8,333 $ 93,746 77,083 24,584 41,667 35,003
Bruce Colburn......... - - 16,666 133,334 8,333 66,667
Joseph Sterensis...... - - - 20,000 - 11,200
Joseph J. Grilli...... 5,000 56,250 6,666 23,334 34,997 27,504
</TABLE>
(1) Calculated by determining the difference between the last reported sales
price of the common stock underlying the exercised Options on the date of
exercise and the exercise price.
(2) Calculated by determining the difference between the last reported sales
price of the common stock underlying the Options on June 30, 1997 and the
exercise price, for those Options where the exercise price of the Options
execeeded the last reported sales price of the common stock.
Employment Agreements
Bruce J. Feldman. On September 1, 1995, the Company entered into an
employment agreement with Bruce J. Feldman, President and Chief Executive
Officer of the Company, for an initial term of three years, subject to automatic
annual extensions of one year on August 31, 1996 and each anniversary
thereafter. Pursuant to the terms of Mr. Feldman's employment agreement, Mr.
Feldman is entitled to receive (i) an annual base salary of $284,000, or such
higher amount as the Compensation Committee may determine (the "Base Salary"),
(ii) an annual cash bonus based on the Company's achievement of specified levels
of net income as determined by the Compensation Committee and (iii) a deferred
annuity program of $15,000 per year and other benefits at least equivalent to
those provided to the Company's other executive officers. The Base Salary will
be reviewed by the Compensation Committee on not less than an annual basis.
Pursuant to the employment agreement, Mr. Feldman is also entitled to receive a
car allowance of $9,000 per year and received a non-qualified stock option grant
to purchase 100,000 shares of Common Stock at a per share exercise price of
$11.00. Of the shares subject to this option, 50% vested immediately upon grant
and the remaining 50% vested on June 30, 1997, upon acheivement by Mr. Feldman
of specified criteria contained in the option grant.
Mr. Feldman's employment agreement may be terminated by the Company with
or without cause, which is defined to include, among other things, the material
breach of the employment agreement by Mr. Feldman, gross negligence in the
performance of his duties, conviction of a felony or commission of a material
act of dishonesty or breach of trust with respect to the Company. The employment
agreement may also be terminated by Mr. Feldman
78
<PAGE>
for good reason, which includes, among other things, the demotion or removal of
Mr. Feldman, a material diminishment of his responsibilities, a reduction in his
Base Salary, failure to be re-elected to the Board or upon a change in control
of the Company. In the event of termination for good reason (including the
Company's failure to renew the term of the employment agreement) by Mr. Feldman,
or without cause by the Company, Mr. Feldman will be entitled to receive, among
other things, regular payments of his Base Salary for three years and have any
unvested stock options and awards accelerate and become fully exercisable. In
the event of termination by the Company for cause or for any other reason, Mr.
Feldman will be entitled to receive any unpaid salary and benefits through the
date of termination. Under the employment agreement, Mr. Feldman is prohibited
from disclosing confidential information during and after the term of the
agreement. In addition, Mr. Feldman is prohibited from soliciting employees or
customers of the Company or engaging or participating in any business which
competes with the Company within a 100-mile radius of any of the Company's
branch offices while he is employed by the Company and for one year thereafter
or, in the event of termination by Mr. Feldman for good reason (including the
Company's failure to renew the term of the employment agreement) or by the
Company without cause, for three years thereafter.
Fred J. Nicholas. The Company entered into an employment agreement, dated
as of January 1, 1995, with Fred J. Nicholas, Chief Operating Officer of the
Company, for a term of three and one-half years. Pursuant to the terms of Mr.
Nicholas's employment agreement, Mr. Nicholas is entitled to receive (i) a base
salary of at least $140,000 per year, (ii) incentive compensation as determined
by the Compensation Committee and (iii) other benefits similar to those provided
to the Company's other officers. Mr. Nicholas's employment agreement may be
terminated with or without cause by either party. In the event of termination by
the Company without cause, Mr. Nicholas will be entitled, under certain
circumstances, to continue to receive regular payments of his base salary for a
period of six months after the date of his termination. In all other cases, in
the event that Mr. Nicholas's employment agreement is terminated, he is entitled
to receive unpaid salary and benefits earned up to the date of termination. In
the event that Mr. Nicholas's employment is terminated for any reason other than
without cause by the Company, he is prohibited from competing with the Company
for a period of two years after such termination.
Bruce J. Colburn. On May 1, 1997, the Company entered into an employment
agreement with Bruce J. Colburn, Chief Financial Officer of the Company, for a
term of three years. Pursuant to the terms of Mr. Colburn's employment
agreement, Mr. Colburn is entitled to receive (i) a current annual base salary
of $175,000, subject to an increase to $200,000 upon the Company's achievement
of annual net revenues, as defined, of $300 million (the "Base Salary"), (ii) an
annual cash bonus based on the Company's achievement of specified goals as
determined by the Compensation Committee and (iii) other benefits similar to
those provided to the Company's other officers. The Base Salary will be
reviewed by the Compensation Committee on not less than an annual basis.
Pursuant to the employment agreement, Mr. Colburn received a non-qualified stock
option grant to purchase 150,000 shares of Common Stock at a per share exercise
price of $9.00. The shares subject to this option vest over a five-year period
beginning
79
<PAGE>
April 8, 1996, and fully vest upon the occurrence of certain events including a
change of control, as defined.
Mr. Colburn's employment agreement may be terminated by the Company with or
without cause, as defined by the agreement. The employment agreement may also
be terminated by Mr. Colburn upon the Company's uncured failure to comply with
material provisions of the employment agreement ("Compliance Failure"). In the
event of termination without cause or for Compliance Failure, Mr. Colburn is
entitled to receive regular payments of his Base Salary for a period of twelve
months. In the event of termination in connection with a change in control, Mr.
Colburn is entitled to receive regular payments of his Base Salary through the
greater of the end of his contract period or twelve months. In the event of
termination by the Company for any other reason, Mr. Colburn will be entitled to
receive any unpaid Base Salary and benefits through the date of termination.
Under the employment agreement, Mr. Colburn is prohibited from disclosing
confidential information during and after the term of the agreement and for one
year thereafter is prohibited from soliciting employees or customers of the
Company or engaging or participating in any business which materially competes
with the Company within any geographical area in which the Company engages in
business.
Joseph J. Grilli. The Company entered into an employment agreement, dated
as of July 1, 1996, with Joseph J. Grilli, Vice President, Mid-Atlantic Region,
for a term of three years. Pursuant to the terms of Mr. Grilli's employment
agreement, Mr. Grilli is entitled to receive (i) a base salary of $125,000 per
year, (ii) incentive compensation as determined by the Board of Directors, and
(iii) other benefits similar to those provided to the Company's other officers.
Mr. Grilli's employment agreement may be terminated with or without cause by
either party. In the event of termination by the Company without cause, Mr.
Grilli will be entitled, under certain circumstances, to continue to receive
regular payments of his base salary for a period of 12 months after the date of
his termination. In all other cases, in the event that Mr. Grilli's employment
agreement is terminated, he is entitled to receive unpaid salary and benefits
earned up to the date of termination. In the event Mr. Grilli's employment is
terminated for any reason other than without cause by the Company, he is
prohibited from competing with the Company for a period of one year.
Director Compensation
Directors' Fees. Each director of the Company who is not also an officer
or employee of the Company receives a fee of $1,000 for each meeting of the
board of directors or any committee of the board of directors attended.
Consulting Arrangements. The Company has a consulting arrangement with
Scopus, of which Mr. Machaver is the principal stockholder. In fiscal 1997,
1996 and 1995, the Company paid consulting fees of approximately $44,000,
$40,000 and $40,000, respectively, to Scopus.
Stock Options. Under the Company's 1995 Employee and Consultant Equity
Plan, each
80
<PAGE>
non-employee director was granted on November 13, 1995 an option to purchase
10,000 shares of Common Stock at an exercise price of $7.50 (the "Directors'
Options"). The Directors Options are currently exercisable with respect to 7,500
shares and will become exercisable with respect to an additional 2,500 shares on
November 13, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock (i) by each person who is known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii) by
each director of the Company, (iii) by each executive officer of the Company
named in the Summary Compensation Table and (iv) by all directors and executive
officers of the Company as a group. Except as otherwise indicated, all
information is as of the Record Date and the beneficial owners of the Common
Stock listed below have sole investment and voting power with respect to such
shares.
<TABLE>
<CAPTION>
Shares Beneficially Owned /(2)/
-------------------------------------
Name and Address of Beneficial Owner/(1)/ Number Percent
- ---------------------------------------------------- --------------- -----------------
<S> <C> <C>
Bruce J. Feldman /(3)/............................... 1,015,853 11.0%
Fred J. Nicholas/(4)/................................ 109,333 1.2%
Bruce J. Colburn/(5)/................................ 18,166 *
Joseph Sterensis..................................... 40,000 *
Joseph Grilli/(6)/................................... 18,333 *
Joseph J. Trustey/(7)/............................... 10,000 *
G. Michael Bellenghi/(7)/............................ 10,000 *
Harvey Machaver/(8)/................................. 36,591 *
Wasatch Advisors, Inc./(9)/.......................... 868,975 9.4%
RCM Capital Management, L.L.C./(10)/................. 920,000 9.9%
Wellington Management Co., L.L.P./(11)/.............. 800,800 8.7%
All Directors and Executive
Officers as a group (15 persons)/(12)/............. 1,272,298 13.8%
</TABLE>
* Denotes less than 1.0%
/(1)/ Except as otherwise shown, the address of each person listed above is in
care of the Company, 2200
81
<PAGE>
Renaissance Boulevard, Suite 300, King of Prussia, PA 19406.
/(2)/ Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and includes voting
or investment power with respect to the shares. Shares of common stock
subject to securities currently exercisable or exercisable within 60 days
following October 1, 1997, are deemed outstanding for computing the share
ownership and percentage ownership of the person holding such securities,
but are not deemed outstanding for computing the percentage of any other
person.
/(3)/ Includes 95,238 shares of common stock held by the Company's Profit
Sharing Plan, of which Mr. Feldman is sole voting trustee, 381,250 shares
of common stock which may be acquired upon the exercise of currently
exercisable stock options, and 5,000 shares of common stock which may be
acquired upon the exercise of currently exercisable warrants.
/(4)/ Includes 108,333 shares of common stock which may be acquired upon the
exercise of currently exercisable options.
/(5)/ Includes 16,666 shares of common stock which may be acquired upon the
exercise of currently exercisable options.
/(6)/ Includes 8,333 shares of common stock which may be acquired upon the
exercise of currently exercisable options.
/(7)/ Represents shares of common stock which may be acquired upon the exercise
of currently exercisable options.
/(8)/ Consists of 20,000 shares of common stock which may be acquired upon the
exercise of currently exercisable warrants, 10,000 shares of common stock
which may be acquired upon the exercise of currently exercisable options
and 6,591 shares held jointly with Mr. Machaver's spouse.
/(9)/ The shares of common stock are owned by a variety of investment advisory
clients of Wasatch Advisors, Inc. ("Wasatch"), which clients receive
dividends with respect to and proceeds from the sale of such shares. No
such client is known to beneficially own more than 5% of the common
stock. Wasatch has sole dispositive and voting power with respect to all
868,975 of the shares of common stock. The information set forth herein
with respect to the beneficial ownership of the common stock is as of
December 31, 1996 and is derived from a Schedule 13-G, dated August 25,
1997, filed by Wasatch with the Commission. The address of such
beneficial owner is 68 S. Main Street, Suite 400, Salt Lake City, UT
84101.
/(10)/ The shares of common stock are owned by a variety of investment advisory
clients of RCM Capital Management, L.L.C. ("RCM"), which clients receive
dividends with respect to and proceeds from the sale of such shares. No
such client is known to beneficially own more than 5% of the common
stock. RCM has sole dispositive power with respect to all 920,000 of the
shares of common stock and sole voting power with respect to 820,000 of
the shares of common stock. The information set forth herein with respect
to the beneficial ownership of the common stock is as of October 1, 1997
and is derived from information supplied to the Company by RCM. The
address of such beneficial owner is 4 Embaracadero Center, Suite 3000,
San Francisco, CA 94111.
/(11)/ The shares of common stock are owned by a variety of investment advisory
clients of Wellington Management Company ("Wellington"), which clients
receive dividends with respect to and proceeds from the sale of such
shares. No such client is known to beneficially own more than 5% of the
common stock. Wellington has shared dispositive power with respect to all
800,800 of the shares of common stock and shared voting power with
respect to 335,000 of the shares of common stock. The information set
forth herein with respect to the beneficial ownership of the common stock
is as of June 30, 1997 and is derived from information supplied to the
Company by Wellington. The address of such beneficial owner is 75 State
Street, Boston, MA 02109.
/(12)/ Includes 25,000 shares of common stock which may be acquired upon the
exercise of currently exercisable warrants and 551,248 shares of common
stock which may be acquired upon the exercise of currently exercisable
options.
82
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than ten
percent of the Company's common stock, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. Officers, directors
and greater than ten-percent shareholders are required by regulation of the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company during or with respect to the Company's most
recent fiscal year and written representations that no other reports were
required, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten-percent beneficial owners were complied
with during fiscal 1997, except that during fiscal 1997, Bruce J. Colburn failed
to timely file one report of a change in ownership of equity securities of the
Company with respect to one transaction.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1992, the Company loaned the principal sum of approximately
$95,000 to Bruce J. Feldman, its President and Chief Executive Officer. The
loan matured on June 30, 1997 and was payable annually with interest at the rate
of 8% per annum until paid in full. This note was forgiven in its entirety over
a five-year period through June 30, 1997 as a result of the Company achieving
certain annual performance criteria.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) The following documents are filed as part of this report:
(1) Financial Statements: Page Number
<S> <C> <C>
Report of Independent Accountants 46
Consolidated Balance Sheets as of June 30, 1996 and 1997 47
Consolidated Statements of Income for the fiscal years ended
June 30, 1995, 1996 and 1997 48
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1995, 1996 and 1997 49
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 1995, 1996 and 1997 50
Notes to Consolidated Financial Statements 52
</TABLE>
83
<PAGE>
<TABLE>
<S> <C> <C>
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts for each of the three
years in the period ended June 30, 1997 S-1
(3) Exhibits:
The exhibits filed with this report are listed in the exhibit
index on page 86.
(b) Current Reports on Form 8-K:
The Company did not file a report on Form 8-K during the quarter
ended June 30, 1997.
</TABLE>
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HOME HEALTH CORPORATION OF AMERICA, INC.
By:
----------------------------------------------------
Bruce J. Feldman
President and Chief Executive Officer
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby
appoint Bruce J. Feldman and Bruce J. Colburn as attorneys-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
Registrant and each such person, individually, and in each capacity stated
below, one or more amendments to the annual report which amendments may make
such changes in the report as the attorney-in-fact acting in the premises deems
appropriate and to file any such amendment to the report with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- --------------------------------- ----------------
<S> <C> <C>
/s/ Bruce J. Feldman President, Chief Executive Officer, October 28, 1997
- --------------------------- Director and Chairman of the Board
Bruce J. Feldman
/s/ Bruce J. Colburn Chief Financial Officer and Chief October 28, 1997
- --------------------------- Accounting Officer
Bruce J. Colburn
/s/ G. Michael Bellenghi Director October 28, 1997
- ---------------------------
G. Michael Bellenghi
/s/ Harvey Machaver Director October 28, 1997
- ---------------------------
Harvey Machaver
/s/ Joseph Trustey Director October 28, 1997
- ---------------------------
Joseph Trustey
</TABLE>
85
<PAGE>
EXHIBIT INDEX
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
------------- -----------
<S> <C> <C>
* 3.1 Amended and Restated Articles of Incorporation of the Company.
* 3.2 Amended and Restated Bylaws of the Company.
** 10.1 Stock Purchase Agreement among HHCA, Home Health Corporation of New
Hampshire, Randy DiSalvo, R.S.D. Management Services, Inc., Nursing
Services Home Care, Inc. and Nursing Services Home Care, Ltd.
*** 10.2 Asset Acquisition Agreement Among Home Health Corporation of
America, Inc. and its Nominees, LHS Holdings, Inc., Liberty Health
Services, Inc., Nurses Today M/C, Inc. and Mark H. O'Brien.
*** 10.3 Asset Acquisition Agreement Among Home Health Corporation of
America, Inc. and its Nominees, PDN, Inc., Medical I.V., Inc. and
Mark H. O'Brien.
*** 10.4 Indemnification Agreement Among Home Health Corporation of America,
Inc. and its Nominees, LHS Holdings, Inc., Liberty Health Services,
Inc., Nurses Today M/C, Inc., PDN, Inc., Medical I.V., Inc. and
Mark H. O'Brien.
* 10.5 Asset Acquisition Agreement among Home Care Medical Supply and
Equipment, Inc., Alpha Home Care Services, Inc., Joel Schreiber,
and Joseph J. D'Alessandro, including schedules and exhibits
thereto.
* 10.6 Subordination Agreement among CoreStates Bank, N.A., Summit
Ventures II, L.P., Summit Investors II, L.P., CoreStates Enterprise
Fund, and Alpha Home Care Services, Inc.
* 10.7 Stock Purchase Agreement by and between Home Health Corporation of
Delaware, Inc.,William Moses, Milton Altshuler, Steven R.
Altshuler, and Jane Altshuler, relating to Delaware Acquisition.
* 10.8 Asset Acquisition Agreement between HHCDME, Inc., and Master
Medical Supply Co., Inc., relating to Delaware Acquisition.
* 10.9 Asset Acquisition Agreement between HHCD, Inc., and Professional
Home Health Care Agency, Inc., relating to Delaware Acquisition.
* 10.10 Indemnification Agreement relating to Delaware Acquisition.
* 10.11 Agreement among Home Health Care Corporation of Delaware, Inc.,
HHCD, Inc., HHCDME, Inc., Master Medical Supply Co., Inc.,
Professional Home Health Services, Inc., Professional Home Health
Care Agency, Inc., William Moses, Andra H. Moses, Steven R.
Altshuler, and Jane Altshuler, relating to Delaware Acquisition.
* 10.12 Full Payment Guaranty of the Company relating to Delaware
Acquisition.
* 10.13 Subordination Agreement among CoreStates Bank, N.A., Summit
Ventures II, L.P., Summit Investors II, L.P., CoreStates Enterprise
Fund, and parties to Delaware Acquisition transaction documents.
* 10.14 Separation Agreement among Home Health Corporation of America,
Inc., Home Health Corporation of Delaware, Inc., HHCD, Inc.,
HHCDME, Inc., Steven R. Altshuler, Jane E. Altshuler, William W.
Moses and Andra H. Moses
</TABLE>
86
<PAGE>
<TABLE>
<S> <C> <C>
* 10.15 Asset Purchase Agreement between Pennsylvania Home Care, Inc. and
Healthcare Professionals, Inc.
**** 10.16 Third Amended and Restated Credit Agreement.
10.17 Amendment No. 1 to the Third Amended and Restated Credit Agreement.
* 10.18 Lease between the Company and Swedeland Road Corporation, relating
to the Company's principal executive offices.
* 10.19 Employment Agreement between the Company and Bruce J. Feldman. (a)
* 10.20 Employment Agreement between the Company and Fred J. Nicholas. (a)
10.21 Employment Agreement between the Company and Bruce Colburn. (a)
* 10.22 Employment Agreement between the Company and Joseph Grilli. (a)
* 10.23 1995 Employee and Consultant Equity Plan. (a)
* 10.24 1984 Employee Stock Option Plan (Qualified and Non-Qualified), as
amended and restated. (a)
* 10.25 Consent and Amendment to Note and Stock Purchase Agreement, dated
September 29, 1995, among the company, certain subsidiaries of the
Company, Summit Ventures II, L.P., Summit Investors II, L.P.
* 10.26 Subordination Agreement, dated September 29, 1995, among CoreStates
Bank, N.A., Summit Ventures II, L.P., Summit Investors II, L.P.,
Summit Subordinated Debt Fund, L.P., CoreStates Enterprise Fund and
Preferred Diagnostic Services, Inc.
* 10.27 Asset Acquisition Agreement among the Company, Home Health
Corporation of America, Inc. - Tampa, Preferred Diagnostic &
Medical Services, Inc., Preferred Diagnostic Services, Inc., G&S
Industries, Inc., and Joel M. Grossman, Jeffrey Grossman, Joseph
Sterensis, Barbara Sterensis and Richard Levitt.
* 10.28 Registration Rights Agreement, dated September 28, 1995, among the
Company, a subsidiary of the Company, Preferred Diagnostic &
Medical Services, Inc. and Preferred Diagnostic Services, Inc.
***** 11.1 Computation of Primary Earnings per Share for each of the three
years in the period ended June 30, 1997
***** 11.2 Computation of Fully Diluted Earnings per Share for each of the
three years in the period ended June 30, 1997
***** 21 Subsidiaries of the Company
23.1 Consent of Independent Accountants
***** 27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-96888) dated November 8, 1995, as amended.
** Incorporated by reference to the Company's Form 10-Q dated September 30,
1996 and filed November 14, 1996.
*** Incorporated by reference to the Company's Form 8-K dated January 10, 1997
and filed January 24, 1997.
**** Incorporated by reference to the Company's Form 10-Q dated March 31, 1997
and filed May 14, 1997.
***** Incorporated by reference to the Company's form 10-K dated June 30, 1997
and filed September 29, 1997.
(a) Represents management contract or compensatory plan.
87
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE
FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Home Health Corporation
of America, Inc. and subsidiaries is included on page 46 of this Form 10-K.
In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in Item 14 (a)(2) of
this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 29, 1997
S-1
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
for each of the three fiscal years ended June 30, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Description
-----------------------------------------------------------------------------
Balance at Charged
beginning to costs and Balance at
of year expenses Deductions end of year
--------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
1997
- --------------------------------
Allowance for doubtful accounts $5,656 $8,431 $3,240 $10,847
1996
- --------------------------------
Allowance for doubtful accounts 4,360 3,464 2,168 5,656
Inventory valuation allowance... 40 - 40 -
1995
- --------------------------------
Allowance for doubtful accounts 3,609 1,727 976 4,360
Inventory valuation allowance... 40 50 50 40
</TABLE>
S-2
<PAGE>
EXHIBIT 10.17
AMENDMENT NO. 1 TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment No. 1") is made as of the 26th day of September, 1997 by and
among HOME HEALTH CORPORATION OF DELAWARE, INC., a Delaware corporation
("Borrower"); CORESTATES BANK, N.A., a national banking association
("CoreStates") and the other banks identified on the signature pages hereto
(each individually a "Bank" and individually and collectively, "Banks"); and
CoreStates as agent for the Banks ("Agent").
WITNESSETH:
----------
WHEREAS, Borrower, Banks and Agent are parties to that certain Third
Amended and Restated Credit Agreement dated March 13, 1997 (as amended from time
to time, including by this Amendment No. 1, the "Credit Agreement"); and
WHEREAS, Home Health Corporation of America, Inc. ("Parent") and
certain of its subsidiaries other than Borrower have executed (or joined in)
that certain Amended and Restated Guaranty dated March 13, 1997 (as amended from
time to time, the "Guaranty") in favor of Banks in connection with the Credit
Agreement; and
WHEREAS, Borrower has requested, and the Banks have agreed subject to
the terms and conditions hereof, to amend certain financial covenants under the
Credit Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and the agreements
herein set forth and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions
-----------
a. General Rule. Unless otherwise defined herein, terms used
------------
herein which are defined in the Credit Agreement shall have the meanings
assigned to them in the Credit Agreement.
b. Additional Definition. The following definition is hereby
---------------------
added to Section 1 of the Credit Agreement to read in its entirety as follows:
"Amendment No. 1" shall mean the Amendment No. 1 to Credit
---------------
Agreement by and among Borrowers, Agent and Banks.
<PAGE>
2. Amendment to Paragraph 5.15 (Maximum Funded Debt to Adjusted
------------------------------------------------------------
EBITDA Ratio). Paragraph 5.15 of the Credit Agreement is hereby amended and
- -------------
restated to read in its entirety as follows:
5.15. Maximum Funded Debt to Adjusted EBITDA Ratio.
--------------------------------------------
Maintain as of the end of each fiscal quarter during the
periods set forth in the left hand column below a ratio of (i) Funded
Debt of Parent and its consolidated Subsidiaries to (ii) Adjusted
EBITDA plus, for any calculation thereof which includes the fiscal
quarter ended June 30, 1997, the amount of non-recurring charges
taken during that quarter and deducted in calculating net income
(i.e., a $3.0 million charge to reflect an increase in bad debt
reserves and a $1.1 million restructuring charge), of not greater
than the ratio set forth in the right hand column below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Date of the Credit Agreement
through 9/30/97 3.25 to 1
10/1/97 through 3/31/98 3.00 to 1
4/1/98 through 12/31/98 2.75 to 1
1/1/99 and thereafter 2.50 to 1
</TABLE>
3. Amendment to Paragraph 5.17 (Maximum Leverage Ratio). Paragraph
----------------------------------------------------
5.17 of the Credit Agreement is hereby amended and restated to read in its
entirety as follows:
5.17 Maximum Leverage Ratio. Maintain as of the end of
each fiscal quarter during the periods set forth in the left hand
column below a ratio of consolidated Funded Debt to consolidated
Total Capitalization of not greater than the ratio set forth in the
right hand column below:
<TABLE>
<CAPTION>
Period Ratio
------ ------
<S> <C>
Date of the Credit Agreement
through 6/30/97 0.65 to 1
7/1/97 through 12/31/97 0.60 to 1
1/1/98 through 6/30/98 0.57 to 1
7/1/98 through 3/31/99 0.55 to 1
4/1/99 and thereafter 0.50 to 1
</TABLE>
-2-
<PAGE>
4. Waiver of Past Defaults. Banks hereby waive the defaults by
-----------------------
Borrower under Paragraphs 5.15 (Maximum Funded Debt to Adjusted EBITDA Ratio)
and 5.17 (Maximum Leverage Ratio) as in effect prior to the date hereof;
provided, that nothing herein shall be construed as a waiver of any defaults
under Paragraphs 5.15 or 5.17, as amended hereby, or any other provisions of the
Credit Agreement.
5. Representations and Warranties. Borrower and Guarantors hereby
------------------------------
represent and warrant to Banks as follows:
a. Representations. The representations and warranties set
---------------
forth in Section Three of the Credit Agreement (other than those made only as of
a specific date) are true and correct in all material respects as of the date
hereof; no Event of Default or Default under the Credit Agreement is in
existence; and there has been no event or circumstance since March 13, 1997,
which has caused or is reasonably likely to cause a Material Adverse Effect.
b. Power and Authority; Enforceability. Borrower has the power
-----------------------------------
and authority under the laws of its state of incorporation and its certificate
of incorporation and bylaws to enter into and perform, to the extent applicable
to it, this Amendment No. 1; and all actions necessary or appropriate for the
execution and performance by Borrower of this Amendment No. 1 have been taken
and upon their execution, the same will constitute the legal, valid and binding
obligations of Borrower, enforceable in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency and other similar laws
affecting the rights of creditors generally.
c. No Violation of Laws or Agreements. The making and
----------------------------------
performance of this Amendment No. 1 and actions required of Borrower hereunder
will not violate any provisions of any federal, state or local law or
regulation, or result in any breach or violation of, or constitute a default
under, any agreement by which Borrower or its property may be bound.
6. Conditions to Effectiveness of Amendment. This Amendment No. 1
----------------------------------------
shall be effective upon Agent's receipt of the following documents and
satisfaction of the following conditions, each in form satisfactory to Banks:
a. Amendment No. 1. This Amendment No. 1, duly executed by
---------------
Borrower, Guarantors, Banks and Agent.
b. Other Documents. Such additional documents as Agent shall
---------------
reasonably request.
7. Affirmation. Borrower and Guarantors hereby affirm all of the
-----------
provisions of the Credit Agreement, as amended (including by this Amendment No.
1) and the other Loan
-3-
<PAGE>
Documents and agree that the terms and conditions of the Credit Agreement as
amended (including by this Amendment No. 1) and the other Loan Documents shall
continue in full force and effect as supplemented and amended hereby.
8. Miscellaneous.
-------------
a. This Amendment No. 1 shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
b. Borrower agrees to reimburse Agent for all reasonable costs
and expenses (including but not limited to, reasonable attorneys' fees and
reasonable disbursements) which Agent may pay or incur in connection with the
preparation of this Amendment No. 1 and the preparation or review of other
documents executed or delivered in connection herewith.
c. All terms and provisions of this Amendment No. 1 shall be
for the benefit of and be binding upon and enforceable by the respective
successors and assigns of the parties hereto.
d. This Amendment No. 1 may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document and each such counterpart shall be deemed an original.
e. Except as expressly set forth in Paragraph 4 above, the
execution, delivery and performance of this Amendment No. 1 shall not effect a
waiver of any right, power or remedy of Agent or Banks under applicable law or
under the Credit Agreement and the agreements and documents executed in
connection therewith or constitute a waiver of any provision thereof.
IN WITNESS WHEREOF, the undersigned by their duly authorized officers,
have executed this Amendment No. 1, effective as of the day and year first
written above.
HOME HEALTH CORPORATION OF
Attest: DELAWARE, INC.
By:_______________________ By:_____________________________
Name: Name: Bruce Colburn
Title: Title: Chief Financial Officer
[EXECUTIONS CONTINUED]
-4-
<PAGE>
CORESTATES BANK, N.A., for itself and as Agent
By:_____________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:_____________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By:_____________________________
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
N.A.
By: ____________________________
Name:
Title:
TORONTO DOMINION (NEW YORK), INC.
By:___________________________
Name:
Title:
[EXECUTIONS CONTINUED]
-5-
<PAGE>
FLEET NATIONAL BANK
By:___________________________
Name:
Title:
-6-
<PAGE>
The undersigned Guarantors hereby acknowledge and agree to the
foregoing Amendment No. 1, affirm the representations set forth in Paragraph 4
thereof, and agree that the Guaranty continues in full force and effect and
guarantees all obligations under the Credit Agreement, as amended thereby:
HOME HEALTH CORPORATION OF HOME HEALTH CORPORATION OF
AMERICA, INC. AMERICA, INC. - TAMPA NURSING
PENNSYLVANIA HOME HEALTH PENNSYLVANIA HOME HEALTH
SERVICES/PHILADELPHIA, INC. SERVICES/SUBURBAN, INC.
PENNSYLVANIA HOME HEALTH HHCA, INC. - DELAWARE
SERVICES/NORTHEAST, INC. HHCA - SERVICE CO.
PENNSYLVANIA HOME CARE, INC. HOME HEALTH CORPORATION OF
HOME CARE MEDICAL SUPPLY AND AMERICA, INC. - EASTERN SHORE
EQUIPMENT, INC. HOME HEALTH SYSTEMS, INC.
NUTRITIONAL HOME HEALTH HHCA TEXAS HOLDINGS, INC.
SERVICES, INC. HHCA TEXAS GP, INC.
ALL CARE HEALTH SERVICES, INC. HHCA TEXAS HEALTH SERVICES,
ALL-CARE HOME HEALTH L.P., by HHCA TEXAS GP, INC.,
SERVICES, INC. its general partner
HOME HEALTH CORPORATION OF HHCA TEXAS INFUSION SERVICES,
AMERICA, INC./FT. PIERCE HOME L.P., by HHCA TEXAS GP, INC.,
HEALTH SERVICES its general partner
HHCD, INC. HHCA TEXAS PRIVATE NURSING
HHCDME, INC. SERVICES, L.P., by HHCA TEXAS GP,
PROFESSIONAL HOME HEALTH INC., its general partner
SERVICES, INC. HHCA TEXAS MEDICAL EQUIPMENT,
HOME HEALTH CORPORATION OF L.P., by HHCA TEXAS GP, INC.,
AMERICA, INC.-TAMPA its general partner
HOME HEALTH CORPORATION OF R.S.D. MANAGEMENT, INC.
AMERICA, INC.-TAMPA NURSING SERVICES HOME CARE,
DIAGNOSTIC SERVICES INC.
HOME HEALTH CORPORATION OF NURSING SERVICES HOME CARE,
AMERICA, INC. - PINELLAS LTD.
HOME HEALTH CORPORATION OF NURSING SERVICES STAFFING OF
AMERICA, INC.- ST. PETERSBURG N.H., INC.
(continued in next column) NURSING SERVICES, INC.
NAHATAN DRUG, INC.
By:_______________________ By:___________________________
Name: Name: Bruce Colburn
Title: Title: Chief Financial
Officer
-7-
<PAGE>
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This AGREEMENT is made as of May 1, 1997, between Home Health Corporation
of America, Inc., a Pennsylvania corporation (the "Company"), and Bruce J.
Colburn ("Executive"). This Agreement supersedes the employment letter dated
March 21, 1996 between the Company and the Executive (the "Employment Letter").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on April 8, 1996 and ending on April 30,
2000, subject to the provisions of paragraph 4 (the "Employment Period").
2. Position and Duties. During the Employment Period, Executive shall
serve as the Chief Financial Officer of the Company and shall have the normal
duties, responsibilities and authority of the Chief Financial Officer.
Executive shall report directly to the Company's Chief Executive Officer.
Executive shall devote his best efforts and full-time attention to the
performance of his duties on behalf of the Company. During the Employment
Period, Executive shall not undertake, outside of the Company, any professional,
commercial, business or public activities without first giving at least 60 days
advance written notice to the Company's Chief Executive Officer and receiving
written authorization and approval from the Company's Chief Executive Officer to
engage in such outside activities.
3. Base Salary and Benefits.
(a) Effective April 8, 1996, Executive's base salary shall be $140,000 per
annum and shall be adjusted upward as set forth in paragraphs 3(b), (c) and (d)
hereof (the "Base Salary") payable in cash and in accordance with the Company's
general payroll practices. Increases in Base Salary shall not be retroactive.
(b) Executive's Base Salary shall be increased to $150,000 per annum
effective October 8, 1996.
(c) During the Employment Period, Executive's Base Salary shall be
increased to $175,000 per annum effective upon the Company's achievement of
annual net revenue of at least $150 million, and shall be further increased to
$200,000 per annum effective upon the Company's achievement of annual net
revenue of at least $300 million. As of any calculation date, annual net
revenue shall be the sum of Company's net revenue for the last four (4)
consecutive fiscal quarters
<PAGE>
as reported in the Company's Form 10-Q, or Form 10-K with respect to the fourth
quarter, filed with the Securities and Exchange Commission and adding or
subtracting, as applicable, the effect on such reported net revenue of
subsequent circumstances requiring restatement thereof (e.g., accounting for a
pooling of interests).
(d) The Base Salary shall be reviewed during the month of October each
year by the Chief Executive Officer and Board of Directors of the Company (the
"Board") and may, in their discretion, be increased (but not decreased) based
upon Executive's performance. The first such review shall occur in October,
1997. The Base Salary shall, at a minimum, be increased on October 8th of each
year by the amount obtained by multiplying the then current Base Salary by the
percentage by which the level of the Philadelphia, Pennsylvania Consumer Price
Index For All Urban Consumers, as reported for the immediately preceding
December 31 by the Bureau of Labor and Statistics of the United States
Department of Labor has increased over the level thereof at December 31 of the
preceding year. The first such increase, if applicable, shall be made on
October 8, 1997.
(e) In addition to the Base Salary, Executive shall be entitled to a
performance bonus (the "Bonus") payable within 120 days after the end of each
fiscal year based upon the Company's achievement of the financial performance
goals to be established by the Chief Executive Officer and Board, from time to
time. The amount of the Bonus shall be determined by the Chief Executive
Officer and Board, but shall not be less than 10% of the Executive's Base Salary
for such period in the event 100% of the established goals are achieved. For
the fiscal year ended June 30, 1996, Executive's Bonus was prorated to reflect
the portion of the fiscal year in which the Executive was employed. The Bonus
shall be paid in cash. In lieu of the Bonus, Executive may elect to participate
in any performance bonus program or plan established by the Company generally
for the Company's other senior executives.
(f) In addition to the Base Salary payable to Executive hereunder, the
Company has granted the Executive options to purchase shares of Common Stock of
the Company pursuant to the Company's 1995 Employee and Consultant Equity Plan
in accordance with the "Stock Option" attached hereto as Exhibit "A". The Stock
Option replaces any previous options granted to Executive, all of which are
hereby terminated.
For purposes of this Agreement, a "Change in Control" of the Company shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding securities of
the Company under an employee benefit plan of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of (A) the outstanding shares of Common Stock of the Company or (B) the
combined voting power of the
2
<PAGE>
Company's then-outstanding securities entitled to vote generally in the election
of directors or (ii) the Company consummates a mergers or consolidation which
results in the holders of voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or the Company consummates a plan of complete liquidation or
closes on an agreement for the sale or other disposition by the Company of all
or substantially all of the Company' assets or any transaction having a similar
effect.
(g) In addition to the Base Salary and any bonuses payable to Executive
pursuant to this paragraph, Executive shall be entitled to the following
benefits during the Employment Period: (i) health insurance as such coverage as
is made generally available to the senior executives of the Company, (ii) a
maximum of three weeks vacation each year with salary, increasing to four weeks
effective October 8, 1997, (iii) participation in any profit sharing plan,
retirement plan, group life insurance plan, or other insurance plan, medical
expense plan or other benefit arrangement maintained by the Company for its
senior executives generally and, if applicable, their family members and (iv)
use of a parking space in the corporate office parking garage.
(h) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement,
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses. Executive shall receive a minimum monthly car allowance of $450.
4. Term.
(a) The Employment Period (i) shall terminate upon Executive's resignation,
death or permanent disability (defined as the expiration of a period of 90 days
in any 12 month period during which Executive is unable to perform his assigned
duties due to physical or mental incapacity), (ii) may be terminated by
Executive at any time if the Company fails to comply with any material provision
of this Agreement, which failure has not been cured within 10 business days
after written notice of such noncompliance has been given by Executive to the
Company and (iii) may be terminated by the Company at any time with or without
Cause.
(b) If the Employment Period is terminated by the Company for Cause or is
terminated by Executive's resignation, Executive shall only be entitled to
receive all amounts due to him through the date of termination.
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(c) If the Employment Period is terminated as a result of Executive's death
or permanent disability, the Company shall pay any amounts due to Executive
through the date of termination and a Bonus (payable as set forth in paragraph
3(e)) in an amount equal to the Bonus (prorated through the date of termination)
which would have otherwise been payable to Executive pursuant to paragraph 3(e)
with respect to the fiscal year in which such termination occurs.
(d) If the Employment Period is terminated by the Company other than for
Cause or by Executive pursuant to paragraph 4(a)(ii) above, Executive shall be
entitled to receive his Base Salary for a period of 12 months, payable in
accordance with the Company's general payroll practices; provided, however that
in the event that a termination occurs within 3 months prior to or 6 months
after a Change of Control, the 12 month severance period shall be increased (but
not decreased) to the number of months remaining in the Employment Period . The
Company shall also continue coverage for Employee under the Company's life
insurance, medical, health, disability and similar welfare benefit plans and the
term life insurance plan described in paragraph 3(g)(i) for a period of twelve
months after the date of termination. The severance benefits described in this
paragraph 4(d) shall be paid in lieu of any other benefits, compensation, claims
or damages to which the Executive may otherwise be entitled and all of such
obligations are waived by Executive.
(e) Except as otherwise set forth above, all of Executive's rights to
fringe benefits and bonuses hereunder (if any) accruing after the termination of
the Employment Period shall cease upon such termination.
(f) For purposes of this Agreement, "Cause" shall mean (i) the willful
failure or refusal by Executive to perform his duties hereunder (other than any
such failure resulting from Executive's incapacity due to physical or mental
illness), which has not been remedied within 10 business days after written
notice is given to Executive by the Company, which notice identifies the manner
in which the Company believes that Executive has not performed such duties and
the steps required to cure such failure to perform, (ii) Executive shall
willfully engage in misconduct toward the Company which is injurious to the
Company or any subsidiary, monetarily or otherwise (including, but not limited
to, conduct in violation of paragraph 5 or 6 hereof) or (iii) the conviction of
Executive of, or the entering of a plea of nolo contendere by Executive with
respect to, a felony.
(g) In the event of any dispute regarding the existence of Executive's
Disability hereunder, the matter will be resolved by the determination of a
majority of three physicians qualified to practice medicine in Pennsylvania, one
to be selected by each of Executive and the Chief Executive Officer of the
Company and the third to be selected by the two designated physicians. For this
purpose, Executive will submit to appropriate medical examinations.
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(h) Executive shall not be required to mitigate the amount of any payment
provided for in this paragraph 4 by seeking other employment or otherwise, and
the amount of such payment or benefit provided for in this paragraph 4 shall not
be reduced by any compensation earned by Executive as a result of employment by
another employer or retirement benefits. Executive shall continue to honor his
obligations under paragraphs 5 and 6 of this Agreement as a condition precedent
to receiving the severance compensation hereunder.
5. Confidential Information. The Executive acknowledges that the
information, observations and data obtained while employed by the Company
concerning the business or affairs of the Company or any subsidiary
("Confidential Information") are the property of the Company or such subsidiary.
Therefore, Executive agrees that he shall not disclose to any unauthorized
person or use for his own account any Confidential Information without the prior
written consent of the Chief Executive Officer, unless and to the extent
required by law, rule or regulation or pursuant to any administrative or court
order. The term "Confidential Information" shall not include (i) the
information which is generally available to the public or those in the Company's
industry as of the date of execution of this Agreement or which later becomes
generally available to the public or those in the Company industry other than as
a result of Executives' or any third parties' prohibited disclosure, (ii)
information which comes to Executive from a bona fide third party source so long
as such source was not, to Executive's knowledge, prohibited from providing such
information to Executive by any contractual, legal, fiduciary or other
obligation and (iii) information which was known to Executive on a non-
confidential basis before such information was obtained from the Company or any
subsidiary.
6. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of his employment with the
Company he will become familiar with the Company's trade secrets and with other
confidential information concerning the Company, the Company's subsidiaries and
their predecessors and that his services will be of special, unique and
extraordinary value to the Company. Therefore, Executive agrees that except as
otherwise provided in this paragraph 6(a), during the Employment Period and
continuing for a period of one year following the termination of employment for
any reason (the "Noncompete Period"), Executive shall not directly or indirectly
own, manage, control, participate in, consult with, be employed by, render
services for, or in any manner engage in any business competitive with the
businesses of the Company or its subsidiaries as such businesses exist on the
date of the termination of Executive's employment, within any geographical area
in which the Company or its subsidiaries engage in such businesses. Nothing
herein shall prohibit (i) Executive from being a passive owner of not more than
5% of the outstanding stock of any class of a corporation which is publicly
traded, so long as Executive has no active participation in the business of such
corporation or (ii) Executive from being employed by a business which derives a
minimal amount of its gross revenues from the provision of goods and services
which are
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competitive with the Company. In the event that the Company shall fail to
provide Executive with the required severance obligations under Paragraph 4(d),
the Company shall not have the right to enforce Executive's obligations under
this Paragraph 6 during the period of such breach.
(b) During the Noncompete Period, Executive shall not directly or
indirectly or through another entity induce or attempt to induce any employee of
the Company or any subsidiary to leave the employ of the Company or such
subsidiary, or in any way interfere with the relationship between the Company or
any subsidiary and any employee thereof or induce or attempt to induce any
customer, supplier, licensee or other business relation of the Company or any
subsidiary to cease doing business with the Company or such subsidiary, or in
any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company or any subsidiary.
(c) If, at the time of enforcement of this Paragraph 6, a court shall hold
that the duration, scope or area restrictions stated herein are unreasonable
under circumstances then existing, the parties agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted for the
stated duration, scope or area that the court shall be allowed to revise the
restriction contained herein to cover the maximum period, scope and area
permitted by law.
(d) In the event of the breach or a threatened breach by Executive of any
of the provisions of this Paragraph 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions thereof (without posting a bond or other security).
7. Executive Representations. Executive hereby represents and warrants
to the Company that (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (ii) Executive is
not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms.
8. Survival. Paragraphs 4 through 10 shall survive and continue in full
force in accordance with their terms notwithstanding any termination of the
Employment Period.
9. Notices. All notices, requests, demands and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to be
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delivered and received five business days after having been deposited in the
United States mail and enclosed in a registered or certified postage-paid
envelope, one business day after having been sent by overnight courier; when
personally delivered or sent by facsimile communications equipment of the
sending party on a business day, or otherwise on the next succeeding business
day thereafter; and in each case addressed to the respective party at the
address set forth below or to such other changed addresses as the party may have
fixed by notice as provided herein:
Notices to Executive:
Bruce J. Colburn
105 Flick Drive
Fort Washington, PA 19034
Telephone: (215) 641-1512
FAX: (215) 641-1512
with a copy to:
Ballard Spahr Andrews & Ingersoll
Attention: C. Baird Brown
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
Telephone: (215) 665-8500
FAX: (215) 864-8999
Notices to the Company:
Home Health Corporation of America, Inc.
Attention: Bruce Feldman
2200 Renaissance Boulevard, Suite 300
King of Prussia, PA 19406
Telephone: (610) 272-1717
FAX: (610) 272-3131
with a copy to:
Kleinbard, Bell & Brecker
Attention: Howard J. Davis
1900 Market Street
Suite 700
Philadelphia, PA 19103
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Telephone: (215) 568-2000
FAX: (215) 568-0140
10. Severability. Whenever possible, each provision of this Agreement
will be interpreted by such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement and the Option Agreement embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral.
12. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
13. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
his rights or delegate his obligations hereunder with the prior written consent
of the Company. The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) of all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
14. Choice of Law. This Agreement will be governed by the internal law,
and not the laws of conflicts, or the Commonwealth of Pennsylvania.
15. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Home Health Corporation of America, Inc.
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By:______________________________
Bruce J. Feldman, President
_________________________________
Bruce J. Colburn
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Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Home Health Corporation of America, Inc. (the "Company") on Form S-8 of our
report dated August 29, 1997, except for Note 13, for which the date is
September 26, 1997, on our audits of the consolidated financial statements and
financial statement schedule of the Company as of June 30, 1996 and 1997, and
for each of the three years in the period ended June 30, 1997, which report is
included in this Annual Report on Form 10-K/A.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 28, 1997
