<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 (IRS Employer Identification Number)
incorporation or organization)
2200 Renaissance Boulevard
Suite 300
King of Prussia, PA 19406
- ----------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (610) 272-1717
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding at November 1, 1998
- ----------------------------- ---------------------------------------------
Common stock, no par value 9,873,664
Exhibit index is located on page 19
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1998 3
Condensed Consolidated Balance Sheets as of June 30, 1998
and September 30, 1998 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 1997 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 3. Defaults Upon Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------------------------
1997 1998
---- ----
<S> <C> <C>
Net revenues............................................... $ 47,046 $ 33,844
Operating costs and expenses:
Patient care costs:
Professional care and product costs................ 21,212 16,564
Depreciation on equipment held for rental.......... 716 887
------------------ -----------------
Total patient care costs....................... 21,928 17,451
General and administrative............................. 17,409 15,755
Provision for doubtful accounts........................ 1,472 19,191
Depreciation........................................... 503 700
Amortization........................................... 751 668
Interest, net.......................................... 1,839 2,161
------------------ -----------------
Total operating costs and expenses.............. 43,902 55,926
------------------ -----------------
Income (loss) before income taxes.......................... 3,144 (22,082)
Provision for income taxes................................. 1,116 -
------------------ -----------------
Net income (loss)................................ $ 2,028 $ (22,082)
================== =================
Other data, including per share data:
Basic per share data:
Weighted average shares outstanding................ 9,149 9,766
================== =================
Earnings (loss) per share.......................... $ 0.22 $ (2.26)
================== =================
Diluted per share data:
Weighted average shares outstanding................ 9,301 9,766
================== =================
Earnings (loss) per share.......................... $ 0.22 $ (2.26)
================== =================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1998 1998
------ ------------------ --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 1,639 $ 3,465
Accounts receivable, net of allowance for doubtful accounts of $12,187
and $29,812, respectively............................................ 58,908 41,428
Inventories............................................................... 2,257 1,739
Prepaid expenses and other current assets................................. 7,918 5,337
-------- --------
Total current assets................................................. 70,722 51,969
Property and equipment, net.................................................. 16,736 15,476
Goodwill, net................................................................ 46,803 47,579
Other assets, net............................................................ 2,578 3,966
-------- --------
Total assets................................................... $136,839 $118,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt..................................... $ 4,211 $ 88,041
Accounts payable......................................................... 6,796 6,557
Accrued salaries and related employee benefits........................... 4,396 4,446
Restructuring and other nonrecurring liabilities......................... 3,667 2,949
Other current liabilities................................................ 3,270 6,050
-------- --------
Total current liabilities............................................. 22,340 108,043
Long-term debt, net of current portion....................................... 85,311 3,844
Other noncurrent liabilities................................................. 3,095 3,090
Commitments and contingencies................................................ - -
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; 9,856 and 9,858
shares issued, 9,764 and 9,766 outstanding, respectively................
44,296 44,298
Accumulated deficit...................................................... (18,203) (40,285)
-------- --------
Total stockholders' equity........................................... 26,093 4,013
-------- --------
Total liabilities and stockholders' equity...................... $136,839 $118,990
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated inancial statements.
4
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended September 30,
-----------------------------------------------
1997 1998
--------------------- --------------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss)............................................... $ 2,028 $(22,082)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 2,072 2,255
Provision for doubtful accounts.............................. 1,472 19,191
Other........................................................ - 110
Net changes in certain assets and liabilities:
Accounts receivable.......................................... (2,609) (1,711)
Inventories.................................................. (65) 518
Prepaid expenses and other current assets.................... 223 2,581
Accounts payable, accrued expenses and other current
liabilities................................................ 252 148
Restructuring and other nonrecurring liabilities.............. - (836)
------ -------
Net cash flows provided by operating activities............ 3,373 174
------ -------
Cash flows used in investing activities:
Purchases of property and equipment............................. (844) (350)
Other, net...................................................... (144) (249)
------ -------
Net cash flows used in investing activities................ (988) (599)
------ -------
Cash flows provided by (used in) financing activities:
Proceeds from long-term debt.................................... - 2,650
Repayments of long-term debt.................................... (1,784) (401)
Proceeds from issuance of common stock.......................... 169 2
------ -------
Net cash flows provided by (used in) financing
activities............................................... (1,615) 2,251
------ -------
Net increase in cash and cash equivalents.......................... 770 1,826
Cash and cash equivalents, beginning of period..................... 464 1,639
------ -------
Cash and cash equivalents, end of period........................... $ 1,234 $ 3,465
====== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Home Health Corporation of America, Inc. and subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Additionally, although the June
30, 1998 condensed consolidated balance sheet was derived from audited financial
statements, it does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
full fiscal year ending June 30, 1999. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
1998 included in the Company's Form 10-K filed with the Securities and Exchange
Commission.
2. Earnings Per Share
The Company adopted Statement of Financial Accounting Standard No. 128
("SFAS 128"), "Earnings Per Share," during the second quarter of fiscal 1998.
Earnings per share and common shares outstanding for the quarter ended September
30, 1997 have been restated for comparative purposes. The following table
indicates a reconciliation of the numerator and denominator in calculating
earnings (loss) per share for the periods presented:
<TABLE>
<CAPTION>
For the three months ended
September 30,
----------------------------------------
1997 1998
------------------ ------------------
(amounts in thousands)
<S> <C> <C>
Net income (loss) used for calculation of basic and diluted earnings
(loss) per share................................................... $ 2,028 $ (22,082)
================== ==================
Weighted average number of common shares outstanding used for
calculation of basic earnings (loss) per share..................... 9,149 9,766
Stock options and warrants assumed outstanding during the
period............................................................. 152 -
------------------ ------------------
Weighted average number of common shares used for calculation of diluted
earnings (loss) per share.......................................... 9,301 9,766
================== ==================
</TABLE>
6
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Credit Facility
As of September 30, 1998, the Company failed to comply with certain
financial covenants set forth in its senior credit facility, as amended (the
"Credit Facility"). As a result, an event of default has occurred. Additionally,
unless the Company is able to amend the Credit Facility, the Company expects
that it will fail to meet certain of the financial covenant requirements in
future periods. As a result, the Company has classified the $83.4 million in
outstanding indebtedness under the Credit Facility as a current liability in the
accompanying unaudited condensed consolidated balance sheet at September 30,
1998. The Company is engaged in negotiations with its lenders as a result of the
event of default and is reviewing its capital structure and seeking financing
alternatives. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
4. Income Taxes
For the three months ended September 30, 1998, the Company recorded an
income tax benefit of $7,331,000 offset by a valuation allowance of the same
amount as the net income carryback amounts available for prior years were fully
utilized as of June 30, 1998.
5. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the periods
presented:
<TABLE>
<CAPTION>
For the three months ended September 30,
-----------------------------------------
1997 1998
----------------- ------------------
(amounts in thousands)
<S> <C> <C>
Non-cash investing and financing activities:
Accrual of earnout liabilities related to
acquisitions.................................. $ - $1,389
================= ==================
</TABLE>
6. Adoption of Recent Accounting Pronouncements
During the three months ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standard No. 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. The Company had no items of comprehensive income to disclose for the
periods presented in these unaudited condensed consolidated financial
statements.
7
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Outlook and Risks
The Company is subject to significant external factors which could
significantly impact its business, including changes in Medicare reimbursement,
government fraud and abuse initiatives and other such factors which are beyond
the control of the Company. Certain of these factors are discussed herein. Refer
to the Company's Annual Report on Form 10-K for the year ended June 30, 1998 for
a discussion of these and additional factors which management believes may
impact the Company. These factors, as well as future changes in reimbursement
and changes in interpretations of regulations, could cause future results to
differ materially from historical trends and management's current expectations.
Restructuring Initiatives
In an effort to reduce operating costs and respond to the reductions in
reimbursement under the Interim Payment System ("IPS") and Medicare oxygen
reimbursement, the Company implemented a restructuring plan during fiscal 1998.
This plan included cost reduction and office consolidation initiatives. Although
the restructuring plan has reduced costs in fiscal 1999, management has
determined that the restructuring plan also had certain negative impacts on
operations. These impacts included decreases in Medicare nursing referrals and
reductions in net product revenues due to a reduction in sales and hospital
coordinator staff throughout the Company's regions as part of the restructuring
plan. To address this issue, management reviewed the Company's operations and is
in the process of increasing sales and hospital coordinator staff in certain of
the Company's regions. Although management expects Medicare nursing referrals
and net product revenues to increase as a result of these staffing increases,
there can be no assurance the Company will be able to achieve the expected
increases in net revenues or nursing referrals. Additionally, management expects
staffing costs to increase before any increases in net revenues and nursing
referrals are achieved. There can be no assurance that the Company will not need
to implement additional cost reduction initiatives in the future or be able to
reduce costs further without negatively impacting operations.
8
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Results of Operations
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------
1997 1998
--------------- -------------
<S> <C> <C>
Net revenues.............................. 100.0 % 100.0 %
Operating costs and expenses:
Patient care......................... 46.6 51.6
General and administrative........... 37.0 46.6
Provision for doubtful accounts...... 3.1 56.7
Depreciation......................... 1.1 2.1
Amortization......................... 1.6 2.0
Interest, net........................ 3.9 6.3
--- -------
Income (loss) from operations............. 6.7 (65.3)
Provision (benefit) for income taxes...... 2.4 -
--- -------
Net income (loss)......................... 4.3 % (65.3)%
=== ======
</TABLE>
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Net revenues. Net revenues decreased to $33,844,000 for the three
months ended September 30, 1998. This represented a decrease of ($13,202,000),
or (28.1%), over the comparable prior fiscal period. The decrease in net
revenues was comprised of a reduction in same-branch Medicare cost-reimbursed
nursing and related patient service net revenues of (46.7%), or ($9,446,000),
and a decline in same-branch net product revenues (durable medical equipment and
respiratory and infusion therapy services) of (27.7%), or ($4,500,000), offset
by an increase in same-branch non-Medicare nursing net revenues of 7.0%, or
$744,000.
The following table indicates the percentage of net revenues
represented by each of the Company's services for the periods presented:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------
1997 1998
--------------- -------------
<S> <C> <C>
Nursing and related patient services:
Medicare 43.1 % 31.9 %
Non-Medicare 22.4 33.4
--------------- -------------
65.5 65.3
Product services:
Respiratory therapy 17.5 16.1
Infusion therapy 6.9 6.9
Durable medical equipment 10.1 11.7
--------------- -------------
Total 100.0 % 100.0 %
=============== =============
</TABLE>
9
<PAGE>
The 46.7% decrease in Medicare cost-reimbursed nursing and related
patient service net revenues during the three months ended September 30, 1998
was primarily a result of implementation of reduced reimbursement rates for the
Company's eleven Medicare cost-reimbursed nursing agencies under IPS effective
July 1, 1998 and decreased Medicare nursing visits of 46.5% compared to the
three months ended September 30, 1997. The primary reasons for the decrease in
Medicare nursing visits were (i) the impact of IPS on the Company's visit
patterns; (ii) the impact of the reduction in hospital coordinator staff in
connection with the Company's restructuring initiatives (see "Restructuring
Initiatives"); and (iii) a general decline in Medicare nursing referrals from
physicians due to recent initiatives by the Health Care Financing Administration
("HCFA"). Under the IPS reimbursement system, the Company is subject to
per-visit and per-beneficiary reimbursement limits that limit the maximum
reimbursement to be received per individual beneficiary per year from Medicare.
Accordingly, implementation of these IPS limits has resulted in a decrease in
visits due to a change in the Company's visit patterns. Additionally, management
believes that ongoing initiatives by HCFA, which establish more rigid guidelines
for physicians to prescribe homecare and penalties regarding Medicare referrals,
have discouraged physicians from referring patients for homecare nursing and
product services.
Although the Company reduced Medicare nursing costs in connection with
its previously announced restructuring initiatives, the decrease in Medicare
nursing visits resulted in increased per-visit costs in excess of the IPS cost
limits for certain of the Company's Medicare cost-reimbursed nursing agencies.
This resulted in the Company's Medicare cost-reimbursed nursing agencies
recording an approximate $3,000,000 loss for these unreimbursed costs during the
three months ended September 30, 1998.
The 27.7% decrease in net product revenues in the three months ended
September 30, 1998 resulted principally from (i) the 25% reduction in Medicare
oxygen reimbursement in January 1998; (ii) reductions in cross-selling
opportunities as a result of the decrease in Medicare nursing visits during the
three months ended September 30, 1998; (iii) reductions in sales staff in
connection with the Company's restructuring initiatives (see "Restructuring
Initiatives"); (iv) a general decline in physician referrals due to recent
initiatives by HCFA; and (v) reductions in managed care and other third-party
payor net revenues due to various factors including (a) the Company ceasing to
provide services and products to selected managed care companies due to their
protracted payment terms, (b) reductions in reimbursement rates by certain
managed care companies, and (c) the Company choosing not to renew contracts with
certain managed care companies.
The 7.0% increase in non-Medicare nursing services in the three months
ended September 30, 1998 resulted principally from increased patient referrals
for skilled nursing and other patient related services, principally related to
pediatric services, offset by a decrease in unskilled nursing and other patient
related services referrals. Total non-Medicare skilled and unskilled nursing
visit and hourly volume increased 3.0% and decreased (5.7%) to 53,700 visits and
303,100 hours, respectively. Non-Medicare skilled nursing visit and hourly
volume during this period increased 4.6% and 10.4% to 45,200 visits and 172,400
hours, respectively. Total non-Medicare unskilled visit and hourly volume during
this period decreased (4.4%) and (21.0%) to 8,500 visits and 130,700 hours,
respectively. In general, the Company receives higher
10
<PAGE>
reimbursement for its skilled nursing and other patient related services
compared to unskilled nursing services.
The Company may continue to experience decreases in its Medicare
cost-reimbursed nursing net revenues as a result of decreased visits and reduced
reimbursement under IPS. The Company may continue to experience decreases in its
respiratory therapy services net revenues as a result of reductions on January
1, 1998 and 1999 in Medicare reimbursement for oxygen services. The Company may
also continue to experience decreases in its net product revenues as a result of
decreased cross-selling opportunities due to decreased Medicare cost-reimbursed
nursing visits. Additionally, if the Company is unable to negotiate rate
increases under certain managed care contracts and as managed care organizations
and other payors continue to exert pricing pressure on the Company and other
home health care providers, the Company may continue to experience decreases in
its net revenues. Because of matters discussed herein that may be beyond the
control of the Company, there can be no assurance that the Company can increase
net revenues from or maintain net revenues at the levels experienced in prior
periods.
Patient care costs. Patient care costs decreased to $17,451,000 for the
three months ended September 30, 1998. This represented a decrease of
($4,477,000), or (20.4%), over the comparable prior fiscal period. This decrease
was principally related to the decrease in net revenues of ($13,202,000).
Patient care costs increased as a percentage of net revenues from 46.6% to 51.6%
principally as a result of (i) the reduction in respiratory net revenues of
($2,795,000), or (33.9%), in connection with the reduction in Medicare
reimbursement for oxygen services effective January 1, 1998 with no offsetting
reduction in direct cost of oxygen products; (ii) unfavorable shifts in payor
and product mix for certain of the Company's product services during the three
months ended September 30, 1998 as compared to the comparable prior fiscal
period resulting in a reduction in profitability of these products; and (iii) a
lack of sufficient skilled nursing staff to provide non-Medicare nursing
services resulting in increased direct costs of providing these services related
to increased overtime and use of temporary staffing agencies.
General and administrative. General and administrative expenses
decreased to $15,755,000 for the three months ended September 30, 1998. This
represented a decrease of ($1,654,000), or (9.5%), over the comparable prior
fiscal period. This decrease was principally related to the Company's
restructuring initiatives during the last half of fiscal 1998. Although general
and administrative expenses decreased in the aggregate they increased as a
percentage of net revenues from 37.0% to 46.6%. This was a result of net
revenues for the three months ended September 30, 1998 decreasing at a faster
rate than the decreases in these expenses. A certain portion of general and
administrative expenses generally do not vary directly with increases or
decreases in net revenues. General and administrative expenses are expected to
increase in connection with the expected increase in sales and hospital
coordinator staffing. See "Restructuring Initiatives."
Provision for doubtful accounts. The provision for doubtful accounts
was $19,191,000 for the three months ended September 30, 1998, which included
(i) $3,288,000 of additional provision for doubtful accounts recorded to comply
with the Company's accounts receivable reserve policy prior to a change in
calculation methodology; and (ii) a $14,442,000 nonrecurring
11
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provision in connection with changes in the Company's accounts receivable
collection strategy and accounts receivable reserve calculation methodology
during the quarter.
Like many other health care providers, the Company's ability to collect
its accounts receivable from managed care and other non-governmental payors has
become subject to increasing difficulties. The Company had been following a
strategy of meeting with certain of its larger managed care payors in attempting
to collect its receivables for products and services supplied to their
subscribers. However, in light of an unfavorable shift in the accounts
receivable aging during the three months ended September 30, 1998, the
continuing industry-wide difficulties in collecting from managed care and other
non-governmental payors, and the Company's need to liquidate its receivables to
generate cash for operations, management determined that further changes to its
collection strategy were necessary. These changes involve more vigorous
negotiations with these payors in an attempt to collect the related receivables,
which ultimately may involve the Company recording discounts on these
receivables. Additionally, due to the unfavorable shift in the accounts
receivable aging during the three months ended September 30, 1998, the Company
reviewed its methodology for determining its provision for doubtful accounts and
determined it was necessary to increase the historical reserve percentages
applied to the older accounts receivable aging categories.
There can be no assurance that the provision for doubtful accounts will
not have to be increased in the future as a result of further adverse market or
payor conditions or further unfavorable shifts in the accounts receivable aging.
See "Liquidity and Capital Resources."
Depreciation. Depreciation expense increased to $700,000 for the three
months ended September 30, 1998. This represented an increase of $197,000, or
39.2%, over the comparable prior fiscal period. This increase was related to
depreciation on equipment purchased during the second through fourth quarters of
fiscal 1998 and the first quarter of fiscal 1999 related principally to
management information systems and improvements in networking capabilities.
Amortization. Amortization decreased to $668,000 for the three months
ended September 30, 1998. This represented a decrease of ($83,000), or (11.1%),
over the comparable prior fiscal period. This decrease was attributable
principally to the writedown of goodwill recorded during the second quarter of
fiscal 1998.
The Company will continue to evaluate the continuing value of goodwill.
There can be no assurance that the remaining balance of goodwill of $47,579,000
at September 30, 1998 will not be reduced for possible impairments which may
occur in the future as a result of sales or writeoffs of certain assets of the
Company, office closures, changes in reimbursement or other issues which may
negatively impact the Company.
Interest, net. Interest, net, increased to $2,161,000 for the three
months ended September 30, 1998. This represented an increase of $322,000, or
17.5%, over the comparable prior fiscal period. This increase principally
resulted from the increase in indebtedness of $9,020,000 from September 30, 1997
as compared to September 30, 1998 and an increase in the weighted average
interest rate during the three months ended September 30, 1998 from the
comparable prior fiscal period.
12
<PAGE>
Provision for income taxes. For the three months ended September 30,
1998, the Company recorded an income tax benefit of $7,331,000 offset by a
valuation allowance of the same amount as the net income carryback amounts
available for prior years were fully utilized as of June 30, 1998.
Liquidity and Capital Resources
Cash provided by operating activities was $174,000 for the three months
ended September 30, 1998 compared to $3,373,000 for the comparable prior fiscal
period. Expenditures for purchases of capital equipment were $350,000 for the
three months ended September 30, 1998 compared with capital expenditures of
$844,000 for the comparable prior fiscal period.
As a result of the Company's classification of amounts outstanding
under its Credit Facility aggregating $83,386,000 at September 30, 1998 as a
current liability, the Company had a working capital deficiency of ($56,074,000)
at September 30, 1998. See "Credit Facility" below. Excluding amounts
outstanding under the Credit Facility at September 30, 1998, working capital
decreased by ($21,070,000) to $27,312,000 at September 30, 1998 from $48,382,000
at June 30, 1998. The decrease principally resulted from a decrease in net
accounts receivable of ($17,480,000) (see "Provision for doubtful accounts") and
an increase in current liabilities of $2,317,000. The decrease in net accounts
receivable resulted in a corresponding decrease in days net revenues outstanding
from 137 at June 30, 1998 to 112 at September 30, 1998.
The Company continues to be subject to difficulties in collecting its
accounts receivable from managed care and other non-governmental payors. See "-
Provision for doubtful accounts." There can be no assurance that the Company's
change in collection strategy will result in significant collections of old
accounts receivable or that further changes in strategy will not be necessary in
the future. Additionally, a continuation of the lengthening of the amount of
time required to collect accounts receivables from managed care organizations or
other payors or the Company's inability to decrease days net revenues
outstanding could have a material adverse effect on the Company's financial
condition or results of operations. There can be no assurance that the Company's
days net revenues outstanding will not increase if these payors continue to
delay or deny payments to the Company for its services. Determining a provision
for doubtful accounts requires management to make estimates and assumptions as
of a point in time. Actual results could differ from these estimates. There can
be no assurance that the provision for doubtful accounts will not have to be
increased in the future as a result of further adverse market or payor
conditions or further unfavorable shifts in the accounts receivable aging.
Certain of the Company's Medicare cost-reimbursed nursing agencies
receive periodic interim payments ("PIPs") from Medicare for nursing visits. PIP
amounts represent an estimate of each agency's expected reimburseable costs for
a specific fiscal period that are paid to the agency in 26 bi-weekly payments.
Each agency submits quarterly reports to its Medicare Fiscal Intermediary (the
"Intermediary") which are used to adjust the agency's PIP amounts to reflect
revisions in the previously submitted number of visits and reimburseable costs.
Generally, adjustments to PIP amounts occur on a retrospective basis after
review of the quarterly reports
13
<PAGE>
filed with the Intermediaries. Due to this time lag, fluctuations in costs or
visit trends during a quarterly period could result in an agency receiving
reimbursement in excess of or less than its actual costs until the PIP amounts
are adjusted to reflect the current cost and visit statistics.
Certain of the Company's Medicare cost-reimbursed nursing agencies
received excess reimbursement from Medicare during the three months ended June
30 and September 30, 1998 due to (i) the Company's cost reduction initiatives
(refer to the Company's Annual Report on Form 10-K for the year ended June 30,
1998); (ii) decreases in Medicare nursing visits (see "Results of operations -
Net revenues"); and (iii) IPS cost limit reductions effective July 1, 1998 with
no corresponding reduction in the PIP amounts. Additionally, excess
reimbursement resulted from certain Intermediaries' failure to reduce the PIP
amounts after the Company's agencies timely filed their quarterly PIP reports.
These overpayments aggregated $5.4 million at September 30, 1998 and are
reflected as a reduction of accounts receivable in the accompanying unaudited
condensed consolidated balance sheet. Generally the Intermediary requires the
overpayments be offset against the PIPs within thirty days. An extended
repayment period of 12 months may be granted by the Intermediary if requested by
the agency. Any repayment period in excess of 12 months must be approved by
HCFA. The Company is requesting extended repayment terms beyond twelve months
for its overpayments. However, there can be no assurance the Company will
receive extended repayment terms. The Company's inability to obtain extended
repayment terms could have a material adverse effect on the Company's cash
flows.
Credit Facility
Amounts outstanding under the Credit Facility aggregated $83.4 million
at September 30, 1998 and $83.9 million at November 1, 1998. The Company failed
to meet certain financial covenant requirements set forth in the Credit Facility
as of September 30, 1998, and, as a result, an event of default has occurred. As
a result, the Company classified the $83.4 million outstanding at September 30,
1998 under the Credit Facility as a current liability in the accompanying
unaudited condensed consolidated balance sheet. Unless the Company is able to
amend the Credit Facility, the Company expects that it will fail to meet certain
of the financial covenant requirements in future periods.
Pursuant to the terms of the Credit Facility, upon the occurrence of an
event of default and upon notice to the Company, the lenders may terminate the
Credit Facility and declare the entire unpaid balance of principal, interest,
fees and all other amounts of indebtedness of the Company to the lenders to be
immediately due and payable. No such notice has been received by the Company.
However, the Company has been notified by its lenders that due to the existence
of the event of default they will not make any advances to the Company under a
$1.4 million Temporary Supplemental Loan Facility and the interest rate on the
outstanding indebtedness will be increased.
Amounts outstanding under the Credit Facility at September 30, 1998
bore interest at the weighted average interest rate of 8.8% per annum. Pursuant
to the notification received from its lenders, effective November 5, 1998 the
interest rate on the indebtedness will be calculated on the basis of the Base
Rate plus the Applicable Margin (as defined by the Credit Facility). The
14
<PAGE>
weighted average interest rate would have been 9.75% at September 30, 1998 if
interest had been calculated on such a basis. Additionally, due to the existence
of the event of default pursuant to the terms of the Credit Facility, interest
may be increased in the future by an additional 2% per annum. The Company is
engaged in negotiations with its lenders as a result of the event of default.
There can be no assurance that the Company will be able to successfully
renegotiate the terms of the Credit Facility.
Additionally, the Company is reviewing its future capital requirements
and identifying its financing alternatives. These alternatives may include such
actions as refinancing amounts outstanding under the Credit Facility and/or
hiring an investment banker to assist the Company in reviewing its capital
requirements and identifying financing alternatives. The Company's future
capital requirements will depend upon the performance of the Company's business,
as well as other factors that are not within the Company's control, including
determination of repayment terms for PIP overpayments, competitive conditions
and regulatory or other government actions. Additionally, in the event that the
lenders under the Credit Facility demand immediate repayment of amounts
outstanding and/or the Company is unable to successfully restructure the
Company's indebtedness, then the Company may not be able to meet its obligations
under the Credit Facility. These or other adverse events could impact the
Company's ability to continue as a going concern.
There can be no assurance that the Company's internally generated
funds and funds from any financings will prove to be sufficient to fund the
Company's operations.
Impact of Year 2000
The impact of Year 2000 computer problems on the Medicare and Medicaid
programs, other federal or state health care programs and other third party
payors could affect prompt reimbursement to the Company in the future unless and
until such potential problems are corrected. The Company's major management
information system software programs are vendor-supplied and are scheduled by
the vendors to be Year 2000 compliant by December 31, 1999. The Company expects
to be Year 2000 compliant by December 31, 1999 and does not expect to incur
significant costs in attaining compliance. However, there can be no assurance
the Company has adequately assessed or identified all aspects of its business
which may be impacted by Year 2000 issues which may arise after December 31,
1999. Additionally, there can be no assurance that vendors who supply the
Company's major management information system software will adequately address
and correct any and all Year 2000 issues that may arise prior to January 1,
2000. As a result of the foregoing, there can be no assurance that Year 2000
computer problems which may impact the Company or its payors will not have a
material adverse effect on the Company's financial condition or results of
operations.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 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,
15
<PAGE>
disclosures about products and services and major customers, on a quarterly
basis. The Company will be required to adopt SFAS No. 131 during the last
quarter of fiscal 1999. The impact of this new standard on the Company's future
financial statements and disclosures has not been determined.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Sensitive Instruments
The Company uses derivative financial instruments to reduce certain
types of financial risk. Interest rate swaps are used to hedge interest rate
risk. Interest rate swaps involve a risk of additional interest expense in the
event that the prevailing LIBOR rate decreases from the Company's fixed interest
rate on the swap. Hedging strategies have been reviewed and approved by
management before being implemented.
The status of the Company's derivative financial instruments as of June
30, 1998 is discussed in paragraph 4 of Note 5 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998. A decrease of 5% to 10% in the
three-month prevailing LIBOR rate in connection with the Company's interest rate
swap agreement would not have a material adverse effect on the Company's results
of operations, cash flows or financial position. There have been no significant
decreases in the three-month prevailing LIBOR rate through September 30, 1998
nor any changes in the nature of the derivative instrument.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On June 8, 1998, Joseph Falkson, Susan Falkson, Michael Falkson and
Peter Falkson, beneficial owners of more than 5% of the Company's common stock,
commenced litigation against the Company and certain named officers of the
Company. This lawsuit was filed in federal court in Boston, Massachusetts. As
disclosed in the Company's Annual Report on Form 10-K for the year ended June
30, 1998, the Company filed a motion to dismiss or alternatively to transfer the
action. This motion was recently denied by the court. The Company is continuing
to vigorously defend itself.
ITEM 3. Defaults Upon Senior Securities
The Company was in default under the terms of the Credit Facility at
September 30, 1998, principally in connection with the violation of certain
financial covenant requirements. Additionally, the Company expects to be in
violation of certain of these financial covenant requirements in future periods.
Amounts outstanding under the Credit Facility aggregated $83.9 million at
November 1, 1998, which is the maximum amount of borrowings permitted under the
Credit Facility. Pursuant to the terms of the Credit Facility, upon the
occurrence of an event of default and notice to the Company, the lenders may
terminate the Credit Facility and declare the entire unpaid balance of
principal, interest, fees and all other amounts of indebtedness of the Company
to the lenders to be immediately due and payable. No such notice has been
received
16
<PAGE>
by the Company. However, the Company has been notified by its lenders that due
to the existence of the event of default they will not make any advances to the
Company under a $1.4 million Supplemental Temporary Loan Facility and interest
on the indebtedness outstanding under the Credit Facility will be increased to
the Base Rate plus the Applicable Margin (as defined by the Credit Facility).
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Credit Facility."
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed with this report are listed in the exhibit index on
page 19.
(b) Reports on Form 8-K
The registrant did not file a report on Form 8-K during the quarter
ended September 30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME HEALTH CORPORATION OF AMERICA, INC.
Date: November 16, 1998
/s/ David S. Geller
---------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(a) 3.1 Amended and Restated Articles of Incorporation of the Company.
(a) 3.2 Amended and Restated Bylaws of the Company.
(b) 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.
(c) 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.
(c) 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.
(c) 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.
(a) 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.
(a) 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.
(a) 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.
(a) 10.8 Asset Acquisition Agreement between HHCDME, Inc., and
Master Medical Supply Co., Inc., relating to Delaware
Acquisition.
(a) 10.9 Asset Acquisition Agreement between HHCD, Inc., and
Professional Home Health Care Agency, Inc., relating to
Delaware Acquisition.
(a) 10.10 Indemnification Agreement relating to Delaware Acquisition.
(a) 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.
(a) 10.12 Full Payment Guaranty of the Company relating to Delaware
Acquisition.
(a) 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.
(a) 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
(a) 10.15 Asset Purchase Agreement between Pennsylvania Home Care, Inc.
and Healthcare Professionals, Inc.
(d) 10.16 Third Amended and Restated Credit Agreement.
(e) 10.17 Amendment No. 1 to the Third Amended and Restated Credit
Agreement.
19
<PAGE>
(a) 10.18 Lease between the Company and Swedeland Road Corporation,
relating to the Company's principal executive offices.
(a) 10.19 Employment Agreement between the Company and Bruce J. Feldman. *
(i) 10.20 Employment Agreement between the Company and David S. Geller. *
(i) 10.21 Employment Agreement between the Company and James J. Swiniuch.*
(i) 10.22 Employment Agreement between the Company and Joseph Grilli. *
(f) 10.23 Amended and Restated 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 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.
(a) 10.26 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.
(g) 10.27 Amendment No. 3 to Third Amended and Restated Credit Agreement.
(h) 10.28 Amendment No. 4 to Third Amended and Restated Credit Agreement.
(i) 10.29 Amendment No. 5 to Third Amended and Restated Credit Agreement.
11.1 Computation of basic and diluted earnings (loss) per share for
the three months ended September 30, 1997 and 1998.
27.1 Financial data schedule for the three months ended September 30,
1998.
- -----------
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-96888) dated November 8, 1995, as amended.
(b) Incorporated by reference to the Company's Form 10-Q dated September 30,
1996 and filed November 14, 1996.
(c) Incorporated by reference to the Company's Form 8-K dated January 10, 1997
and filed January 24, 1997.
(d) Incorporated by reference to the Company's Form 10-Q dated March 31, 1997
and filed May 14, 1997.
(e) Incorporated by reference to the Company's Form 10-K/A dated June 30, 1997
and filed October 28, 1997.
(f) Incorporated by reference to the Company's Proxy Statement filed January
14, 1998.
(g) Incorporated by reference to the Company's Form 10-Q dated December 31,
1997 and filed February 17, 1998.
(h) Incorporated by reference to the Company's Form 10-Q/A dated March 31, 1998
and filed June 3, 1998.
(i) Incorporated by reference to the Company's Form 10-K dated June 30, 1998
and filed September 24, 1998.
* Represents management contract or compensatory plan
20
<PAGE>
Exhibit 11.1
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
Computation of Basic and Diluted Earnings (Loss) Per Share
for the three months ended September 30, 1997 and 1998
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1997 September 30, 1998
------------------------------------ ----------------------------------
Basic Diluted Basic Diluted
----------------- --------------- -------------- ----------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss) available to common
stockholders........................... $2,028 $2,028 $(22,082) $(22,082)
================= ============== ============== ================
Weighted average number of maximum shares
outstanding during period.............. 9,149 9,149 9,766 9,766
Weighted average number of maximum shares
subject to exercise under outstanding
stock options and warrants, net of
treasury shares assumed repurchased.... - 152 - -
----------------- -------------- -------------- ----------------
Weighted average number of common shares
outstanding............................ 9,149 9,301 9,766 9,766
================= ============== ============== ================
Net earnings (loss) per share............... $0.22 $0.22 $(2.26) $(2.26)
================= ============== ============== ================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT SEPTEMBER 30, 1998 AND THE RELATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,465
<SECURITIES> 0
<RECEIVABLES> 71,240
<ALLOWANCES> 29,812
<INVENTORY> 1,739
<CURRENT-ASSETS> 51,969
<PP&E> 31,345
<DEPRECIATION> 15,869
<TOTAL-ASSETS> 118,990
<CURRENT-LIABILITIES> 108,043<F1>
<BONDS> 0
0
0
<COMMON> 44,298
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 118,990
<SALES> 33,844
<TOTAL-REVENUES> 33,844
<CGS> 17,451
<TOTAL-COSTS> 53,765<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,161
<INCOME-PRETAX> (22,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,082)
<EPS-PRIMARY> (2.26)
<EPS-DILUTED> (2.26)
<FN>
<F1>INCLUDES $83.4 MILLION OF INDEBTEDNESS UNDER THE COMPANY'S SENIOR CREDIT
FACILITY WHICH WAS CLASSIFIED AS A CURRENT LIABILITY DURING THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 DUE TO AN EVENT OF DEFAULT UNDER THE SENIOR CREDIT
FACILITY.
<F2>INCLUDES $14.4 MILLION NONRECURRING PROVISION IN CONNECTION WITH CHANGES IN
THE COMPANY'S ACCOUNTS RECEIVABLE COLLECTION STRATEGY AND ACCOUNTS RECEIVABLE
RESERVE CALCULATION METHODOLOGY DURING THE THREE MONTHS ENDED SEPTEMBER 30,
1998.
</FN>
</TABLE>
