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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended June 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 (I.R.S. Employer
of incorporation or Identification No.)
organization)
2200 Renaissance Boulevard, Suite 300, King of Prussia 19406
(Address of principal executive offices) (Zip code)
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 or any
amendment to this Form 10-K. [_]
On August 31, 1998, 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 $10,821,000.
The number of shares of the registrant's common stock, no par value, outstanding
as of August 31, 1998 was 9,765,764.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be prepared in connection with the 1998
Annual Meeting of Shareholders are incorporated by reference into Part III of
this report.
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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 operates 44 branch locations
in Florida, Pennsylvania, Delaware, New Jersey, Maryland, Massachusetts, New
Hampshire, Texas and Illinois. The Company generated $174.3 million in net
revenues in fiscal 1998.
The Company's business is impacted by extensive political, economic and
regulatory influences, which continue to subject the health care industry in the
United States to fundamental change. During fiscal 1998, significant changes to
the Medicare system of reimbursement were enacted in connection with the
Balanced Budget Act of 1997 (the "Budget Act"). The implementation of the
Interim Payment System (the "IPS") for the Company's Medicare cost-reimbursed
nursing agencies and reductions in Medicare oxygen services reimbursement rates
which resulted from the Budget Act have had and are expected to continue to have
a significant impact on the Company's current and future operations. Recent
legislation introduced into the U.S. Congress, if enacted, could result in
additional changes in the system of Medicare reimbursement. The uncertainty of
the outcome of additional legislative and regulatory issues facing the industry
have had a significant impact on the industry. See "Industry Overview," "Payor
Mix" and "Government Regulation."
In an effort to reduce operating costs and respond to the above reductions
in Medicare reimbursement, the Company implemented a restructuring plan during
fiscal 1998. This plan, which included cost reduction and office consolidation
initiatives, as well as management's assessment of the continuing value of
goodwill under the changing reimbursement environment, resulted in pre-tax
accounting charges aggregating $28.7 million during fiscal 1998 which were
comprised of a writedown of goodwill of $23.5 million and restructuring costs of
$5.2 million. Although the restructuring plan is expected to reduce costs, there
can be no assurance the Company will be able to achieve the expected cost
savings or synergies from the closing or consolidation of offices and other
restructuring efforts or will be able to reduce costs without negatively
impacting operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's growth objective under the current industry climate is to
enhance its position as one of the leading providers 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 and other referral
sources; and (iv) expanding through acquisitions in existing and new markets as
capital and other business constraints permit. See "Strategy."
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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 "Strategy."
While the Company completed fourteen acquisitions in both existing and new
markets between fiscal 1996 and 1997, it completed no acquisitions during fiscal
1998. As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company has
slowed its growth through acquisition. In addition, the Company is restricted by
its senior credit facility from engaging in acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management believes that as a result of Medicare legislative and regulatory
changes and managed care and other competitive pressures, the home health care
industry will continue to consolidate. See "Industry Overview" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks." The Company believes it will be positioned to
execute its acquisition strategy once Medicare reimbursement regulation
uncertainties and the Company's capital constraint issues are resolved. See
"Strategy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Acquisitions."
From fiscal 1996 to fiscal 1998, the Company generated a compound annual
growth rate in net revenues of 39.6% through a combination of acquisitions and
internal growth. The Company's net revenues increased from $64.1 million in
fiscal 1995 to $174.3 million in fiscal 1998 (of which 66.3% represented nursing
and related patient services net revenues). The Company experienced internal
growth rates in net revenues of 19%, 16% and 4% for fiscal years 1996, 1997 and
1998, 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 Company's internal growth rate
during fiscal 1998 was impacted by implementation of certain provisions of the
Budget Act. The percentage of the Company's net revenues from managed care
organizations and other non-governmental payors increased from 37.8% in fiscal
1996 to 39.2% in fiscal 1998. See "Payor Mix," "Government Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Internal Growth" and "- Forward Outlook and Risks."
INDUSTRY OVERVIEW
The importance of home health care is increasing as a result of significant
economic
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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 $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.
The growth in home health care is also due to increased acceptance of home
health care 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. Additionally, the implementation of
the IPS and other provisions of the Budget Act are resulting in a number of
Medicare cost-reimbursed nursing agencies and other home care providers closing
or consolidating with other larger providers. As a result of these economic and
competitive pressures, the home health care industry is continuing to undergo
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 one of the
leading providers 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.
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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 Northern and Southern 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'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.
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 - Internal Growth" and "- Forward Outlook and Risks."
Develop Managed Care and Other Referral Sources. Managed care and other
non-governmental payors, which are an increasingly significant source of
referrals for home health care services, accounted for 37.8% and 39.2% of the
Company's net revenues in fiscal 1996 and 1998, respectively. All of the
Company's 44 branch locations are accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("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.
While the Company's net revenues from managed care and other non-
governmental payors 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 the Company's 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 business,
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."
During fiscal 1998 the Company terminated relationships with certain
managed care organizations and is in the process of reviewing its managed care
contracts. As a result, the Company's relationships with its managed care
referral sources may continue to change. In connection with these terminations
and other factors, the Company's internal growth rates declined during fiscal
1998. 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 - Internal
Growth," "- Liquidity and Capital Resources" and "- Forward Outlook and Risks."
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Expand Through Acquisitions in Existing and New Markets. While the Company
completed fourteen acquisitions between fiscal 1996 and 1997, it completed no
acquisitions during fiscal 1998. As a result of the uncertainty of the outcome
of additional legislative and regulatory changes in the system of Medicare
reimbursement, the Company has slowed its growth through acquisitions. In
addition, the Company is restricted by its senior credit facility from engaging
in acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Management believes that as a result of
Medicare legislative and regulatory changes and managed care and other
competitive pressures, the home health care industry will continue to
consolidate. See "Industry Overview" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward Outlook and Risks."
Generally, the Company has followed an acquisition strategy of seeking to
acquire home health care businesses in existing and new markets. The Company's
acquisition strategy in existing markets generally has been 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 has been 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. The Company believes
that its acquisition of companies which provided primarily nursing services at
the time of acquisition have enhanced the Company's net revenues as related
services and products were introduced by the Company into the new markets
through additional acquisitions. The Company's acquisition strategy may change
as a result of the ongoing legislative and regulatory changes in the industry.
The Company believes it will be positioned to execute its acquisition strategy
once Medicare reimbursement regulation uncertainties and the Company's capital
constraint issues are resolved. See "Payor Mix," "Government Regulation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and " - 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. 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,
---------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Nursing and related patient services:
Medicare 37.4% 41.9% 41.2%
Non-Medicare 22.6 22.2 25.1
------- ------- -------
60.0 64.1 66.3
Respiratory therapy 17.8 18.1 15.2
Infusion therapy 14.0 8.4 7.0
Durable medical equipment 8.2 9.4 11.5
------- ------- -------
Total 100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
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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:
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.
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Continuous positive airway pressure therapy which forces air through
respiratory passage-ways during sleep to prevent sleep apnea.
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.
The Company currently operates pharmacies in Folcroft and Dupont,
Pennsylvania; Largo and Pompano Beach, Florida; Chicago, Illinois and Dallas,
Texas to serve substantially all of its home infusion patients in its regions
and employs licensed pharmacists and registered nurses who have specialized
skills in home infusion therapy.
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
During fiscal 1998, the Company reorganized from five operating regions to
two in
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connection with its restructuring and cost reduction initiatives announced in
February and March 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Form 10-Q/A dated March
31, 1998. As a result, the Company's operations are now organized into a
Northern and Southern region. The Northern Region is comprised of the Company's
New England, Northeast Pennsylvania and Mid-Atlantic operating locations. The
Southern Region is comprised of the Company's Florida and Texas operating
locations. Each operating location has an Area Vice President who reports to the
Company's Chief Executive Officer and is responsible for managing the operations
of his respective operating location. Regional support staff are generally
organized by either nursing and related patient services or other services or
products. The Northern and Southern Regions have Coordinated Care Centers
located in Broomall, Pennsylvania and Largo, Florida, respectively, 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. Management functions, such as
professional services oversight, finance, sales training and support, product
development, policy and procedure development, and management information
systems are centralized at the corporate headquarters. As the Company finalizes
implementation of its restructuring plan the organization of it operations is
subject to change. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COORDINATED CARE CENTERS
The Company's 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 by 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.
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.
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
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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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks."
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 August 31, 1998,
the Company employed approximately 48 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., Aetna/U.S. Healthcare, Inc., Independence
Blue Cross, Keystone Health Plans East and Prudential Health Care Plan, Inc.
During fiscal 1998 the Company terminated relationships with certain
managed care organizations and is in the process of reviewing its managed care
contracts. As a result, the Company's relationships with its managed care
referral sources may continue to change. 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 - Internal Growth," "- Liquidity and Capital Resources"
and "- Forward Outlook and Risks."
The Vice President of Business Development is responsible for (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. However, there can be no assurance
the Company will be able to successfully develop or maintain existing
relationships. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward Outlook and Risks."
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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 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 continue to increase. The following table outlines the
payor mix for the Company's net revenues for the periods presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Medicare 50.3% 55.5% 51.9%
Medicaid 11.9 5.8 8.9
Managed care and other 37.8 38.7 39.2
-------- -------- --------
Total 100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
Medicare 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. The Medicare program
provides for, under both Medicare Part A and Medicare Part B, certain home
health services furnished by a home health agency under a plan established and
reviewed by a physician, 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. Prior to changes in Medicare
reimbursement resulting from the Budget Act, Medicare Part A (principally
nursing and related
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patient services) reimbursed 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 and are subject to
audit. Medicare Part B (principally respiratory and infusion services and
durable medical equipment) is paid on a fixed fee-for-service basis similar to
other third-party payors, such as managed care organizations.
The Budget Act, enacted by the U.S. Congress ("Congress") in August 1997,
requires the Health Care Financing Administration ("HCFA"), the department of
the U.S. Department of Health and Human Services responsible for the rules
governing Medicare and Medicaid, to initiate the implementation of a prospective
payment system (the "PPS") under both Medicare Part A and Medicare Part B for
home health agencies by October 1, 1999, with up to a four-year phase-in period.
This implementation deadline may be postponed due to Year 2000 issues HCFA must
address. The Company believes that reimbursement under a PPS system would
consist of either an established fee for a specific clinical diagnosis or a
fixed per diem amount for providing service. Implementation of a PPS system for
hospitals in 1984 generally resulted in lower reimbursement per patient
admission. However, the reimbursement mechanism was designed to reward
providers with costs below a specific cost per diagnosis per admission.
Similarly, to the extent the Company's Medicare cost-reimbursed nursing
agencies' costs to provide services are below reimbursement rates established
under the PPS, the Company would expect to benefit by being reimbursed amounts
in excess of their costs. However, the impact of the PPS on the Company's
results of operations cannot be predicted with any level of certainty as it
would depend largely upon the rates established under the PPS and the Company's
cost structure at that time.
Prospective rates determined by HCFA are expected to reflect a 15%
reduction in cost limits and per-patient limits in place as of September 30,
1999. For fiscal years 2001 and beyond, the standard payment amount will be
adjusted by the home health market index established by HCFA. In the event the
implementation deadline is not met, the reduction will be applied to the
reimbursement system then in place. The impact of the implementation of the PPS
on the Company's results of operations cannot be predicted with any certainty at
this time and would depend, to a large extent, on the reimbursement rates for
home health services established under PPS and the Company's ability to deliver
its services at a cost below the PPS rates. There can be no assurances that
such reimbursement rates would cover the costs incurred by the Company to
provide home health services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward Outlook and Risks."
For cost reporting periods beginning on or after October 1, 1997 and until
the PPS becomes effective, the Budget Act established an interim payment system
(the "IPS") that provides for the lowering of reimbursement limits for home
health visits. Cost limit increases for fiscal 1995 and 1996 were eliminated in
determining the IPS reimbursement limits. In addition, for cost reporting
periods beginning on or after October 1, 1997, home health agencies cost limits
are determined as the lesser of (i) their charges, (ii) their actual costs,
(iii) cost limits based on 105% of median costs of freestanding home health
agencies, or (iv) an agency-specific per-patient cost limit, based on 98% of
1994 costs adjusted for inflation and agency-specific and
11
<PAGE>
regional cost differences (a "blended rate," or patient aggregate allowance).
The new cost limits apply to the Company for the cost reporting period beginning
July 1, 1998, except for the Company's Medicare cost-reimbursed nursing agency
located in Texas, for which the new cost limits applied for the cost reporting
period which began January 1, 1998.
The implementation of the IPS had a significant impact on reimbursements
received by the Company's Texas Medicare cost-reimbursed nursing agency during
fiscal 1998 and is expected to have a significant impact on reimbursements in
fiscal 1999 to be received by all of the Company's Medicare cost-reimbursed
nursing agencies. In an effort to reduce operating costs and respond to the
reductions in Medicare reimbursement, the Company implemented a restructuring
plan during fiscal 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Recent legislation introduced in the U.S. Congress ("Congress"), if
enacted, could result in improvements in IPS reimbursement or a moratorium on
IPS until PPS is implemented. The Company cannot predict the effect that any
legislation, if enacted, would have on the Company's results of operations.
For cost reporting periods beginning after October 1, 1997, the Budget Act
also requires home health agencies 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 does not
expect this provision of the Budget Act to have a material impact on the
Company's financial condition or results of operations.
The Budget Act also provided for a 25% reduction in home oxygen
reimbursement from Medicare effective January 1, 1998 and a further reduction of
5% effective January 1, 1999. Compounding these reductions was 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. The reduction in oxygen reimbursement during fiscal 1998 had an
impact on internal growth in the Company's net revenues. The additional
reduction to be effective January 1, 1999 is also expected to impact internal
growth in net revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations- Internal Growth" and "- Forward Outlook and
Risks."
Various other provisions of the Budget Act may also have an impact on the
Company's business and results of operations. The impact of these reimbursement
changes could have a material adverse effect on the Company's financial
condition or results of operations. In addition to the impact on health care
reimbursement resulting from the Budget Act, other changes have been announced
in a federal policy that may adversely impact the Company's operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward Outlook and Risks - Medicare Reimbursement."
Medicaid Programs. Medicaid is a health insurance program, jointly funded
by the federal and state governments, which provides health insurance coverage
for certain financially
12
<PAGE>
or medically needy persons regardless of age. Medicaid benefits supplement
Medicare benefits for financially needy persons age 65 or older.
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. Of the Company's eleven Medicare cost-reimbursed
nursing agencies, eight currently receive periodic interim payments ("PIPs")
from Medicare for services provided. PIPs are bi-weekly payments, the amounts of
which are reviewed quarterly to reflect increases or decreases in the volume of
home health services actually provided. Because PIPs are paid bi-weekly, 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 for home health services concurrent with the implementation of
the PPS. This change could result in a material adverse effect on the Company's
cash flow. The Company's remaining Medicare cost-reimbursed nursing 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. At June 30, 1998, approximately
39.2% of the Company's net revenues were derived from managed care and other
non-governmental payors. The Company is continuing to experience an industry-
wide increase in the length of time required to collect receivables owed by
managed care and other payors. A continuation of the lengthening of the amount
of time required to collect accounts receivable 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 - Liquidity and Capital Resources"
and "- 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 net revenues from managed care and
other non-governmental payors 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. Other payor and employer groups, including
Medicare, are exerting pricing pressure on home health care providers, resulting
in reduced profitability. Such pricing pressures could have a
13
<PAGE>
material adverse effect on the Company's financial condition or results of
operations. See "Medicare Programs" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward Outlook and Risks."
MEDICARE CASE MIX STUDY
During fiscal 1997, the Company was selected to participate in a study of
Medicare cost-reimbursed nursing agencies (the "Medicare Case Mix Project")
being conducted by HCFA. The Medicare Case Mix Project is a result of HCFA's
commitment to implement the PPS for Medicare cost-reimbursed nursing agencies by
October 1999. See "Payor Mix - Medicare Program." 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 cost-reimbursed 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.
GOVERNMENT REGULATION
Recent Regulatory Developments. The Company's business is subject to
extensive federal, state and local regulation. 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. While the Budget Act has
significantly impacted the home health care industry, additional changes may
also 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 "Payor Mix" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks."
Certificates of Need, Permits and Licensure. The federal government and all
states regulate various aspects of the home health care industry. Such laws
include state laws which may impose certificate of need and licensure
requirements on home health care agencies, laws covering the dispensing of drugs
and the operation of pharmacies, as well as laws governing participation in the
Medicare and Medicaid programs. Federal laws may also 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
14
<PAGE>
currently licensed where required by the applicable federal, state and local
laws. 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 Company has obtained all of the
necessary certificates of need, licenses, permits and certification to operate
its business from those states in which it operates. 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. Moreover, there can be no assurance that the Company will be able to
obtain any certificates of need, licenses, permits, and/or other certification
which may be required in the future if the Company expands its operations or
laws change to impose additional requirements or interpretations of existing
regulations change. Moreover, any attempt to obtain additional certificates of
need or any other required approvals will cause the Company to incur certain
expenses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward Outlook and Risks."
JCAHO Accreditation. Since 1989, the Joint Commission on Accreditation of
Healthcare Organizations (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, has accredited home health agencies which voluntarily choose to
obtain such accreditation and which satisfy the applicable standards. All of
the Company's home health agencies are currently accredited by the JCAHO. Upon
acquiring companies in existing or new regions which are non-accredited, the
Company may choose to have a particular agency undergo the JCAHO accreditation
process, 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. See "Strategy."
Fraud and Abuse and Self-referral Laws. The home health care industry is
subject to anti-kickback provisions of the federal Medicare and Medicaid Patient
and Program Protection Act of 1987 ("Fraud and Abuse Statute"), which prohibit
the knowing and willful offer, payment, solicitation or receipt of any
remuneration, in cash or in kind, directly or indirectly, as inducement for
referral for items or services which may be paid for in whole or in part under
the Medicare or Medicaid programs, all other federal health care programs and
state health care programs. While the Fraud and Abuse Statute expressly
prohibits transactions that have traditionally had criminal implications, such
as kickbacks, rebates, gifts, free services, bribes or other incentives 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 U.S. Department of Health and Human Services ("HHS") has adopted
regulations creating "safe harbors" from federal criminal and civil penalties
under the Fraud and Abuse 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 Fraud and Abuse
Statute that do not conform to an applicable safe harbor are not necessarily in
violation of the statute, but the practice may be subject to increased scrutiny
and possible prosecution. The criminal penalty for conviction under the Fraud
and Abuse Statute is a fine of up to $25,000 and/or up to five years
imprisonment. In addition to criminal penalties, administrative
15
<PAGE>
(such as temporary or permanent suspension from the Medicare and Medicaid
programs), and civil monetary penalties may be imposed for violations. Federal
enforcement officials may also attempt to use other federal statutes to punish
or prosecute behavior considered fraudulent or abusive, including the Federal
False Claims Act and the Health Insurance Portability and Accountability 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 and
Accountability 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.
The Fraud and Abuse Statute covers 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 Health Insurance and Portability and
Accountability Act of 1996 requires HHS to issue binding advisory opinions
through its Office of Inspector General as to whether given practices involve
prohibited payment or solicitation of remuneration in exchange for referrals. A
recent advisory opinion that could affect the Company as a supplier of durable
medical equipment held that a supplier's charge for durable medical equipment
substantially exceeded Medicare's charge for the same equipment. Suppliers of
durable medical equipment should be aware that this area may face closer
scrutiny by the government.
On June 3, 1998, HHS issued a federal Medicare regulation, commonly
referred to as the Incentive Program for Fraud and Abuse Information, which will
make citizens who alert Medicare of possible acts of fraud and abuse eligible
for rewards if their information leads directly to the recovery of Medicare
money. The program will be launched in January 1999 and will reward the
individual reporting the fraud the lesser of 10% of the recovered payment or
$1,000.
Other recent HCFA actions to combat fraud and abuse in home health care
include increased scrutiny before a provider or supplier's admission into the
Medicare program (agencies are now being asked about whether they have any
"related business interests"), increased scrutiny of claims, increased oversight
of payment procedures (e.g., disallowing agencies to bill for services when they
----
are not medically necessary), payment reform (IPS, PPS), the development of
future regulations that would require home health agencies to re-enroll in
Medicare every three years and regulations that would allow Medicare to bar
payment to convicted health care felons.
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
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<PAGE>
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.
Additionally, in fiscal 1997, HCFA 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 it finds 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.
The federal government has enacted the so-called "Stark Law," which
generally prohibits physicians from referring patients for clinical laboratory
services which may be paid for in whole or in part by the Medicare or Medicaid
programs to entities in which they have a financial relationship. 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" and
other 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 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. Moreover, Medicare regulations contain additional specific
self-referral restrictions for a physician with an ownership interest in a 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.
While the Company believes that it is in material compliance with the fraud
and abuse and self-referral 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. During fiscal 1998, the Company
implemented
17
<PAGE>
an internal Compliance Program. See "Compliance Program" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Outlook and Risks." Although the Company does not believe it has
violated any fraud and abuse and self-referral 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."
COMPLIANCE PROGRAM
In August, 1998, HHS issued compliance program guidance for home health
agencies. The guidance encourages home health agencies to develop effective
internal controls that promote adherence to applicable federal and state law and
program requirements of federal, state and private health plans. The absence of
a compliance program or an incomplete or ineffective compliance program may not
be regarded favorably by HHS and could negatively affect government audits,
investigations, and/or inspections. During fiscal 1998, the Company implemented
an internal compliance program (the "Compliance Program"). Although management
believes the Compliance Program will be effective and will assist the Company in
monitoring and enhancing the effectiveness of its internal controls, there can
be no assurance that the Compliance Program will identify all potential
compliance issues or that as drafted it will be viewed as complete or effective
under audit or inspection by third party payors. 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, 1998, the Company employed approximately 1,054 full- and part-time
employees. In addition, the Company maintains registries of approximately 2,015
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 $3.0 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
18
<PAGE>
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Outlook and
Risks."
ITEM 2. PROPERTIES
The Company leases its corporate office in King of Prussia, Pennsylvania as
well as its 44 branch offices located in nine states. The corporate office is
approximately 16,000 square feet with a remaining lease term through calendar
1999. The Company's branch offices, which are leased, vary in size and in the
aggregate constitute 254,000 square feet of space. The Company's branch offices
range in size from 1,200 to 26,000 square feet. The Company's leases for its
offices have recurring lease terms which range from month-to-month to six years,
in most cases with options to renew. Management decreased the number of branch
offices during fiscal 1998 in connection with its restructuring and cost
reduction initiatives. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Management believes that the leased
properties are adequate for its present needs and that suitable additional or
replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
On February 19, 1998, a shareholder commenced litigation against the
Company and certain named officers of the Company. In the lawsuit, entitled
Koenig v. Feldman, et al. which was filed in the United States District Court
- -------------------------
for the Eastern District of Pennsylvania, the plaintiff alleges that the
defendants, in violation of federal securities laws, engaged in a scheme to
artificially inflate and maintain the market price of the Company's common stock
by, among other things, making false and misleading statements or failing to
disclose material facts in documents filed with the Securities and Exchange
Commission or in press releases issued by the Company, particularly with respect
to the Company's efforts to obtain timely payment for the Company's products and
services and the Company's termination of business with certain managed care
companies. The plaintiff, who filed the lawsuit on behalf of himself and all
others similarly situated, seeks certification of the lawsuit as a class action
on behalf of all persons who purchased the Company's common stock between
September 3, 1997 and February 16, 1998. The Company believes that the lawsuit
is without merit and is vigorously defending itself. A motion filed by the
Company to dismiss the lawsuit is currently pending with the court.
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. Among
other claims, the plaintiffs allege that delays in the issuance and registration
of shares pursuant to a formula in a Subscription Agreement between the Company
and the plaintiffs, who are former owners of a business acquired by the Company,
has resulted in damages, including a loss in excess of $1 million. The claims
are for breach of contract, breach of good faith and fair dealing,
misrepresentation, fraudulent inducement and violation of the Massachusetts
Unfair and Deceptive Trade Practices Act. As relief, the plaintiffs seek
specific performance of the
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<PAGE>
Subscription Agreement, consequential damages resulting from the alleged
breaches, a declaratory judgment, punitive damages for the fraud based claims
and an award of costs and attorneys fees. The Company intends to vigorously
defend against these claims, and has filed a motion to dismiss or alternatively
to transfer the action, which is presently pending with the court.
Certain former owners of businesses acquired by the Company have commenced
or threatened legal proceedings against the Company for non-payment of certain
amounts in connection with the acquisitions, payment of which is currently
prohibited by the Company's senior credit facility. See Note 5 to the fiscal
1998 consolidated financial statements, included herein.
The Company is also a party to certain legal actions arising in the
ordinary course of business.
While the Company believes it has adequate legal defenses and/or insurance
coverage for the above actions, there can be no assurance of favorable outcomes
regarding these legal actions or that recovery of any insurance proceeds will be
sufficient to cover any judgments, settlements or costs relating to any pending
or future legal proceedings. Additionally, 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. See "Management's Discussion and Analysis -
Forward Outlook and Risks."
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 1998, through the solicitation of proxies or otherwise.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 in fiscal 1998 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------- --------- ---------
<S> <C> <C>
June 30, 1998 $ 4.19 $2.25
March 31, 1998 11.31 2.75
December 31, 1997 13.63 8.38
September 30, 1997 13.38 9.50
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
</TABLE>
As of August 31, 1998, there were 9,765,764 shares of common stock
outstanding and approximately 163 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.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of June 30,
1997 and 1998, and for each of the years in the three-year period ended June 30,
1998, have been derived from the Company's consolidated financial statements,
which were audited by PricewaterhouseCoopers LLP, independent accountants, and
included herein. The selected consolidated data set forth below as of June 30,
1994, 1995 and 1996 and for the fiscal years ended June 30, 1994 and 1995 have
been derived from the Company's consolidated financial statements, as restated
for a merger (see Note 3, 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 herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues $46,706 $64,149 $95,878 $150,232 $174,335
Adjusted EBITDA (1) 2,245 4,228 11,193 18,026 16,956
Income (loss) before income taxes (2) 957 1,551 5,690 5,001 (29,164)
Income tax provision (benefit) 646 793 2,396 2,187 (4,316)
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle 311 758 3,294 2,814 (24,848)
Net income (loss) $ 555 $ 758 $ 2,133 $ 2,814 $(24,848)
========= ========= ========== =========== ==========
Net income (loss) available to
common stockholders $ 456 $ 635 $ 1,229 $ 2,808 $(24,848)
========= ========= ========== =========== ==========
Diluted net income (loss) per common
share $0.13 $0.17 $0.18 $0.32 $(2.67)
========= ========= ========== =========== ==========
Weighted average common shares
outstanding 3,572 3,676 6,653 8,673 9,316
========= ========= ========== =========== ==========
JUNE 30,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $11,201 $12,059 $20,346 $ 43,204 $ 48,382
Total assets 20,745 34,572 69,975 153,263 136,839
Long-term debt and capital lease
obligations, less current portion 7,664 14,264 16,287 78,793 85,311
Redeemable stock 2,991 3,555 1,744 - -
Total stockholders' equity $ 3,275 $ 4,938 $37,648 $ 50,572 $ 26,093
</TABLE>
(1) Adjusted EBITDA is a non-generally accepted accounting principle measurement
and is calculated by deducting patient care costs (excluding depreciation on
rental equipment), general and administrative expenses, and provision for
doubtful accounts from net revenues. Adjusted EBITDA represents earnings
before interest, income taxes, depreciation on rental equipment (included in
patient care costs), depreciation on fixed assets, amortization, the
cumulative effect of a change in accounting principles of $244,000 in fiscal
1994, nonrecurring bridge financing expenses of $913,000, before income
taxes, in fiscal 1996, an extraordinary loss of $1.2 million in fiscal 1996,
merger and other nonrecurring items of $3.0 million, before income taxes, in
fiscal 1997 and the writedown of goodwill and merger and other nonrecurring
items aggregating $29.9 million, before income taxes, in fiscal 1998.
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
22
<PAGE>
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 (loss) 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 (loss) before income
taxes in fiscal 1997 includes merger and other nonrecurring items of $3.0
million. Income (loss) before income taxes in fiscal 1998 includes a
writedown of goodwill and merger and other nonrecurring items of $29.9
million. 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 one of the leading providers of comprehensive home health
care services and products, delivering nursing and related patient services,
respiratory therapy, infusion therapy and durable medical equipment. From fiscal
1996 to fiscal 1998, the Company generated a compound annual growth rate in net
revenues of 39.6% through a combination of acquisitions and internal growth. The
Company experienced internal growth rates in net revenues of 19%, 16% and 4% for
fiscal years 1996, 1997 and 1998, 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 Company's internal growth rate during fiscal 1998 was impacted by
implementation of certain provisions of the Budget Act. See "Internal Growth."
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 the amortization of goodwill and
other intangible assets.
RESTRUCTURING INITIATIVES
The Company's business is impacted by extensive political, economic and
regulatory influences, which continue to subject the health care industry in the
United States to fundamental change. During fiscal 1998, significant changes to
the Medicare system of reimbursement were enacted in connection with the Budget
Act. The implementation of the IPS for the Company's Medicare cost-reimbursed
nursing agencies and reductions in Medicare oxygen services reimbursement rates
which resulted from the Budget Act have had and are expected to continue to have
a significant impact on the Company's current and future operations. Recent
legislation introduced into the U.S. Congress, if enacted, could result in
additional changes in the system of Medicare reimbursement. The uncertainty of
the outcome of additional legislative and regulatory
23
<PAGE>
issues facing the industry have had a significant impact on the industry. See
"Business - Industry Overview," " - Payor Mix" and " - Government Regulation."
In an effort to reduce operating costs and respond to the above reductions
in Medicare reimbursement, the Company implemented a restructuring plan during
fiscal 1998. This plan, which included cost reduction and office consolidation
initiatives, as well as management's assessment of the continuing value of
goodwill under the changing reimbursement environment, resulted in pre-tax
accounting charges aggregating $28.7 million during fiscal 1998 which were
comprised of a writedown of goodwill of $23.5 million and restructuring costs of
$5.2 million.
The writedown of goodwill was required based upon the estimated impact of
the announced reductions in Medicare oxygen reimbursement and the expected
impact of the IPS on the Company's continuing operations. The writedown was
comprised of $9.0 million related to certain durable medical equipment,
respiratory therapy, and infusion therapy companies and $14.5 million related to
certain Medicare cost-reimbursed nursing agencies.
The restructuring costs of $5.2 million were principally comprised of (i)
the closure and consolidation of certain branch locations, including the accrual
of estimated facility exit costs and future lease costs, the write-off of
leasehold improvements and other exit costs; and (ii) estimated employee
severance costs in connection with the related termination of employees,
including certain former owners of businesses acquired. See "Fiscal 1998
Compared with Fiscal 1997 - Merger and other nonrecurring expenses" and Note 2
to the fiscal 1998 consolidated financial statements included herein.
Although the restructuring plan is expected to reduce costs, there can be
no assurance the Company will be able to achieve the expected cost savings or
synergies from the closing or consolidation of offices and other restructuring
efforts or will be able to reduce costs without negatively impacting operations.
See "Forward Outlook and Risks."
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,
-------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Nursing and related patient services:
Medicare 37.4% 41.9% 41.2%
Non-Medicare 22.6 22.2 25.1
------ ------ ------
60.0 64.1 66.3
Respiratory therapy 17.8 18.1 15.2
Infusion therapy 14.0 8.4 7.0
Durable medical equipment 8.2 9.4 11.5
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
Since the end of fiscal 1995, service mix has fluctuated primarily as a
result of companies
24
<PAGE>
acquired. During fiscal 1997 and 1998, 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 during fiscal 1997.
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,
---------------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Medicare nursing visits 434,000 873,000 936,000
Non-Medicare nursing services:
Hours 438,000 980,000 1,231,000
Visits 120,000 173,000 230,000
</TABLE>
The significant growth in Medicare nursing visits and non-Medicare nursing
hours and visits in fiscal 1997 and 1998 is a result of the acquisition during
fiscal 1997 of two Medicare and non-Medicare nursing and related patient service
companies in the Texas and New England regions, as well as other nursing
acquisitions during fiscal 1997, increased referrals, and effective cross-
selling of nursing services through the Company's other services. See
"Acquisitions" and "Internal Growth."
Respiratory therapy, infusion therapy and durable medical equipment net
revenues increased to $53.9 million in fiscal 1997 from $38.4 million in fiscal
1996, as a result of acquisitions, increased referrals and effective cross-
selling of these services to the Company's nursing patients. Respiratory
therapy, infusion therapy and durable medical equipment net revenues increased
to $58.8 million in fiscal 1998 from fiscal 1997, as a result of a full year of
operations of companies acquired during fiscal 1997, increased referrals and
effective cross-selling of these services to the Company's nursing patients.
Respiratory therapy net revenues were also impacted by the reductions in
Medicare oxygen reimbursement during fiscal 1998. See "Acquisitions" and
"Internal Growth."
ACQUISITIONS
While the Company completed fourteen acquisitions in both existing and new
markets between fiscal 1996 and 1997, it completed no acquisitions during fiscal
1998. As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company has
slowed its growth through acquisition. In addition, the Company is restricted by
its senior credit facility from engaging in acquisitions. Management believes
that as Medicare legislative and regulatory changes and managed care and other
competitive pressures continue to arise, the home health care industry will
continue to consolidate. See "Business -Industry Overview," " - Payor Mix" and
" - Government Regulation." The Company believes it will be positioned to
execute its acquisition strategy once Medicare reimbursement regulation
uncertainties and the Company's capital constraint issues are resolved. See
"Forward Outlook and Risks."
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
25
<PAGE>
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 with the
remaining acquisitions accounted for as purchases. Under the purchase method,
the results of operations from acquisitions were included in the Company's
results of operations from the dates of acquisition, which occurred at various
times during those fiscal years. Accordingly, the operating results for any
fiscal year are not necessarily comparable with the results for any past or
future fiscal year. The purchase price for companies acquired under the purchase
method is allocated to net identifiable assets, principally accounts receivable,
fixed assets and inventory, with any excess allocated to goodwill and other
intangible assets.
The Company is required to make certain payments to former owners of
businesses acquired in prior periods, as part of the consideration paid for the
acquisitions. During fiscal 1998, the Company paid $1.8 million in additional
consideration for certain acquisitions completed in prior periods. Amounts to be
paid in cash during fiscal 1999 as additional consideration for non-Medicare
nursing and related patient services and infusion therapy services companies
acquired during prior periods approximate $2.1 million. Amounts aggregating $2.1
million may also be paid in the form of the Company's common stock to certain
former owners through fiscal 2000 in connection with earnouts related to
businesses acquired by the Company. During fiscal 1998 the Company issued
579,901 additional shares in connection with an acquisition completed in fiscal
1997.
The former owners of a business acquired by the Company in fiscal 1999
commenced litigation against the Company during the fourth quarter of fiscal
1998 for nonperformance under certain provisions of the acquisition documents.
The Company intends to vigorously defend against these claims, and has filed a
motion to dismiss or alternatively to transfer the action, which is presently
pending with the court. See "Item 3 - Legal Proceedings."
Certain former owners of businesses acquired by the Company have commenced
or threatened legal proceedings against the Company for non-payment of certain
amounts in connection with the acquisitions, payment of which is prohibited by
the Company's senior credit facility. See Note 5 to the fiscal 1998 consolidated
financial statements, included herein.
During September 1997 the Company entered into a definitive agreement for
the acquisition through merger of U.S. HomeCare Corporation ("USHO"). During
February 1998, the Company and USHO agreed to the termination of the proposed
merger. Deferred acquisition costs of $1.2 million associated with this
proposed merger were written-off during fiscal 1998 and are included in merger
and other nonrecurring expenses in the fiscal 1998 consolidated statement of
operations, included herein.
INTERNAL GROWTH
The Company experienced internal growth of 4% during fiscal 1998, compared
to 16%
26
<PAGE>
during fiscal 1997. Internal growth during fiscal 1998 was comprised of an
increase of 6.2%, or $2.8 million, in same-branch Medicare cost-reimbursed
nursing and related patient service net revenues and an increase of 18.0%, or
$5.1 million, in same-branch net revenues for non-Medicare nursing services,
offset by a decrease of (9.5%) or ($3,645,000) in same-branch product net
revenues (durable medical equipment and respiratory and infusion therapy
services).
The increase in net revenues relating to Medicare cost-reimbursed nursing
and related patient services resulted from a (0.5%) decrease in visits at same-
branch Medicare cost-reimbursed nursing branches offset by increased costs
incurred by these branches resulting in additional cost reimbursement. The
increase in non-Medicare nursing services net revenue resulted from 9% and 33%
increases in hourly and visit volume, respectively, from same-branch non-
Medicare nursing branches, primarily as a result of effective cross-selling of
these nursing services to the Company's product patients and increased patient
referrals.
The decrease in product net revenues was due principally to the reductions
in Medicare oxygen reimbursement, which were effective January 1, 1998, as well
as various other factors such as the Company ceasing to provide services and
products to selected managed care companies due to their protracted payment
terms, a reduction in reimbursement rates by certain managed care companies, the
Company choosing not to renew certain contracts with managed care companies that
were attempting to impose rate reductions and a decline in cross-selling of
these products and services to the Company's nursing patients during the
transition to certain of the Company's regional Coordinated Care Centers during
the second quarter of fiscal 1998.
The Company may continue to experience a decrease in its internal growth
rate related to respiratory therapy services as a result of the reductions on
January 1, 1998 and 1999 in Medicare reimbursement for oxygen services.
Additionally, the Company may also experience a decrease in the internal growth
rate for its Medicare cost-reimbursed nursing agencies when they become subject
to the IPS. In addition, 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 a decrease in its
internal growth rate. See "Business - Payor Mix" and "- Government Regulation."
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 periods. See "Forward
Outlook and Risks."
27
<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,
-------------------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Net revenues 100.0% 100% 100.0%
Operating costs and expenses:
Patient care 48.2 47.8 47.4
General and administrative 37.7 36.1 40.6
Provision for doubtful accounts 3.6 5.6 4.2
Depreciation 0.9 1.0 1.4
Amortization 1.1 1.6 1.6
Interest, net 1.6 2.6 4.3
Merger and other nonrecurring 1.0 2.0 3.7
Writedown of goodwill - - 13.5
------- -------- -------
Income (loss) from operations 5.9 3.3 (16.7)
Income tax provision (benefit) 2.5 1.4 (2.5)
------- -------- -------
Income (loss) before extraordinary item 3.4 1.9 (14.2)
Extraordinary item 1.2 - -
------- -------- -------
Net income (loss) 2.2% 1.9% (14.2)%
======= ======== =======
</TABLE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Net revenues. In fiscal 1998, net revenues increased to $174.3 million.
This represented an increase of $24.1 million, or 16%, over fiscal 1997. Of
this increase, $19.8 million, or 54%, was attributable to acquisitions completed
during fiscal 1997. The balance of the increase was due to internal growth of
4%, or $4.3 million. See "Internal Growth." Net revenues from nursing and
related patient services increased from $75.0 million in fiscal 1997 to $83.0
million in fiscal 1998, an 11% increase. The increase in Medicare nursing and
related patient services net revenues resulted from increased visits,
principally as a result of a full year of operations from acquisitions
consummated during fiscal 1997, and increased costs resulting in additional cost
reimbursement, offset by the decrease in net revenues resulting from
implementation of the IPS in the Texas Region effective January 1, 1998. Total
Medicare nursing visits increased 7% to 936,000 visits for fiscal 1998. Total
non-Medicare nursing hourly and visit volume increased 26% and 33%,
respectively, to 1,231,000 hours and 230,000 visits, respectively, for fiscal
1998. A full year of operations from acquisitions consummated during fiscal
1997, effective cross-selling of these nursing services to the Company's product
patients and increased referrals contributed to these volume increases. Product
net revenues increased $4.9 million, or 9.0%, to $58.8 million for fiscal 1998,
from $53.9 million for fiscal 1997. as a result of , increased referrals and
effective cross-selling of infusion therapy services to the Company's nursing
patients. This increase was comprised of an increase of $8.5 million in net
revenues for fiscal 1998 attributable to a full year of operations from
acquisitions consummated during fiscal 1997, offset by a decrease of $3.6
million in net revenues for same-branch operations due to various factors
discussed under "Internal Growth." Managed care organizations and other payors
accounted for 38.7% and 39.2% of the Company's net revenues in fiscal 1997 and
1998, respectively. The Company expects
28
<PAGE>
revenues from managed care and other non-governmental payors to continue to
increase. See "Business - Payor Mix" and "Forward Outlook and Risks."
Patient care. In fiscal 1998, patient care costs increased to $82.7
million. This represented an increase of $10.9 million, or 15.2%, over fiscal
1997. This increase was principally related to the increases in net revenues.
Patient care costs decreased as a percentage of net revenues from 47.8% to
47.4%. Patient care costs as a percentage of net revenues are impacted by
numerous variables, many of which are beyond the control of the Company. The
Company may be able to reduce patient care costs as a percentage of net revenues
as a result of its cost reduction initiatives and the termination or non-renewal
by the Company of contracts with managed care companies that are marginally
profitable, provided the Company's net revenues increase. The ability of the
Company to increase net revenues in the future will be impacted by the
reductions in Medicare oxygen reimbursement on January 1, 1998 and 1999, the
continuing pressure by managed care payors to reduce their reimbursement to the
Company for the Company's products and services and the lower IPS cost limits
effective January 1, 1998 for the Company's Texas Medicare cost-reimbursed
nursing agency and July 1, 1998 for the Company's other Medicare cost-reimbursed
nursing agencies. See "Restructuring Initiatives," "Internal Growth" and "Net
Revenues."
General and administrative. In fiscal 1998, general and administrative
expenses increased to $70.8 million. This represented an increase of $16.6
million, or 31%, over fiscal 1997. General and administrative expenses increased
as a percentage of net revenues from 36.1% to 40.6%. Of these increases, costs
of $9.2 million were related to a full year of operations included in fiscal
1998 related to acquisitions completed during the third and fourth quarters of
fiscal 1997, with the remainder principally resulting from infrastructure
enhancements implemented by the Company prior to adoption by the Company of its
restructuring plan, including costs related to an increase in staffing in
certain departments, costs related to implementation of the Company's regional
Coordinated Care Centers and increased costs for insurance, telecommunications
and other operating expenses. The Company may be able to reduce general and
administrative expenses as a percentage of net revenues as a result of its cost
reduction and office consolidation initiatives. See "Restructuring Initiatives."
Provision for doubtful accounts. In fiscal 1998, the provision for doubtful
accounts decreased to $7.3 million from $8.4 million in fiscal 1997. Excluding
the nonrecurring provisions recorded during fiscal 1998 and 1997, discussed
below, provision for doubtful accounts remained relatively consistent as a
percentage of net revenues, decreasing to 3.5% for fiscal 1998 from 3.6% for
fiscal 1997.
The fourth quarter of fiscal 1998 included a pre-tax provision of $1.2
million for accounts receivable due from the Allegheny Health, Education and
Research Foundation ("AHERF") which filed for protection under Chapter 11 of the
U.S. Bankruptcy Code in July 1998. Due to the uncertainty of the outcome of
AHERF's bankruptcy proceedings, the Company recorded a reserve for the entire
amount of the pre-bankruptcy receivable. The Company is reimbursed by AHERF for
post-bankruptcy services on a prepaid basis.
The fourth quarter of fiscal 1997 included a pre-tax provision of $3.0
million of additional accounts receivable reserves. The additional reserve
primarily resulted from a slow down in payments during the fourth quarter of
fiscal 1997 from a number of the Company's
29
<PAGE>
larger managed care payors and increasing attempts by them to deny payments for
products and services furnished to their subscribers .
The Company continues to experience difficulties in collecting receivables
from managed care and other non-governmental payors. This continues be a
significant issue throughout the industry. See "Liquidity and Capital
Resources." The Company expects revenues from managed care organizations to
continue to increase. See "Business - Payor Mix" and "Forward Outlook and
Risks."
Depreciation. In fiscal 1998, depreciation expense increased to $2.4
million. This represented an increase of $913,000, or 60%, over fiscal 1997.
This increase was attributable to a full year of depreciation on assets acquired
in connection with acquisitions during fiscal 1997 and increases resulting from
capital expenditures related to vehicles, management information systems and
equipment to support the Company's internal growth.
Amortization. In fiscal 1998, amortization increased to $2.9 million.
This represented an increase of $515,000, or 22%, over fiscal 1997. This
increase was attributable to amortization of goodwill arising from acquisitions
in fiscal 1997, offset by the reduction in amortization as a result of the
writedown of goodwill during the second quarter of fiscal 1998. See "Writedown
of goodwill."
Interest, net. In fiscal 1998, interest, net, increased to $7.5 million.
This represented an increase of $3.7 million, or 95%, over fiscal 1997. This
increase was related to a full year of interest from indebtedness related to
fiscal 1997 acquisitions with the remainder resulting from increased
indebtedness under the Company's working capital credit facility.
Merger and other nonrecurring. The Company incurred certain merger and
nonrecurring expenses during fiscal 1998 and 1997.
Fiscal 1998 merger and nonrecurring expenses included: (i) an aggregate
pre-tax charge of $5.2 million recorded in connection with (a) the closure and
consolidation of certain branch locations, including the accrual of estimated
facility exit costs and future lease costs, the write-off of leasehold
improvements, and other exit costs, and (b) estimated employee severance costs
in connection with the related termination of employees, including certain
former owners of businesses acquired; and (ii) the write-off of deferred
acquisition costs aggregating $1.2 million associated with the termination of
the Company's proposed acquisition of USHO. See "Restructuring Initiatives" and
"Acquisitions."
Fiscal 1997 merger and nonrecurring expenses included: (i) $1.6 million
resulting from transaction fees, legal and accounting costs and other
nonrecurring costs associated with a merger in November 1996; (ii) the write-off
of $300,000 of deferred costs related to a canceled 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; and (iii) 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.
30
<PAGE>
Writedown of goodwill. During fiscal 1998, the Company recorded a writedown
of goodwill previously recorded in connection with certain acquisitions. The
Company determined the writedown of goodwill was required based upon the
estimated impact of the announced reductions in Medicare oxygen reimbursement
and the impact of the IPS on the Company's continuing operations. Based upon
management's determination of the expected impact of these changes on the
carrying value of goodwill, goodwill was written down by $23.5 million during
fiscal 1998. This writedown was comprised of $9.0 million related to certain
durable medical equipment and respiratory and infusion therapy companies and
$14.5 million related to certain Medicare cost-reimbursed nursing agencies.
The Company will continue to evaluate the continuing value of goodwill.
There can be no assurance that the remaining balance of goodwill of $46.8
million at June 30, 1998 will not be reduced for possible impairments which may
occur in the future as a result of changes in reimbursement or other issues.
Additionally, reimbursement regulations have been issued related to
reimbursement for certain mobile diagnostic services. These regulations could
eliminate payment for mobile diagnostic services to the Company. Goodwill
associated with mobile diagnostic services acquisitions aggregated approximately
$1.0 million at June 30, 1998.Mobile diagnostic services represent less than 3%
of the Company's current net revenues.
Loss before income taxes. Significant factors which affected the loss
before income taxes for fiscal 1998 included a pre-tax operating loss from the
Texas Medicare cost-reimbursed nursing agency of approximately ($1,384,000) as a
result of implementation of the IPS in the Texas Region effective January 1,
1998 and pretax charges aggregating $28.7 million related to the nonrecurring
writedown of goodwill and merger and other nonrecurring costs recorded during
fiscal 1998. Although the restructuring plan is expected to reduce costs, there
can be no assurance the Company will be able to achieve the expected cost
savings or synergies from the closing or consolidation of offices and other
restructuring efforts or will be able to reduce costs without negatively
impacting operations. See "Forward Outlook and Risks."
Provision (benefit) for income taxes. The Company recorded a tax benefit
of 14.8% of pretax loss for fiscal 1998. The principal reason for the
difference between the tax benefit and the federal and state statutory tax rates
was a result of the writedown of goodwill during fiscal 1998. The writedown of
goodwill included approximately $15.6 million of nondeductible goodwill recorded
in connection with certain acquisitions, for which the Company receives no
income tax benefit.
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
31
<PAGE>
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.
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-margin
non-nursing services, principally due to acquisitions, and an increase in the
percentage of corporate and regional overhead allocated to the Medicare cost-
reimbursed nursing 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. Excluding the $3.0 million additional
provision discussed below, the provision for doubtful accounts remained
consistent as a percentage of net revenues at 3.6% in fiscal 1997 and 1996.
During the fourth quarter of fiscal 1997, the Company recorded approximately
$3.0 million in additional provision for doubtful accounts, which amount was in
addition to amounts historically reported as a percentage of net revenues. This
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 products and services
furnished to their subscribers. See "Liquidity and Capital Resources."
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.
32
<PAGE>
Merger and other nonrecurring. See "Fiscal 1998 Compared with Fiscal 1997
- - Merger and other nonrecurring" for discussion of fiscal 1997 merger and other
nonrecurring items.
Fiscal 1996 nonrecurring expenses included: (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 fiscal 1996 in connection with
a fiscal 1996 acquisition and the Company's initial public 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
nondeductible 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.
QUARTERLY RESULTS
The following table presents selected unaudited quarterly operating results
for the Company for each of the four quarters in fiscal 1997 and 1998. 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-branch 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. Net revenues and net income during
fiscal 1998 were significantly impacted by the implementation, effective January
1, 1998, of the IPS for the Company's Texas Medicare cost-reimbursed nursing
agency and the reduction in reimbursement for Medicare-reimbursed oxygen
services. Quarterly results were also impacted by merger and nonrecurring items
recorded during fiscal 1998 and 1997 aggregating $7.7 million and $6.0 million,
respectively, including nonrecurring provisions for doubtful accounts in both
periods. Additionally, the Company recorded a writedown of goodwill of $23.5
million during the second quarter of fiscal 1998. See the Company's Form 10-Q's
for fiscal 1997 and 1998, not included herein and "Results of Operations -
Fiscal 1998 Compared with Fiscal 1997 - Provision for doubtful accounts," "-
Merger and other nonrecurring" and "- Writedown of goodwill." 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
operations for the full
33
<PAGE>
fiscal year or predictive of future periods. See "Internal Growth" and "Forward
Outlook and Risks."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
SEP-96 DEC-96 MAR-97 JUN-97 SEP-97 DEC-97 MAR-98 JUN-98
------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $27,118 $32,967 $42,267 $47,880 $47,046 $ 45,742 $42,367 $39,180
Income (loss) before
income taxes 2,217 1,121 2,527 (864) 3,144 (27,813) (979) (3,516)
Net income (loss) $ 1,354 $ 689 $ 1,567 $ (796) $ 2,028 $(23,856) $ (644) $(2,377)
======= ======= ======= ======= ======= ======== ======= =======
Net income (loss) per
common share $ 0.16 $ 0.08 $ 0.18 $ (0.09) $ 0.22 $ (2.60) $ (0.07) $ (0.24)
======= ======= ======= ======= ======= ======== ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Consistent with its growth strategy, the Company has expanded its
operations over the past three years through a combination of internal growth
and acquisitions. This growth has been principally financed through borrowings
under the Company's senior credit facility, installment notes and stock issued
to sellers in connection with acquisitions and through the Company's initial
public offering.
Working capital increased to $48.4 million at June 30, 1998 from $43.2
million at June 30, 1997, an increase of $5.2 million. The increase primarily
resulted from an increase in current assets of $6.0 million offset by an
increase in current liabilities of $800,000. The increase in current assets was
comprised principally of an increase in accounts receivable of $2.5 million and
an increase in prepaids and other current assets of $3.3 million. The increase
in current liabilities was comprised principally of the change in the current
portion of restructuring and other nonrecurring liabilities of $2.9 million at
June 30, 1998, offset by a decrease of $2.1 million in the current portion of
long-term debt.
The increase in accounts receivable caused an increase in days net revenues
outstanding from 104 at June 30, 1997 to 132 for June 30, 1998, using a three-
month rolling average calculation. The increase in days net revenues
outstanding resulted from a decrease in net revenues of $8.7 million from the
three months ended June 30, 1997 to the three months ended June 30, 1998, as
well as the increase of $2.5 million in net accounts receivable from June 30,
1997 to June 30, 1998. The decrease in net revenues resulted from various
factors. See "Net Revenues" and "Internal Growth." The increase in accounts
receivable was principally due to internal growth and certain managed care
payors continuing to subject the Company to increasingly protracted payment
terms and increasing attempts by these and other non-governmental payors to deny
payments for products and services furnished to their subscribers. The increase
in the length of time required to collect receivables owed by managed care and
other non-governmental payors is an industry-wide issue. 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 sales 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 sales outstanding will not continue to
increase if these payors
34
<PAGE>
continue to follow protracted payment terms in reimbursing the Company for its
services. See "Business - Payor Mix" and "Forward Outlook and Risks - Risks
Related to Collection of Accounts Receivable."
While the Company completed fourteen acquisitions between fiscal 1996 and
1997, there were no acquisitions during fiscal 1998. Cash expenditures for
acquisitions were $37.5 million for fiscal 1997. The Company is required to make
certain payments to former owners of businesses acquired in prior periods, as
part of the consideration paid for the acquisitions. During fiscal 1998, the
Company paid $1.8 million in additional consideration for certain acquisitions
completed in prior periods. Amounts to be paid in cash during fiscal 1999 as
additional consideration for non-Medicare nursing and related patient services
and infusion therapy services companies acquired during prior periods
approximate $2.1 million. Amounts aggregating $2.1 million may also be paid in
the form of the Company's common stock to certain former owners through fiscal
2000 in connection with earnouts related to businesses acquired by the Company.
During fiscal 1998 the Company issued 579,901 additional shares in connection
with an acquisition completed in fiscal 1997. The Company is currently
restricted by its senior credit facility from engaging in acquisitions. As a
result of the changing reimbursement environment and certain capital
constraints, the Company has slowed its growth through acquisition. See
"Business - Strategy," "Acquisitions" and "Forward Outlook and Risks."
The former owners of a business acquired by the Company in fiscal 1997
commenced litigation against the Company during the fourth quarter of fiscal
1998 for nonperformance under certain provisions of the acquisition documents.
The Company intends to vigorously defend against these claims, and has filed a
motion to dismiss or alternatively to transfer the action, which is presently
pending with the court. See "Item 3 - Legal Proceedings."
Certain former owners of businesses acquired by the Company have commenced
or threatened legal proceedings against the Company for non-payment of certain
amounts in connection with the acquisitions, payment of which is prohibited by
the Company's senior credit facility. See Note 5 to the fiscal 1998 consolidated
financial statements, included herein.
Goodwill was $46.8 million at June 30, 1998, after a $23.5 million
writedown recorded during fiscal 1998. The Company will continue to evaluate the
continuing value of goodwill. There can be no assurance that the remaining
balance of goodwill at June 30, 1998 will not be reduced for possible
impairments which may occur in the future as a result of changes in
reimbursement or other issues. Additionally, reimbursement regulations have been
issued related to reimbursement for certain mobile diagnostic services. These
regulations could eliminate payment for mobile diagnostic services to the
Company. Goodwill associated with mobile diagnostic services acquisitions
aggregates approximately $1.0 million at June 30, 1998. Mobile diagnostic
services represent less than 3% of the Company's current net revenues.
Expenditures for purchases of capital equipment were $5.0 million and $5.2
million for fiscal 1998 and 1997, respectively, including $2.2 million and $1.4
million of purchases in fiscal 1998 and fiscal 1997, respectively, funded
through capital leases. The Company has budgeted its capital equipment needs at
between $5.0 to $6.0 million during fiscal 1999, which includes continuing
investments in equipment held for rental and management information systems.
On September 23, 1998, the Company and its lenders amended the Company's
senior
35
<PAGE>
credit facility (the "Credit Facility"). The Credit Facility, as amended, limits
the maximum amount of borrowings under the Credit Facility to $83.4 million,
provides for temporary borrowings under the Credit Facility of up to $1.4
million through December 31, 1998 for payroll and related costs, prohibits the
Company from making certain subordinated payments to former owners of acquired
businesses and restricts the Company's ability to engage in acquisitions. The
Credit Facility further limits, under certain circumstances, the Company's
ability to incur additional indebtedness, sell material assets, prohibits
payment of dividends and also requires the Company to meet or exceed certain
coverage, leverage and indebtedness ratios. The amendment to the Credit Facility
on September 23, 1998 waived the Company's compliance with certain covenant
requirements as of June 30, 1998 and amended certain covenant requirements for
future periods. Other amendments to the Credit Facility during February and May
1998 waived and/or amended certain covenant requirements as of December 31, 1997
and March 31, 1998, respectively. On September 23, 1998, the Company had $83.4
million outstanding under the Credit Facility bearing interest at a weighted
average interest rate of 8.8%, and also, $3.4 million of cash on hand.
Indebtedness under the Credit Facility is collateralized by substantially all of
the assets of the Company, subject to certain permitted liens and exceptions.
See Note 5 to the fiscal 1998 consolidated financial statements, included
herein.
The Company believes cash on hand, cash flows generated from operations and
the Company's ability to finance certain capital expenditures through leasing
arrangements should be adequate to enable the Company to fund its operations.
The Company's future capital requirements will depend upon many factors,
including the performance of the Company's business, as well as other factors
that are not within the Company's control, including competitive conditions and
regulatory or other government actions. However, 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. In the event that the
Company's cash on hand, internally generated funds and funds from any financings
prove to be insufficient to fund the Company's operations, then the Company may
be required to adjust its cost structure, and/or some or all of the Company's
development and expansion plans could be delayed or abandoned, and/or the
Company may be required to seek additional funds. See "Forward Outlook and
Risks."
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
Medicare, 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
36
<PAGE>
relating to the impact on the Company of new accounting pronouncements.
FORWARD OUTLOOK AND RISKS
This Form 10-K contains and incorporates by reference certain "forward-
looking statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act with respect to results of operations and
businesses of the Company. All statements, other than statements of historical
facts, included in this Form 10-K, including those regarding market trends, the
Company's financial position, business strategy, projected costs, and plans and
objectives of management for future operations, are forward-looking statements.
In general, such statements are identified by the use of forward-looking words
or phrases including, but not limited to, "intended," "will," "should," "may,"
"expects," "expected," "anticipates," and "anticipated" or the negative thereof
or variations thereon or similar terminology. These forward-looking statements
are based on the Company's current expectations. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to be
correct. Because forward-looking statements involve risks and uncertainties,
the Company's actual results could differ materially. Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed hereunder and elsewhere in this Form 10-
K. These forward-looking statements represent the Company's judgment as of the
date of this Form 10-K. All subsequent written and oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by the Cautionary Statements. The Company disclaims, however, any intent or
obligation to update its forward-looking statements.
Recent Regulatory Developments. The Company's business is subject to
extensive federal, state and local regulation. 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. While the Budget Act has
significantly impacted the home health care industry, additional changes may
also 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 "Business - Payor Mix" and "Business -
Government Regulation."
Medicare Reimbursement. The Budget Act requires HCFA to implement the PPS
for Medicare cost-reimbursed home nursing agencies by October 1, 1999, with up
to a four-year phase-in period. See "Business - Payor Mix - Medicare
Reimbursement." This implementation deadline may be postponed due to Year 2000
issues HCFA must address. In the event the
37
<PAGE>
implementation deadline is not met, the reduction will be applied to the
reimbursement system then in place. The impact of the implementation of the PPS
on the Company's results of operations cannot be predicted with any certainty at
this time and would depend, to a large extent, on the reimbursement rates for
home health services established under the PPS and the Company's ability to
deliver its services at a cost below the PPS rates. There can be no assurances
that such reimbursement rates would cover the costs incurred by the Company to
provide home health services. See "Business- Payor Mix" and "Business -
Government Regulation."
For cost reporting periods beginning on or after October 1, 1997 and until
the PPS becomes effective, the Budget Act established the IPS that provides for
the lowering of reimbursement limits for home nursing visits. Cost limit
increases for fiscal 1995 and 1996 were eliminated in determining the IPS
reimbursement limits. In addition, for cost reporting periods beginning on or
after October 1, 1997, home health agencies cost limits are determined as the
lesser of (i) their actual charges, (ii) their actual costs, (iii) cost limits
based on 105% of median costs of freestanding home health agencies, or (iv) an
agency-specific per-patient cost limit, based on 98% of 1994 costs adjusted for
inflation and agency-specific and regional cost differences (a "blended rate,"
or patient aggregate allowance). The new cost limits apply to the Company for
the cost reporting period beginning July 1, 1998, except for the Company's
Medicare cost-reimbursed nursing agency located in Texas, for which the new cost
limits applied for the cost reporting period which began January 1, 1998. See
"Business - Payor Mix" and "Business - Government Regulation."
The implementation of the IPS had a significant impact on reimbursements
received by the Company's Texas Medicare cost-reimbursed nursing agency during
fiscal 1998 and is expected to have a significant impact on reimbursements in
fiscal 1999 to be received by the Company's remaining Medicare cost-reimbursed
nursing agencies. In an effort to reduce operating costs and respond to the
reductions in Medicare reimbursement, the Company implemented a restructuring
plan during fiscal 1998.See "Restructuring Initiatives" and "Forward Outlook and
Risks - Risks Associated with Restructuring."
Recent legislation introduced in Congress, if enacted, could result in
improvements in IPS reimbursement or a moratorium on IPS until PPS is
implemented. The Company cannot predict the effect that any legislation, if
enacted, would have on the Company's results of operations.
For cost reporting periods beginning after October 1, 1997, the Budget Act
also requires home health agencies 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 does not
expect this provision of the Budget Act to have a material impact on the
Company's financial condition or results of operations.
38
<PAGE>
The Budget Act also provided for a 25% reduction in home oxygen
reimbursement from Medicare effective January 1, 1998 and a further reduction of
5% effective January 1, 1999. Compounding these reductions was 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 during fiscal 1998 had an
impact on internal growth in the Company's net revenues. The additional
reduction to be effective January 1, 1999 is also expected to impact internal
growth in net revenues. See "Internal Growth," "Net Revenues" and "Results of
Operations - Fiscal 1998 Compared with Fiscal 1997."
Various other provisions of the Budget Act may also have an impact on the
Company's business and results of operations. The Budget Act required that all
home health agencies obtain surety bonds in the amount of at least $50,000 by
June 1, 1998. This requirement changed on July 31, 1998. The date that current
and new home health agencies will now be required to obtain a surety bond will
not be until sixty days following publication of a final rule by HCFA, but no
earlier than February 15, 1999. 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 until final
regulations are issued.
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. The Company is in the
process of applying for separate licensure for four of its branch offices to
comply with this policy. This process is expected to have an impact on costs
associated with operating these branches. Although the Company has not yet
determined the aggregate cost impact of complying with this policy, but it is
not expected to have a material adverse effect on the Company's financial
condition.
Reimbursement Payments. The possible discontinuance of PIPs for eight of
the Company's Medicare cost-reimbursed nursing agencies concurrent with the
implementation of the PPS could result in a material adverse effect on the
Company's cash flow. See "Business - Payor Mix - Reimbursement Payments."
Although legislation may defer the discontinuance of PIPs, the Company cannot
predict the effect that any legislation, if enacted, would have on the Company's
results of operations.
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.
39
<PAGE>
Risks Associated with Collection of Accounts Receivable. 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
experienced an increase in its days net revenues outstanding from 104 at June
30, 1997 to 132 for June 30, 1998, using a three-month rolling average
calculation. The increase in days net revenues outstanding resulted from a
decrease in net revenues of $8.7 million from the three months ended June 30,
1997 to the three months ended June 30, 1998, as well as an increase of $2.5
million in net accounts receivable from June 30, 1997 to June 30, 1998. The
decrease in net revenues resulted from various factors. See "Net Revenues" and
"Internal Growth." The increase in accounts receivable was principally due to
internal growth and certain managed care payors continuing to subject the
Company to increasingly protracted payment terms and increasing attempts by
these and other non-governmental payors to deny payments for products and
services furnished to their subscribers.
At June 30, 1998, approximately 39.2% of the Company's net revenues were
derived from managed care and other non-governmental payors. The increase in the
length of time required to collect receivables owed by managed care and other
payors is an industry-wide issue. 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 sales
outstanding could have a material adverse effect on the Company's financial
condition or results of operations. During fiscal 1998 the Company terminated
relationships with certain managed care organizations and is in the process of
reviewing its managed care contracts. See "Forward Outlook and Risks -
Dependence on Relationships with Referral Sources." There can be no assurance
that the Company's days sales outstanding will not continue to increase if these
payors continue to follow protracted payment terms in reimbursing the Company
for its services. See "Business - Payor Mix" and "Liquidity and Capital
Resources."
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 and
other non-governmental payors 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. Other payor and employer groups, including
Medicare, 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. During
fiscal 1998 the Company terminated relationships with certain managed care
organizations and is in the process of reviewing its managed care contracts.
See "Forward Outlook and Risks - Dependence on Relationships with Referral
Sources."
Restructuring Initiatives. In an effort to reduce operating costs and
respond to the reductions in Medicare reimbursement, the Company implemented a
restructuring plan during
40
<PAGE>
fiscal 1998. This plan included cost reduction and office consolidation
initiatives and resulted in $5.2 million in restructuring costs being recorded
during fiscal 1998. See "Restructuring Initiatives." There can be no assurance
the Company will be able to achieve the expected cost savings or synergies from
the closing or consolidation of offices and its other restructuring efforts or
will be able to reduce costs without negatively impacting operations.
Need for Additional Financing. The Company believes cash on hand, cash
flows generated from operations and the Company's ability to finance certain
capital expenditures through leasing arrangements should be adequate to enable
the Company to fund its operations. The Company's future capital requirements
will depend upon many factors, including the performance of the Company's
business, as well as other factors that are not within the Company's control,
including competitive conditions and regulatory or other government actions.
However, there can be no assurance that the Company's cash on hand, internally
generated funds and funds from any financings will prove to be sufficient to
fund the Company's operations. In the event that the Company's cash on hand,
internally generated funds and funds from any financings prove to be
insufficient to fund the Company's operations, then the Company may be required
to adjust its cost structure, and/or some or all of the Company's development
and expansion plans could be delayed or abandoned, and/or the Company may be
required to seek additional funds.
Risks Related to Goodwill. During fiscal 1998, the Company wrote-off $23.5
million of goodwill recorded in connection with certain acquisitions. See
"Results of Operations - Fiscal 1998 Compared with Fiscal 1997 - Writedown of
goodwill." At June 30, 1998, after recording this writedown, goodwill resulting
from acquisitions was approximately $46.8 million, or approximately 34.2% of
total assets. Goodwill is the excess of cost over the fair value of the net
assets of businesses acquired. There can be no assurance that the Company will
ever realize the value of such goodwill. This goodwill is being amortized on a
straight-line basis over 20 to 25 years. The Company will continue to evaluate
on a regular basis whether events or 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, 1998 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. Additionally, reimbursement
regulations have been issued related to reimbursement for certain mobile
diagnostic services. These regulations could eliminate payment for mobile
diagnostic services to the Company. Goodwill associated with mobile diagnostic
services acquisitions aggregates approximately $1.0 million at June 30, 1998.
Mobile diagnostic services represent less than 3% of the Company's current net
revenues.
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 44
current branch locations in nine states. Since fiscal 1995, the Company
generated a compound annual growth rate in net revenues of 39.6%
41
<PAGE>
through a combination of acquisitions and internal growth. The Company
experienced internal growth rates in net revenues of 19%, 16% and 4% for fiscal
years 1996, 1997 and 1998, respectively. See "Internal Growth." 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.
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 fiscal 1996 to
fiscal 1998, the Company's net revenues derived from managed care and other non-
governmental payors increased from 37.8% to 39.2%. While the Company's net
revenues from managed care and other non-governmental payors 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 the Company's services,
resulting in reduced profitability on such services.
During fiscal 1998 the Company terminated its relationship with certain
managed care organizations as a result of these companies continuing to subject
the Company to increasingly protracted payment terms and increasing attempts by
these and other non-governmental payors to deny payments for products and
services furnished to their subscribers. Additionally, the Company is in the
process of reviewing all of its managed care contracts and determining if the
contracts meet the Company's profitability guidelines. As a result of these
terminations and other factors, the Company's internal growth rates declined
during fiscal 1998. See "Internal Growth." 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.
Year 2000 Computer Concerns. 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
42
<PAGE>
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.
Potential Risks Associated with Acquisitions and Expansion. While the
Company completed fourteen acquisitions between fiscal 1996 and 1997, it
completed no acquisitions during fiscal 1998. As a result of the uncertainty of
the outcome of additional legislative and regulatory changes in the system of
Medicare reimbursement, the Company has slowed its growth through acquisitions.
In addition, the Company is restricted by its senior credit facility from
engaging in acquisitions. Management believes that as a result of Medicare
legislative and regulatory changes and managed care and other competitive
pressures, the home health care industry will continue to consolidate. See
"Business - Industry Overview," "Business - Payor Mix" and "Business -
Government Regulation." The Company believes it will be positioned to execute
its acquisition strategy once Medicare reimbursement regulation uncertainties
and the Company's capital constraint issues are resolved.
When evaluating acquisitions, the Company seeks 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. Moreover, many states have Certificate of Need,
licensure, or similar laws which generally require that the appropriate state
agency approve certain acquisitions and/or determine that a need exists for new
services and capital expenditures or other changes prior to such new services
being added. Additionally, HCFA approval concerning the redesignation of branch
offices as separate providers may also be required. To the extent that
Certificates of Need or other approvals are required for expansion of Company
operations, either through acquisitions or provision of new services, such
expansion could be adversely affected by the failure or inability to obtain the
necessary approvals, changes in the standards applicable to such approvals, and
possible delays and expenses associated with such approvals.
There can be no assurance that the Company will be able to successfully
negotiate, finance or integrate 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. There can be no assurance that any given
acquisition will be consummated, or if consummated, will not materially
adversely 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
43
<PAGE>
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.
Potential Risks Associated with Geographic Expansion. In pursuing its
growth strategy, the Company has expanded its operations into new geographic
markets. 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 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 Associated with Managed Care Contracts. As an increasing percentage
of patients become members of managed care organizations, the Company believes
that it will be required to deliver its products and services to health
maintenance organizations, employer groups and other private third party payors
on a capitated or other risk sharing basis. Under some of these arrangements, a
health care provider accepts a predetermined amount per member per month in
exchange for providing all covered services to beneficiaries of the payor during
the month. Such arrangements pass much of the economic risk of providing care
from the payor to the provider. To the extent that patients or enrollees covered
by such contracts require more frequent or extensive care than is anticipated,
additional costs would be incurred, resulting in a reduction in margins. In the
worst case, net revenues associated with risk-sharing contracts or capitated
provider networks would be insufficient to cover the costs of the services
provided. Any such reduction of net revenues could have a material adverse
effect on the Company.
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 its rapid growth, future
results of operations could be materially adversely affected if it is unable to
do so effectively. The Company implemented a restructuring plan during fiscal
1998. See "Restructuring Initiatives" and "Forward Outlook and Risks - Risks
Associated with Restructuring."
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
44
<PAGE>
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. The Company is subject to extensive regulation
which govern financial and other arrangements between healthcare providers 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
Medicare and Medicaid patients or the purchasing, leasing, ordering or arranging
for any good, facility services or items for which payment can be made under
Medicare and Medicaid, federal and state health care programs, (ii) the Federal
False Claims Act, which prohibits the submission for payment to the federal
government of fraudulent claims, and (iii) "Stark legislation," which generally
prohibits, with limited exceptions, the referrals of patients by a physician to
providers of "designated health services" under the Medicare and Medicaid
programs, including home health services, physical therapy and occupational
therapy, where the physician has a financial relationship with the provider.
Violations of these 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 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 "Business - Government
Regulation."
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 Operation Restore
Trust ("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. See "Business - Government Regulation." 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 interpretations of such laws.
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, whereby HCFA
completes ORT-type surveys on a much smaller scale. Assuming the reviewer
uncovered nothing significant during its survey, 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 undergo
further
45
<PAGE>
review. See "Business - Government Regulation."
While the Company believes that it is in material compliance with the fraud
and abuse and self-referral 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.
Certificate of Need, Permits and Licensure. The federal government and all
states regulate various aspects of the home health care industry. Such laws
include certificates of need, certification under Medicare and Medicaid and
other third party programs, as well as state laws which may impose licensure
requirements on home health care agencies. The failure to obtain, renew or
maintain any of the required regulatory approvals or licenses could 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.
Geographic Concentration. Approximately $58.6 million, or 33.6%, of the
Company's net revenues in fiscal 1998 were derived from the Company's operations
in Florida and approximately $106.9 million, or 61.4 %, of the Company's net
revenues in fiscal 1998 were derived from the Company's operations in Florida
and the Mid-Atlantic operating areas. 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 or
the Mid-Atlantic states 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 significant 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-branch net revenues during the first fiscal
quarter which ends on September 30 as compared to the
46
<PAGE>
immediately preceding quarter due to fewer referrals during the summer months.
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 retain and attract 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 successful in attracting or retaining the personnel it requires.
Pending and Threatened Litigation. The Company is a party to certain
pending and threatened legal actions. See "Item 3 - Legal Proceedings." While
the Company believes it has adequate legal defenses and/or insurance coverage
for these actions, there can be no assurance of favorable outcomes regarding
these legal actions or that recovery of any insurance proceeds will be
sufficient to cover any judgments, settlements or costs relating to any pending
or future legal proceedings. Additionally, 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 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 $3.0 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.
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<PAGE>
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.
Compliance Program. In August, 1998, HHS issued compliance program
guidance for home health agencies. The guidance encourages home health agencies
to develop effective internal controls that promote adherence to applicable
federal and state law and program requirements of federal, state and private
health plans. The absence of a compliance program or an incomplete or
ineffective compliance program may not be regarded favorably by HHS and could
negatively affect government audits, investigations, and/or inspections. During
fiscal 1998, the Company implemented an internal Compliance Program. Although
management believes the Compliance Program will be effective and will assist the
Company in monitoring and enhancing the effectiveness of its internal controls,
there can be no assurance that the Compliance Program will identify all
potential compliance issues or that as drafted it will be viewed as complete or
effective under audit or inspection by third party payors.
ITEM 7A. 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 fiscal 1998 consolidated
financial statements, included herein. A decrease in the three-month prevailing
LIBOR rate of 5 to 10% 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.
48
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES PAGE
----
Report of Independent Accountants 50
Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1998 51
Consolidated Statements of Operations for the fiscal years
ended June 30, 1996, 1997 and 1998 52
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1996, 1997 and 1998 53
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 1996, 1997 and 1998 54
Notes to Consolidated Financial Statements 55
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Home Health Corporation of America, Inc.
King of Prussia, Pennsylvania
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Home Health
Corporation of America, Inc. and its subsidiaries at June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 2, 1998, except for paragraph 1 of note 5,
for which the date is September 23, 1998
50
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, JUNE 30,
ASSETS 1997 1998
------ -------- --------
Current assets:
Cash and cash equivalents $ 464 $ 1,639
Accounts receivable, net of allowance for doubtful
accounts of $10,847 and $12,187, respectively 56,410 58,908
Inventories 3,262 2,257
Prepaid expenses and other current assets 4,584 7,918
-------- --------
Total current assets 64,720 70,722
Property and equipment, net 18,261 16,736
Goodwill, net of accumulated amortization of $3,347
and $6,118, respectively 68,202 46,803
Other assets, net 2,080 2,578
-------- --------
Total assets $153,263 $136,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 6,263 $ 4,211
Accounts payable 5,705 6,796
Accrued salaries and related employee benefits 4,788 4,396
Restructuring and other nonrecurring liabilities 764 3,667
Other current liabilities 3,996 3,270
-------- --------
Total current liabilities 21,516 22,340
Long-term debt, net of current portion 78,793 85,311
Other noncurrent liabilities 2,382 3,095
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;
9,221 and 9,856 shares issued, 9,129 and 9,764
outstanding, respectively 43,927 44,296
Retained earnings (accumulated deficit) 6,645 (18,203)
-------- --------
Total stockholders' equity 50,572 26,093
-------- --------
Total liabilities and stockholders' equity $153,263 $136,839
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
51
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
------- -------- ---------
Net revenues $95,878 $150,232 $ 174,335
Operating costs and expenses:
Patient care costs:
Professional care and product costs 45,121 69,521 79,280
Depreciation on equipment held for rental 1,091 2,297 3,428
------- -------- ---------
Total patient care costs 46,212 71,818 82,708
General and administrative 36,100 54,254 70,828
Provision for doubtful accounts 3,464 8,431 7,271
Depreciation 899 1,524 2,437
Amortization 1,021 2,346 2,861
Interest, net 1,579 3,849 7,508
Merger and other nonrecurring 913 3,009 6,370
Writedown of goodwill - - 23,516
------- -------- ---------
Total operating costs and expenses 90,188 145,231 203,449
------- -------- ---------
Income (loss) before income taxes and
extraordinary item 5,690 5,001 (29,164)
Provision (benefit) for income taxes 2,396 2,187 (4,316)
------- -------- ---------
Income (loss) before extraordinary item 3,294 2,814 (24,848)
Extraordinary loss on debt redemption, net 1,161 - -
------- -------- ---------
Net income (loss) $ 2,133 $ 2,814 $ (24,848)
======= ======== =========
Other data, including per share data:
Basic per share data:
Weighted average shares outstanding 6,535 8,549 9,316
======= ======== =========
Earnings (loss) per share $ 0.19 $ 0.33 $ (2.67)
======= ======== =========
Diluted per share data:
Weighted average shares outstanding 6,653 8,687 9,316
======= ======== =========
Earnings (loss) per share $ 0.18 $ 0.32 $ (2.67)
======= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
52
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 2,133 $ 2,814 $(24,848)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and other 3,195 6,210 8,726
Provision for doubtful accounts 3,464 8,431 7,271
Writedown of goodwill - - 23,516
Deferred income taxes (28) 65 (2,131)
Other 1,784 318 557
Net changes in certain assets and liabilities, net
of acquisitions:
Accounts receivable (12,085) (27,550) (10,456)
Inventories (452) (438) 1,005
Prepaid expenses and other current assets (221) (216) (2,870)
Accounts payable, accrued expenses and other (712) (2,801) (27)
Restructuring and other nonrecurring liabilities - - 3,039
-------- -------- --------
Net cash flows provided by (used in) operating
activities (2,646) (14,340) 3,782
-------- -------- --------
Cash flows used in investing activities:
Purchases of property and equipment (3,346) (3,789) (2,753)
Cash paid for acquisitions, net of cash acquired (15,693) (37,542) (1,835)
Other, net (399) (979) (349)
-------- -------- --------
Net cash flows used in investing activities (19,438) (42,310) (4,937)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from long-term debt 23,730 60,277 8,610
Repayments of long-term debt (15,591) (4,602) (6,366)
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 (200) (287) (263)
Repayment of preferred stock and preferred stock
dividends (607) - -
Proceeds from issuance of common stock 24,778 31 349
-------- -------- --------
Net cash flows provided by financing activities 22,126 55,419 2,330
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 42 (1,231) 1,175
Cash and cash equivalents, beginning of year 1,653 1,695 464
-------- -------- --------
Cash and cash equivalents, end of year $ 1,695 $ 464 $ 1,639
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
53
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Retained
Additional Earnings Stock
Class A and B Common Stock, Paid-in (Accumulated Treasury Subscriptions
Common Stock no par Capital Deficit) Stock Receivable Total
-------------- -------------- ---------- ------------ -------- ------------- -------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 2,634 264 185 - 2,394 2,607 (291) (36) 4,938
Exercise of options and warrants 194 19 231 190 22 231
Issuance of warrants - - - - 1,192 - - - 1,192
Recapitalization (2,828) (283) 3,465 4,713 (3,504) - 291 - 1,217
Issuance of common stock - - 3,794 25,822 - - - - 25,822
Conversion of subordinated note - - 400 3,000 - - - - 3,000
Write-off of Series C preferred
stock discount - - - - - (786) - - (786)
Preferred stock dividends - - - - - (117) - - (117)
Forgiveness of shareholder loan - - - - - - - 18 18
Net income - - - - - 2,133 - - 2,133
------ ------ ------ ------ ---------- ------------ -------- ------------- -------
Balance at June 30, 1996 - - 8,075 33,725 104 3,837 - (18) 37,648
Preferred stock dividends - - - - - (6) - - (6)
Exercise of stock options - - 23 31 - - - - 31
Issuance of common stock - - 661 6,379 - - - - 6,379
Forgiveness of shareholder loan - - - - - - - 18 18
Exchange of preferred shares - - 81 1,250 - - - - 1,250
Conversion of notes to common stock - - 189 2,042 (104) - - - 1,938
Expiration of redemption requirement - - 100 500 - - - - 500
Net income - - - - - 2,814 - - 2,814
------ ------ ------ ------ ---------- ------------ -------- ------------- -------
Balance at June 30, 1997 - - 9,129 43,927 - 6,645 - - 50,572
Exercise of stock options - - 50 349 - - - - 349
Issuance of common stock - - 585 20 - - - - 20
Net loss - - - - - (24,848) - - (24,848)
------ ------ ------ ------ ---------- ------------ -------- ------------- -------
Balance at June 30, 1998 - - 9,764 44,296 - (18,203) - - 26,093
====== ====== ====== ====== ========== ============ ======== ============= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
54
<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.
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. The allowance
for doubtful accounts principally consists of an estimate of amounts that may
prove to be uncollectible. 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 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 62%, 61% and 61% of the Company's net
revenues in fiscal 1996, 1997 and 1998, respectively, are from participation in
Medicare and state Medicaid programs. The Company does not believe there are any
significant credit risks associated with receivables from Medicare and Medicaid.
At June 30, 1997 and 1998, respectively, 49% and 40% 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. Management provides an allowance for estimated amounts that
may prove to be uncollectible.
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.
55
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
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.
Upon occurrence of a possible impairment event, management evaluates the
recoverability of goodwill 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. The Company
recorded a writedown of goodwill of $23.5 million during fiscal 1998. See note
2.
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.
Deferred income taxes are provided using the asset and liability method for
temporary differences 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.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standard No. 128
("SFAS 128"), "Earnings Per Share," during fiscal 1998. This statement
establishes standards for computing and presenting earnings per share. Basic
earnings per share is calculated using the average shares of common stock
outstanding while diluted earnings per share reflects the potential dilution
that could occur if stock options were exercised. The adoption of SFAS 128 did
not have a material effect on the Company's earnings per share. Earnings per
share and
56
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
common shares outstanding for fiscal 1996 and 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>
1996 1996 (1) 1997 1998
------- -------- ------ --------
<S> <C> <C> <C> <C>
Net income (loss) $3,294 $ 2,133 $2,814 $(24,848)
Write-off of discount on preferred stock (787) (787) - -
Dividends on preferred stock (117) (117) (6) -
------ -------- ------- --------
Net income (loss) used for calculation of
basic and diluted income (loss) per share $2,390 $ 1,229 $2,808 $(24,848)
====== ======== ====== ========
Weighted average number of common shares
outstanding used for calculation of basic
income (loss) per share 6,535 6,535 8,549 9,316
Stock options and warrants assumed outstanding
during the period 118 118 138 -
------ -------- ------- --------
Weighted average number of common shares used
for calculation of diluted income (loss) per
share 6,653 6,653 8,687 9,316
====== ======== ====== ========
</TABLE>
(1) Net income reduced to reflect extraordinary loss of $1.2 million on early
extinguishment of indebtedness.
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 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 1999. The impact of
these new standards on the Company's future financial statements and disclosures
has not been determined.
57
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. MEDICARE REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
In August 1997, Congress approved the Balanced Budget Act of 1997 (the
"Budget Act"). The Budget Act established an interim payment system (the "IPS")
that provided for the lowering of reimbursement limits for home health nursing
visits. The Budget Act also provided 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
was a freeze on consumer price index increases in oxygen reimbursement rates
until the year 2003. These changes in reimbursement have had and are expected to
continue to have a significant impact on the Company's current and future
operations.
In an effort to reduce operating costs and respond to the above
reductions in Medicare reimbursement, the Company implemented a restructuring
plan during fiscal 1998. This plan, which included cost reduction and office
consolidation initiatives, as well as management's assessment of the continuing
value of goodwill under the changing reimbursement environment, resulted in pre-
tax accounting charges aggregating $28.7 million during fiscal 1998 which were
comprised of a writedown of goodwill of $23.5 million and restructuring costs of
$5.2 million.
The writedown of goodwill was required based upon the estimated impact
of the announced reductions in Medicare oxygen reimbursement and the expected
impact of the IPS on the Company's continuing operations. The writedown was
comprised of $9.0 million related to certain durable medical equipment,
respiratory therapy, and infusion therapy companies and $14.5 million related to
certain Medicare cost-reimbursed nursing agencies.
The restructuring costs of $5.2 million were principally comprised of
(i) the closure and consolidation of certain branch locations, including the
accrual of estimated facility exit costs and future lease costs, the write-off
of leasehold improvements and other exit costs; and (ii) estimated employee
severance costs in connection with the related termination of employees,
including certain former owners of businesses acquired. The initial phase of the
restructuring plan was substantially implemented by June 30, 1998. The final
phase is expected to be completed by December 1998. The cash portion of the pre-
tax accounting charge is estimated to be approximately $5.1 million.
Approximately $1.5 million was charged against the related accruals during
fiscal 1998. The restructuring costs were included in merger and other
nonrecurring expenses in the fiscal 1998 consolidated statement of operations.
3. ACQUISITIONS
There were no acquisitions consummated during fiscal 1998. The purchase
prices for the acquisitions prior to fiscal 1998 accounted for as purchases were
allocated to identifiable assets, principally accounts receivable, equipment and
inventory. The results of operations for these acquisitions were included from
their respective acquisition dates.
58
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
During September 1997 the Company entered into a definitive agreement
for the acquisition through merger of U.S. HomeCare Corporation ("USHO"). During
February 1998 the Company and USHO agreed to the termination of the proposed
merger. Deferred acquisition costs of $1.2 million associated with this proposed
merger were written-off during fiscal 1998 and included in merger and other
nonrecurring expenses in the fiscal 1998 consolidated statement of operations.
Fiscal 1997 Acquisitions
Pooling Transaction
On November 12, 1996, the Company acquired Home Health Systems, Inc.
("HHSI") in a merger transaction. HHSI was a provider of durable medical
equipment and infusion and respiratory therapy services, with 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 fiscal 1997 and were reflected in merger and other nonrecurring
expenses in the fiscal 1997 consolidated statement of operations. 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.
Purchase Transactions
The Company consummated ten acquisitions 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, the Company expanded its ongoing operations in Pennsylvania, New
Jersey, Maryland and the Tampa/St. Petersburg, Florida market with five
acquisitions. The acquisitions in fiscal 1997 included nursing and related
patient services, infusion therapy, durable medical equipment and respiratory
services. The aggregate consideration paid and debt assumed in these
acquisitions was $52.0 million, the cash portion of which was funded through
borrowings under the senior credit facility.
The Company is required to make certain payments to former owners of
businesses acquired in prior periods, as part of the consideration paid for the
acquisitions. During fiscal 1998, the Company paid $1.8 million in additional
consideration for certain acquisitions completed in prior periods. Amounts to be
paid in cash during fiscal 1999 in connection with acquisitions completed in
prior periods approximate $2.1 million. Additional amounts aggregating $2.1
million may be paid in the form of the Company's common stock to certain former
owners through fiscal 2000 in connection with earnouts related to businesses
acquired by the Company.
During fiscal 1998 the Company issued 579,901
59
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
additional shares in connection with an acquisition completed in fiscal 1997.
The former owners of a business acquired by the Company commenced
litigation against the Company during the fourth quarter of fiscal 1998 for
nonperformance under certain provisions of the acquisition documents. See
note 8.
Certain former owners of businesses acquired by the Company have commenced
or threatened legal proceedings against the Company for non-payment of certain
amounts in connection with the acquisitions, payment of which is prohibited by
the Company's senior credit facility. See note 5.
4. PROPERTY AND EQUIPMENT
At June 30, 1997 and 1998, property and equipment consisted of:
<TABLE>
<CAPTION>
1997 1998
------- -------
(amounts in thousands)
<S> <C> <C>
Equipment held for rental $16,221 $17,121
Capitalized leases 5,279 7,245
Furniture, fixtures and equipment 6,616 7,356
Leasehold improvements 756 883
------- -------
28,872 32,605
Less accumulated depreciation 10,611 15,869
------- -------
$18,261 $16,736
======= =======
</TABLE>
5. LONG-TERM DEBT
At June 30, 1997 and 1998, long-term debt consisted of:
<TABLE>
<CAPTION>
1997 1998
------- -------
(amounts in thousands)
<S> <C> <C>
Senior Credit Facility:
Working capital $29,668 $38,278
Acquisitions 42,458 42,458
Sellers notes with interest rates of approximately
8%, principal and interest due monthly through
fiscal year 2000 7,273 2,663
Other debt, principally capital leases, rates
generally fixed from 8.5% to 18% through fiscal year
2003 5,657 6,123
------- -------
85,056 89,522
Less current maturities 6,263 4,211
------- -------
$78,793 $85,311
======= =======
</TABLE>
60
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Senior Credit Facility
On September 23, 1998, the Company and its lenders amended the Company's
senior credit facility (the "Credit Facility"). The Credit Facility, as amended,
limits the maximum amount of borrowings under the Credit Facility to $83.4
million, provides for temporary borrowings under the Credit Facility of up to
$1.4 million through December 31, 1998 for payroll and related costs, prohibits
the Company from making certain subordinated payments to former owners of
acquired businesses and restricts the Company's ability to engage in
acquisitions. The Credit Facility further limits, under certain circumstances,
the Company's ability to incur additional indebtedness, sell material assets,
prohibits payment of dividends and also requires the Company to meet or exceed
certain coverage, leverage and indebtedness ratios. The amendment to the Credit
Facility on September 23, 1998 waived the Company's compliance with certain
covenant requirements as of June 30, 1998 and amended certain covenant
requirements for future periods. Other amendments to the Credit Facility during
February and May 1998 waived and/or amended certain covenant requirements as of
December 31, 1997 and March 31, 1998, respectively. On September 23, 1998, the
Company had $83.4 million outstanding under the Credit Facility bearing interest
at a weighted average interest rate of 8.8%, and also, $3.4 million of cash on
hand. Indebtedness under the Credit Facility is collateralized by substantially
all of the assets of the Company, subject to certain permitted liens and
exceptions.
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 plus the Company's margin (the "Prime Rate") or
(ii) the London Interbank Borrowing Rate, as elected from time to time by the
Company, plus the Company's margin ("LIBOR"). 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 one-month) if a rate based on LIBOR is elected. As of
June 30, 1998, all borrowings outstanding under the Credit Facility bore
interest at the weighted average LIBOR rate of 8.5%. After the Amendment, the
Prime and Libor Rates applicable to the Company's borrowings under the Credit
Facility were 10.25% and 8.8%, respectively, including the Company's margin.
Certain former owners of businesses acquired by the Company have
commenced or threatened legal proceedings against the Company for non-payment of
certain amounts due to them in connection with acquisitions, payment of which is
currently prohibited by the Credit Facility. Such amounts aggregated $4.8
million at June 30, 1998, excluding related interest. The payment of these
amounts are subordinate to the rights of the senior lenders under the Credit
Facility and, as such, certain of the former owners are not permitted under the
related subordination agreements to demand payment from the Company until all
amounts outstanding under the Credit Facility have been repaid. The Company is
required by the Credit Facility to use its best efforts to convert these amounts
to equity. The Company believes the ultimate outcome of these pending or
threatened legal actions will not have a material adverse effect on the
Company's financial condition or results of operations.
61
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
-------------
<S> <C>
(amounts in thousands)
1999 $ 4,211
2000 82,895
2001 1,577
2002 668
2003 171
-------
$89,522
=======
</TABLE>
Interest Rate Swap Agreement
In April 1997, the Company entered into a two-year convertible interest
rate cap agreement with a financing institution. After the first year of the
agreement, the financing institution exercised its conversion option and
converted the agreement to an interest rate swap agreement, effectively fixing
the Company's annual interest expense at 6.2% on a notional amount of $11.0
million (the "Notional Amount"), and extending the term of the agreement through
April 2000. The Company will be required to pay to the financing institution the
difference between the three-month prevailing LIBOR rate (5.6% at June 30, 1998)
and 6.2% on the Notional amount on a quarterly basis. The Company estimates this
will result in additional interest expense of approximately $60,000 annually,
assuming the LIBOR rate at June 30, 1998 does not fluctuate during fiscal 1999.
6. CAPITAL STOCK
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, senior
subordinated indebtedness, a portion of the Senior Credit Facility and to redeem
preferred stock. The Company recorded an extraordinary loss of $1.2 million in
connection with this early extinguishment of indebtedness.
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.
62
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Recapitalization
Upon consummation of the Offering, 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, B and C common stock
outstanding prior to the Offering was canceled and exchanged for one share each
of the Company's new no par value common stock. 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.
7. WARRANTS AND OPTIONS
Warrants
Warrants outstanding at June 30, 1998 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 Amended
and Restated 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 Company's stockholders also authorized 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.
63
<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 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
Granted 341 $ 7.27 $4.56 to $14.75
Canceled (330) $ 9.54 $1.00 to $13.00
Exercised (50) $ 6.92 $1.00 to $9.00
----------- ---------- ------------------
Outstanding at June 30, 1998 573 $ 7.24 $1.00 to $13.00
=========== ========== ==================
Exercisable at June 30, 1998 123 $ 5.32 $1.00 to $13.00
=========== ========== ==================
</TABLE>
Options exercisable at June 30, 1998 include 3,334 options issued under
the 1985 Plan exercisable at $1.00 per share which expire in June 2005. The
remaining options exercisable at June 30, 1998 are exercisable at a weighted
average price of $5.71 per share and expire from November 2000 through February
2008.
No compensation cost has been recognized for options granted under the
Option Plan as the Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standard No. 123, "Stock Based Compensation" ("SFAS
123") during fiscal 1997. Under SFAS 123, compensation cost of $915,000 and
$1.1 million would have been recorded in fiscal 1997 and 1998, respectively, for
the Company's Option Plan based upon the fair value of the option awards.
Earnings (loss) per share would have been $0.22 and ($2.75) in fiscal 1997 and
1998, respectively, 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 EXPECTED
RISK FREE INTEREST EXPECTED LIFE OF
FISCAL YEAR ISSUED RATE VOLATILITY OPTIONS
- ---------------------- ------------------ ---------- --------
<S> <C> <C> <C>
1994 4.6% - % 3
1995 5.0 - 7
1996 6.0 64.3 7
1997 6.7 59.4 7
1998 5.9 69.2 6
</TABLE>
64
<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>
1999 $ 1,915 $2,649
2000 1,840 2,213
2001 1,651 1,551
2002 718 899
2003 172 724
------- ----------------
Total minimum lease payments 6,296 $8,036
================
Less amount representing interest 483
-------
Present value of net minimum future $ 5,813
=======
</TABLE>
Total rent expense under cancelable and noncancelable operating leases
amounted to $3.4 million, $4.7 million and $5.4 million for fiscal 1996, 1997
and 1998, respectively, including rent expense on equipment which is subleased
to patients and included in patient care costs of $1.5 million, $1.8 million and
$1.5 million, respectively.
The Company has employment agreements with four officers which expire
through July 2001. These agreements provide for, among other things, total
annual base compensation of $751,000.
The Company maintains medical malpractice and general liability insurance
coverage through non-captive insurance companies. Additionally, the Company has
self-insurance trusts for employee health insurance and workers compensation
claims in certain states. The Company establishes reserves for claims incurred
during the fiscal year but not reported until subsequent fiscal periods.
On February 19, 1998, a shareholder commenced litigation against the
Company and certain named officers of the Company. In the lawsuit, entitled
Koenig v. Feldman, et al. which was filed in the United States District Court
- -------------------------
for the Eastern District of Pennsylvania, the plaintiff alleges that the
defendants, in violation of federal securities laws, engaged in a scheme to
artificially inflate and maintain the market price of the Company's common stock
by, among other things, making false and misleading statements or failing to
disclose material facts in documents filed with the Securities and Exchange
Commission or in press releases issued by the Company, particularly with respect
to the Company's efforts to obtain timely payment for the Company's products and
services and the Company's termination of business with certain
65
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
managed care companies. The plaintiff, who filed the lawsuit on behalf of
himself and all others similarly situated, seeks certification of the lawsuit as
a class action on behalf of all persons who purchased the Company's common stock
between September 3, 1997 and February 16, 1998. The Company believes that the
lawsuit is without merit and is vigorously defending itself. A motion filed by
the Company to dismiss the lawsuit is currently pending with the court.
On June 8, 1998, certain former owners of a business acquired by the
Company commenced litigation against the Company and certain named officers of
the Company. This lawsuit was filed in federal court in Boston, Massachusetts.
Among other claims, the plaintiffs allege that delays in the issuance and
registration of shares pursuant to a formula in a Subscription Agreement between
the former owners and the Company has resulted in damages, including a loss in
excess of $1 million. The claims are for breach of contract, breach of good
faith and fair dealing, misrepresentation, fraudulent inducement and violation
of the Massachusetts Unfair and Deceptive Trade Practices Act. As relief, the
plaintiffs seek specific performance of the Subscription Agreement,
consequential damages resulting from the alleged breaches, a declaratory
judgment, punitive damages for the fraud base claims and an award of costs and
attorneys fees. The Company intends to vigorously defend against these claims,
and has filed a motion to dismiss or alternatively to transfer the action, which
is presently pending with the Court.
Certain former owners of businesses acquired by the Company have commenced
or threatened legal proceedings against the Company for non-payment of certain
amounts in connection with the acquisitions, payment of which is prohibited by
the Company's senior credit facility. See note 5.
The Company is a party to certain other legal actions arising in the
ordinary course of business.
The Company believes it has adequate legal defenses and/or insurance
coverage for the above 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.
9. EMPLOYEE BENEFIT PLANS
The Company terminated its profit-sharing plan during fiscal 1998. As a
result, participants' account balances under the plan became fully-vested
immediately. The Company is in the process of distributing the assets to the
plan participants and is not entitled to receive any distributions or residual
balance under the plan.
The Company 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.
66
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES
The provision (benefit) for income taxes for the following fiscal years
consisted of:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
(amounts in thousands)
<S> <C> <C> <C>
Currently payable (receivable):
Federal $2,084 $2,274 $(1,294)
State 341 132 16
------ ------ -------
2,425 2,406 (1,278)
------ ------ -------
Deferred:
Federal (78) (202) (2,963)
State 49 (17) (75)
------ ------ -------
(29) (219) (3,038)
------ ------ -------
$2,396 $2,187 $(4,316)
====== ====== =======
</TABLE>
A reconciliation of the U.S. Federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. Federal income tax rate 34% 34% (34%)
State income taxes, net of Federal income
tax benefit 5 3 1
Other, principally nondeductible goodwill 3 7 18
---- ---- ----
Effective income tax rate 42% 44% (15%)
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
(amounts in thousands)
<S> <C> <C>
Accounts receivable $ 1,786 $ 2,153
Net operating losses 50 1,045
Depreciation and amortization - 398
Restructuring and other nonrecurring - 241
Other 256 160
------- -------
Gross deferred tax assets 2,092 3,997
------- -------
Depreciation and amortization (1,269) -
Other (73) (73)
------- -------
Gross deferred tax liabilities (1,342) (73)
------- -------
Valuation allowance (50) (1,045)
------- -------
Net deferred tax asset $ 700 $ 2,879
======= =======
</TABLE>
67
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Deferred tax assets and liabilities included in the balance sheets as of
the periods presented were as follows:
<TABLE>
<CAPTION>
1997 1998
------ ------
(amounts in thousands)
<S> <C> <C>
Net deferred tax assets, current $1,973 $2,486
Net deferred tax assets, noncurrent - 393
Net deferred tax liabilities, noncurrent 1,273 -
------ ------
Net deferred tax asset $ 700 $2,879
====== ======
</TABLE>
At June 30, 1998, certain of the Company's subsidiaries had state net
operating loss ("NOLs") carryforwards aggregating $19.7 million with varying
expiration dates. The Company has recorded a full valuation allowance against
these NOLs.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
(amounts in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,646 $ 3,274 $8,028
======= ======= ======
Income taxes $ 1,433 $ 2,135 $ 696
======= ======= ======
Noncash investing and financing activities:
Accrued dividends on preferred stock $ 67 $ 6 -
======= ======= ======
Capital lease obligations incurred $ 895 $ 1,433 $2,222
======= ======= ======
Issuance of warrants in connection with debt $ 1,192 - -
======= ======= ======
Conversion of subordinated note to stock $ 3,000 - -
======= ======= ======
Write-off of Series C preferred stock discount $ 787 - -
======= ======= ======
Acquisitions:
Assets acquired and amounts paid to former
owners $24,828 $61,457 $1,835
Less:
Liabilities assumed and acquisition costs 2,391 11,335 -
Issuance of subordinated seller notes and
subordinated convertible note 5,400 6,201 -
Issuance of common stock 1,275 6,379 -
Capital lease obligations assumed 69 - -
------- ------- ------
Cash paid, net of cash acquired $15,693 $37,542 $1,835
======= ======= ======
</TABLE>
68
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
(amounts in thousands)
<S> <C> <C> <C>
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 and B common stock $ (280) - -
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 - -
------- ------ ------
- - -
======= ====== ======
</TABLE>
12. FOURTH QUARTER EVENTS
The fourth quarter of fiscal 1998 included a pre-tax provision of $1.2
million for accounts receivable due from the Allegheny Health, Education and
Research Foundation ("AHERF") which filed for protection under Chapter 11 of the
U.S. Bankruptcy Code in July 1998. Due to the uncertainty of the outcome of
AHERF's bankruptcy proceedings, the Company recorded a reserve for the entire
amount of the pre-bankruptcy receivable. The Company is reimbursed by AHERF for
post-bankruptcy services on a pre-pay basis. This amount is included in
provision for doubtful accounts in the accompanying 1998 consolidated statement
of operations.
The fourth quarter of fiscal 1998 also included a $1.5 million charge in
connection with the Company's restructuring initiatives. See note 2.
69
<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
Information required by this item is incorporated herein by reference to
the Company's proxy statement to be filed with respect to the 1998 annual
meeting of stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
70
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: Page Number
Report of Independent Accountants 50
Consolidated Balance Sheets as of June 30, 1997
and 1998 51
Consolidated Statements of Operations for the fiscal
years ended June 30, 1996, 1997 and 1998 52
Consolidated Statements of Cash Flows for the fiscal
years ended June 30, 1996, 1997 and 1998 53
Consolidated Statements of Stockholders' Equity for
the fiscal years ended June 30, 1996, 1997 and 1998 54
Notes to Consolidated Financial Statements 55
(2) Financial Statement Schedules:
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts for
each of the three years in the period ended
June 30, 1998 S-2
(3) Exhibits:
The exhibits filed with this report are listed in
the exhibit index on page 73.
(b) Current Reports on Form 8-K:
The Company did not file a report on Form 8-K during
the quarter ended June 30, 1998.
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
September 24, 1998.
HOME HEALTH CORPORATION OF AMERICA, INC.
By: /s/ Bruce J. Feldman
-------------------------------------
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 David S. Geller 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 indicated, on September 24, 1998.
Signature Title
- -------------------- -------------------------------
/s/ Bruce J. Feldman President, Chief Executive Officer,
- ------------------------ Director and Chairman of the Board
Bruce J. Feldman (principal executive officer)
/s/ David S. Geller Chief Financial Officer
- ------------------------ (principal financial and accounting officer)
David S. Geller
/s/ G. Michael Bellenghi Director
- ------------------------
G. Michael Bellenghi
/s/ Harvey Machaver Director
- ------------------------
Harvey Machaver
/s/ Donald Glecklen Director
- ------------------------
Donald Glecklen
72
<PAGE>
EXHIBIT INDEX
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------
<C> <S>
(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.
</TABLE>
73
<PAGE>
<TABLE>
<C> <S>
(d) 10.16 Third Amended and Restated Credit Agreement.
(e) 10.17 Amendment No. 1 to the Third Amended and Restated Credit
Agreement.
(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. *
10.20 Employment Agreement between the Company and David S. Geller. *
10.21 Employment Agreement between the Company and James J. Swiniuch. *
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.
(a) 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.
(a) 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.
(a) 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.
(f) 10.29 Amended and Restated Agreement and Plan of Merger among Home
Health Corporation of America, Inc., HHCA Acquisition
Corporation, Inc. and U.S. HomeCare Corporation.
(g) 10.30 Termination of Amended and Restated Agreement and Plan of Merger
among Home Health Corporation of America, Inc., HHCA Acquisition
Corporation, Inc. and U.S. HomeCare Corporation.
(g) 10.31 Amendment No. 3 to Third Amended and Restated Credit Agreement.
(h) 10.32 Amendment No. 4 to Third Amended and Restated Credit Agreement.
10.33 Amendment No. 5 to Third Amended and Restated Credit Agreement.
11.1 Computation of basic earnings (loss) per share for each of the
three years in the period ended June 30, 1998.
11.2 Computation of diluted earnings (loss) per share for each of the
three years in the period ended June 30, 1998.
23.1 Consent of Independent Accountants
27.1 Financial data schedule for fiscal 1998.
27.2 Financial data schedule for fiscal 1997 (amended).
27.3 Financial data schedule for fiscal 1996 (amended).
</TABLE>
- ----------
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-96888) dated November 8, 1995, as amended.
74
<PAGE>
(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 Form 8-K dated September 26,
1997 and filed October 7, 1997.
(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.
* Represents management contract or compensatory plan
75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE
FINANCIAL STATEMENT SCHEDULE
Our audits of the consolidated financial statements referred to in our report
dated September 2, 1998, except for paragraph 1 of note 5, for which the date is
September 23, 1998, appearing on page 50 of this Form 10-K, also included an
audit of the financial statement schedule listed in Item 14 (a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 2, 1998, except for paragraph 1 of note 5,
For which the date is September 23, 1998
S-1
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1998
(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>
1998
- -------------------------------
Allowance for doubtful accounts $10,847 $7,271 $5,931 $12,187
Income tax valuation allowance 50 995 - 1,045
1997
- -------------------------------
Allowance for doubtful accounts 5,656 8,431 3,240 10,847
Income tax valuation allowance 50 - - 50
1996
- -------------------------------
Allowance for doubtful accounts 4,360 3,464 2,168 5,656
Income tax valuation allowance 50 - - 50
Inventory valuation allowance 40 - 40 -
</TABLE>
S-2
<PAGE>
Exhibit 10.20
EMPLOYMENT AGREEMENT
--------------------
Parties: HOME HEALTH CORPORATION OF AMERICA, INC.
- -------
a Pennsylvania corporation ("Employer")
2200 Renaissance Boulevard, Suite 300
King of Prussia, PA 19406
DAVID S. GELLER ("Executive")
868 Westminster Drive
Lancaster, Pennsylvania 17601
Date: July 20, 1998
- ----
Background: Employer desires to employ Executive and Executive desires to be
- ----------
employed by the Employer as the Chief Financial Officer of Employer. In
consideration of Executive's future services to Employer, Employer desires to
provide for the payment of certain compensation and other benefits to Executive,
all as more fully described in this Agreement.
INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual covenants
and agreements stated below, Executive and Employer agree as follows:
1. Employment and Term: Employer hereby employs Executive and Executive
-------------------
accepts such employment, subject to all of the terms and conditions of this
Agreement, for a term of three (3) years beginning on July 20, 1998 (the
"Term"). The Term will automatically be extended for an additional one (1) year
period on July 19th of each year, unless sooner terminated in accordance with
other provisions of this Agreement or prior to such date either party gives the
other party written notice of its intention not to extend this Agreement, all in
accordance with the terms of this Agreement.
2. Position and Duties. Employer shall employ Executive as its Chief
-------------------
Financial Officer. Executive shall report directly to the Employer's President
and Chief Executive Officer. Executive shall have the normal duties,
responsibilities and authority of the Chief Financial Officer and shall
undertake such responsibilities and duties that may be assigned to him from time
to time by the Employer's President and Chief Executive Officer. Executive shall
devote all of his working time, energy, skill and best efforts to Employer's
business and affairs and to the promotion of Employer's interests as is required
for the fulfillment of his obligations and the performance of his duties under
this Agreement, except that Executive shall not be precluded from pursuing
personal business interests, so long as such activities do not materially
interfere with Executive's performance of his duties under this Agreement.
<PAGE>
3. Compensation, Benefits and Expenses.
-----------------------------------
3.1 Salary. Employer shall pay to Executive a gross base salary of
------
One Hundred Sixty Five Thousand Dollars ($165,000.00) ("Base Salary"); provided,
--------
however, that commencing on January 20, 1999, Executive's Base Salary shall be
- -------
One Hundred Seventy Five Thousand Dollars ($175,000.00). The Base Salary shall
be reviewed each January 20 thereafter by the Employer's President and Chief
Executive Officer and may be increased (but not decreased) based upon
Executive's performance. Executive's Base Salary shall be payable in accordance
with Employer's normal payroll practices for employees and Employer shall deduct
or cause to be deducted from Executive's Base Salary all taxes and amounts
required by law to be withheld.
3.2 Benefits. Employer shall pay to Executive an automobile expense
--------
allowance of Four Hundred Fifty Dollars ($450.00) per month. To the extent he is
eligible under the general provisions thereof, Executive shall be entitled to
participate in and shall be included in all other employee benefit plans, group
insurance, disability, profit sharing, savings, bonus, health insurance, life
insurance, retirement, stock or similar plans or programs of Employer.
3.3 Bonuses. In addition to his Base Salary, Executive shall be
-------
eligible to participate in the Company's Executive Management Bonus Program
(the "Bonus") in the event that Employer and its subsidiaries achieve targeted
consolidated net income (the "Targeted Income"). Subject to approval, in its
sole discretion, of Employer's Compensation Committee, it is anticipated that
the Bonus available to Executive shall be up to twenty-five percent (25%) of
Executive's Base Salary in the event that Employer and its subsidiaries achieve
Targeted Income, to be determined after the issuance of the audited financial
statements of Employer and its subsidiaries; provided, however, that Employer's
-------- -------
Compensation Committee, in its sole discretion, may amend the Bonus Program at
any time.
3.4 Vacation. Executive shall be entitled to four weeks of vacation
--------
during each year.
3.5 Expenses. Executive is authorized to incur, and shall be
--------
promptly reimbursed by Employer for, ordinary, necessary and reasonable expenses
in the course of his performance of services under this Agreement. Executive
shall properly account for all such expenses.
3.6 Entire Compensation. The compensation provided for in this
-------------------
Section 3, together with the grant of stock options to the Executive pursuant to
- ---------
the Employer's Amended and Restated 1995 Employee and Consultant Equity Plan,
shall be the full consideration for the services to be rendered by Executive to
Employer under this Agreement.
-2-
<PAGE>
4. Termination.
-----------
4.1 Termination by Death. If Executive dies, then this Agreement and
--------------------
all of Executive's rights to compensation and benefits under this Agreement
shall terminate immediately, except that Executive's heirs, personal
representatives or estate shall be entitled to receive the unpaid portion of
Executive's Base Salary and any accrued benefits up to the date of death,
including a pro rata share of Executive's Bonus, if any, for such fiscal year,
and to any benefits that are to be continued or paid after the date of
termination in accordance with the terms of the corresponding benefit plans.
4.2 Termination by Disability. If Executive becomes disabled, he
-------------------------
shall continue to receive all of his compensation and benefits in accordance
with Section 3 for a period of 12 months following the Onset of Disability (as
---------
defined in this Section 4.2). If Executive's disability continues for more than
-----------
12 months after the Onset of Disability or for periods aggregating more than 12
months during any 24 month period, then Employer shall have the right to
terminate this Agreement and all of Executive's rights to compensation and
benefits under this Agreement immediately, except that Executive shall be
entitled to receive the unpaid portion of Executive's Base Salary, any accrued
benefits up to the date of Employer's termination pursuant to this Section 4.2
-----------
and any benefits that are to be continued or paid after the date of termination
in accordance with the terms of the corresponding benefit plans. Any amounts due
to Executive under this Section 4.2 shall be reduced, dollar-for-dollar, by any
-----------
amounts received by Executive under any disability insurance policy or plan
provided to Executive by Employer. "Onset of Disability" means the first day on
which Executive shall be unable to perform his duties under this Agreement by
reason of physical or mental incapacity, sickness or infirmity.
4.3 Termination for Cause. Employer may, upon thirty (30) days prior
---------------------
written notice, terminate Executive's employment and his rights to compensation
and benefits under this Agreement for Cause (as defined in this Section 4.3),
-----------
except that Executive shall be entitled to receive any unpaid portion of
Executive's Base Salary and benefits earned to the date of termination and any
benefits that are to be continued or paid after the date of termination for
Cause in accordance with the terms of the corresponding benefit plans. "Cause"
shall exist if Executive is convicted of a felony, is grossly negligent in the
performance of his duties under this Agreement, commits a material act of
dishonesty or breach of trust with respect to Employer or materially breaches
this Agreement, but only if Executive is given notice specifying, in reasonable
detail, the nature of the alleged cause and Executive had a reasonable
opportunity to take remedial action but failed or refused to do so.
4.4 Termination for Good Reason. Executive may, upon thirty (30)
---------------------------
days prior written notice (except with respect to subsection 4.4(e) for which
ninety (90) days prior written
-3-
<PAGE>
notice shall be required) to Employer, resign his employment for "Good Reason".
Good Reason shall exist if:
(a) Executive is demoted, removed or not re-elected to any of his
positions or offices, or there is a material diminishment of Executive's
responsibilities, duties or status;
(b) there is a reduction in Executive's Base Salary or a material
reduction in Executive's benefits;
(c) Employer breaches a material provision of this Agreement;
(d) a "Change in Control" occurs, which for purposes of this
Agreement, shall mean a change in control of Employer of a nature that would be
required to reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not Employer is then subject to such reporting requirement;
provided that, without limitation, such a change in control shall be deemed to
have occurred if:
(i) any person (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act), other than those persons in control of Employer
as of the date hereof, shall acquire the power, directly or indirectly, to
direct the management or policies of Employer or shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of 50% or more of the combined voting power of Employers' then
outstanding securities; or
(ii) during any period of two (2) consecutive years,
individuals who at the commencement of such period constitute the entire Board
of Directors of Employer shall cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
Employer's shareholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
commencement of such period; provided, however, that for purposes of this
subsection, all directors elected in accordance with the foregoing procedure
shall be deemed to be directors at the commencement of such period;
In the event of a Change in Control, all of the stock options and awards issued
to Executive under any stock option plan of Employer (collectively, the
"Options") shall become fully vested as of the date of such Change in Control,
regardless of the terms of any such stock option plan.
(e) Employer relocates its principal executive offices without
Executive's consent to a location more than fifty (50) miles from the principal
offices of Employer in King of Prussia, Pennsylvania;
-4-
<PAGE>
(f) any failure by Employer to obtain the assumption of this
Agreement by any successor or assign of Employer; or
(g) any purported termination of Executive for Cause that is not
effected pursuant to the method described in Section 4.3.
-----------
4.5 Termination Without Cause. Employer may, upon thirty (30) days
-------------------------
prior written notice to Executive, terminate his employment without Cause.
4.6 Termination By Executive. Executive may, upon ninety (90) days
------------------------
prior written notice to Employer, terminate his employment with Employer.
4.7 Benefits Upon Termination by Executive for Good Reason,
-------------------------------------------------------
Termination by Employer Without Cause or Termination upon Employer Notice. In
- -------------------------------------------------------------------------
the event that (i) Executive chooses to resign from his employment hereunder for
Good Reason pursuant to Section 4.4, (ii) Employer terminates Executive's
-----------
employment without Cause pursuant to Section 4.5 or (iii) Employer elects not to
-----------
extend this Agreement pursuant to Section 1, then: (1) Executive shall continue
---------
to receive for a period of twelve (12) months after such termination (the
"Severance Period"), his Base Salary payable in regular installments as if he
was still employed by Employer (the "Severance Payments"); provided, however,
-------- -------
that in the event Executive chooses to resign from his employment for Good
Reason pursuant to Section 4.4, the Severance Period shall be the greater of:
-----------
(a) twelve (12) months after such termination; or (b) the number of months
remaining in the initial Term; (2) all of the Options shall be fully vested as
of the date his employment terminates, regardless of the terms of the stock
option plan of Employer pursuant to which such Options were issued; and (3)
health insurance of Executive shall continue to be provided by Employer for a
period of twelve (12) months from the date of his termination.
4.8 Procedure upon Termination. Upon termination of his employment,
--------------------------
Executive shall promptly return to Employer all documents (including copies) and
other materials and property of Employer, or pertaining to its businesses,
including without limitation customer and prospect lists, contracts, files,
manuals, letters, reports and records in his possession or control, no matter
from whom or in what manner acquired.
5. Discoveries. Executive shall communicate to Employer, in writing when
-----------
requested, and preserve as confidential information of Employer, all marketing
concepts and each discovery, idea, design, invention and improvement relating in
any manner to Employer's business that has been conceived, developed or made by
Executive, whether alone or jointly with others, at any time (during or after
business hours) during Executive's employment with Employer (such concepts,
ideas and designs are referred to as "Executive's Discoveries"). All of
Executive's Discoveries shall be
-5-
<PAGE>
Employer's exclusive property, and Executive shall, at Employer's expense, sign
all documents and take such other actions as it may reasonably request to
confirm its ownership of Executive's Discoveries. Executive shall not, except
with Employer's express prior written consent, or except in the proper course of
his employment with Employer, use any of Executive's Discoveries for his own
benefit or the benefit of any person or disclose any of Executive's Discoveries
to any third person through publication or in any other manner.
6. Nondisclosure. At all times during and after the Term, except with
-------------
Employer's express prior written consent or in connection with the proper
performance of services under this Agreement, Executive shall not, directly or
indirectly, communicate, disclose or divulge to any person or use for the
benefit of any person, any confidential or proprietary knowledge or information,
no matter when or how acquired, concerning the conduct and details of the
business of Employer including, but not limited to, (a) names of customers,
prospects and suppliers, (b) details of customer, prospect and supplier
contracts and proposals, (c) budget and other non-public financial information
and (d) marketing methods, trade secrets and financial condition. For purposes
of this Section 6, confidential information shall not include any information
---------
that is now known by the general public, that becomes known by the general
public other than as a result of any improper act or omission of Executive, or
that Executive is required to disclose pursuant to a judicial process; provided,
--------
however, that Executive shall notify Employer of such judicial process, and give
- -------
Employer the opportunity to contest such disclosure.
7. Noncompetition. Executive acknowledges that Employer's business is
--------------
highly competitive, and that the services Employer provides are complex and
sophisticated and require substantial and continuous expenditures of time and
money to develop, market and maintain. Accordingly, during the Non-Compete
Period (as hereinafter defined), except with Employer's express prior written
consent, Executive shall not, directly or indirectly, in any capacity, for the
benefit of any person:
(a) communicate with or solicit any person who is or during such
period becomes an executive employee or salesperson of Employer in any manner
that interferes or might interfere with such person's relationship with Employer
or in an effort to obtain such person as an employee of any person;
(b) communicate with or solicit any person who is or during such
period becomes a customer, supplier, agent or representative of Employer in any
manner that interferes or might interfere with such person's relationship with
Employer, or in an effort to obtain such person as a customer, supplier, agent
or representative of any person that conducts a business in competition with
Employer; and/or
-6-
<PAGE>
(c) establish, own, manage, operate or control, or participate in the
establishment, ownership, management, operation or control of, serve as an
employee, director, officer or consultant for, or make a material investment in,
any person that conducts a home health care business (including, without
limitation, the provision of private duty or Medicare-reimbursable nursing and
related health care services and equipment to home-bound patients (including
without limitation bedside care and treatment, infusion therapy, pharmaceutical
and rehabilitative services), and the provision of mobile diagnostic services)
in competition with Employer within a 100-mile radius of any of Employer's
offices; provided, however, that this provision shall not be construed to
-----------------
prohibit the ownership by Executive of not more than two percent (2%) of any
class of securities of any corporation engaged in such a home health care
business that has a class of securities registered pursuant to the Exchange Act.
For purposes of this Agreement, the Non-Compete Period shall mean the period
during which Executive is employed by Employer and continuing for a period of
time equal to the greater of (i) one (1) year after termination of Executive's
employment hereunder or (ii) the Severance Period; provided, however, that in
-------- -------
the event that Executive terminates his employment for Good Reason pursuant to
Section 4.4., or Executive is terminated without Cause pursuant to Section 4.5,
- ----------- -----------
the Non-Compete Period shall continue for a period of time equal to the
Severance Period. Notwithstanding the foregoing, in the event that Employer
shall fail to provide Executive with the compensation owed to Executive pursuant
to Section 4.6, the Non-Compete Period shall automatically terminate and
-----------
Executive shall from that day forward not be subject to the restrictions set
forth in this Section 7.
---------
8. Remedy. Executive acknowledges that the covenants contained in
------
Sections 5, 6 and 7 of this Agreement ("Covenants") are a material part of the
- -------------------
consideration bargained for by Employer and that, without the agreement of
Executive to be bound by the Covenants, Employer would not have agreed to enter
into this Agreement. Executive acknowledges that any breach by him of any of the
Covenants will result in irreparable injury to Employer for which money damages
could not adequately compensate Employer. If there is such a breach, Employer
shall be entitled, in addition to all other rights and remedies which Employer
may have at law or in equity, to have an injunction issued by any competent
court enjoining and restraining Executive and all other persons and entities
involved therein from continuing such breach. The existence of any claim or
cause of action which Executive or any such other person or entity may have
against Employer shall not constitute a defense or bar to the enforcement of any
of such Covenants. If Employer must resort to legal proceedings to enforce any
Covenant that has a fixed term, then such term shall be extended for a period of
time equal to the period during which a breach of such Covenant was occurring,
beginning on the date of a final order of a court or other tribunal (without
further right of appeal) holding that such a breach occurred or, if later, the
last day of the original fixed term of such Covenant. If any portion of any such
Covenant or its application is construed to be invalid, illegal or
unenforceable, then the other portions and their application shall not be
affected thereby and shall be enforceable without regard thereto. If any of the
Covenants is determined to be unenforceable because of its
-7-
<PAGE>
scope, duration, geographical area or similar factor, then the court or tribunal
making such determination shall have the power to reduce or limit such scope,
duration, area or other factor, and such Covenant shall then be enforceable in
its reduced or limited form.
9. Indemnification. Executive shall be indemnified by Employer, to the
---------------
maximum extent permitted under applicable law and the articles of incorporation
and bylaws of Employer, for all acts of Executive as an officer of Employer
and/or any other company that Executive serves as an officer at the request of
Employer.
10. Prior Agreements. Executive represents to Employer (a) that there are
----------------
no restrictions, agreements or undertakings whatsoever to which Executive is a
party which would prevent or make unlawful his execution of this Agreement or
his employment hereunder, (b) that his execution of this Agreement or his
employment hereunder do not constitute a breach of any contract, agreement or
understanding, oral or written, to which he is a party or which he is bound and
(c) that he is free and able to execute this Agreement and to enter into
employment by Employer.
11. Mitigation. Executive shall not be required to mitigate the amount of
----------
any payment provided for in Sections 3 or 4 hereof by seeking employment or
---------------
otherwise. Employer shall not be entitled to setoff against the amounts payable
to Executive hereunder any amounts earned by Executive in other employment after
termination of his employment with Employer hereunder or any amounts that might
have been earned by Executive in other employment had he sought such other
employment. The amounts payable to Executive hereunder shall not be treated as
damages but as severance compensation to which Executive is entitled by reason
of termination of his employment in the circumstances contemplated by this
Agreement.
12. Notices. All notices, consents or other communications required or
-------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally, (b) three business
days after being mailed by first class certified mail, return receipt requested,
postage prepaid, or (c) one business day after being sent by a reputable
overnight delivery service, postage or delivery charges prepaid, to the parties
at their respective addresses stated on the first page of this Agreement.
Notices may also be given by prepaid telegram or telecopy and shall be effective
on the date transmitted if confirmed within 24 hours thereafter by a signed
original sent in the manner provided in the preceding sentence. Any party may
change its address for notice and the address to which copies must be sent by
giving notice of the new addresses to the other parties in accordance with this
Section 12, except that any such change of address notice shall not be effective
- ----------
unless and until received.
13. Entire Agreement. This Agreement is the entire agreement between the
----------------
parties with respect to the subject matter hereof and may not be terminated,
modified or amended except in a writing executed by each party hereto affected
by such termination, modification or amendment.
-8-
<PAGE>
This Agreement supersedes all prior agreements and understandings among the
parties with respect to its subject matter.
14. Assignment. This Agreement, being for the personal services of
----------
Executive, shall not be assignable by him.
15. No Waivers. No waiver with respect to this Agreement shall be
----------
enforceable unless in writing and signed by the party against whom enforcement
is sought. Except as otherwise expressly provided herein, no failure to
exercise, delay in exercising, or single or partial exercise of any right, power
or remedy by any party, and no course of dealing between or among any of the
parties, shall constitute a waiver of, or shall preclude any other or further
exercise of the same or any other right, power or remedy.
16. Severability. If any provision of this Agreement is construed to be
------------
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof.
18. Controlling Law. This Agreement is made under, and shall be construed
---------------
and enforced in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF on the date first above
written.
EMPLOYER: EXECUTIVE:
HOME HEALTH CORPORATION
OF AMERICA, INC.
By: /s/ Bruce J. Feldman /s/ David S. Geller
--------------------- -------------------
BRUCE J. FELDMAN DAVID S. GELLER
President and Chief Executive Officer
-9-
<PAGE>
Exhibit 10.21
EMPLOYMENT AGREEMENT
--------------------
Parties: HOME HEALTH CORPORATION OF AMERICA, INC.
- -------
a Pennsylvania corporation ("Employer")
2200 Renaissance Boulevard, Suite 300
King of Prussia, PA 19406
JAMES J. SWINIUCH ("Executive")
Date: July 1, 1998
- ----
Background: Executive is currently employed as the Corporate Vice President of
- ----------
Reimbursement of Employer. In consideration of Executive's past, present and
future corporate services to Employer, Employer desires to provide for the
payment of certain compensation and other benefits to Executive, all as more
fully described in this Agreement.
INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual covenants
and agreements stated below, Executive and Employer agree as follows:
1. Employment and Term. Employer hereby employs Executive and Executive
-------------------
accepts such employment, subject to all of the terms and conditions of this
Agreement, for a term of three (3) years beginning on the date of this Agreement
(the "Term"). The Term will automatically be extended for an additional one (1)
year period on June 30th of each year, unless sooner terminated in accordance
with other provisions of this Agreement or prior to such date either party gives
the other party written notice of its intention not to extend this Agreement.
2. Position and Duties. Employer shall employ Executive as its Corporate
-------------------
Vice President of Reimbursement. Executive shall report directly to the
Employer's Corporate Chief Operating Officer. Executive shall have
responsibility for the firm-wide billing and cash collections operations of
Employer, and shall undertake such responsibilities and duties that may be
assigned to him from time to time by the Employer's President and Chief
Executive Officer. Executive shall devote all of his working time, energy, skill
and best efforts to Employer's business and affairs and to the promotion of
Employer's interests as is required for the fulfillment of his obligations and
the performance of his duties under this Agreement, except that Executive shall
not be precluded from pursuing personal investments, so long as such activities
do not materially interfere with Executive's performance of his duties under
this Agreement.
3. Compensation, Benefits and Expenses.
-----------------------------------
3.1 Salary. Employer shall pay to Executive a gross base salary of
------
One Hundred Ten Thousand Dollars ($110,000). Executive's Base Salary shall be
payable in
<PAGE>
accordance with Employer's normal payroll practices for employees and Employer
shall deduct or cause to be deducted from Executive's Base Salary all taxes and
amounts required by law to be withheld.
3.2 Benefits. Employer shall pay to Executive an automobile expense
--------
allowance of Four Hundred Fifty Dollars ($450.00) per month. To the extent he is
eligible under the general provisions thereof, Executive shall be entitled to
participate in and shall be included in all other employee benefit plans, group
insurance, disability, profit sharing, savings, bonus, health insurance, life
insurance, retirement, stock or similar plans or programs of Employer.
3.3 Health Insurance. Employer shall pay for family coverage for
----------------
health insurance for Executive through Employer's health insurance carrier.
3.4 Bonuses. In addition to his Base Salary, Executive shall be
-------
eligible to participate in a quarterly bonus upon achieving cash collections and
DSO goals.
3.5 Vacation. Executive shall be entitled to four weeks of vacation
--------
during each year.
3.6 Expenses. Executive is authorized to incur, and shall be promptly
--------
reimbursed by Employer for, ordinary, necessary and reasonable expenses in the
course of his performance of services under this Agreement. Executive shall
properly account for all such expenses.
3.7 Entire Compensation. The compensation provided for in this
-------------------
Section 3 shall be the full consideration for the services to be rendered by
- ---------
Executive to Employer under this Agreement.
4. Termination.
-----------
4.1 Termination by Death. If Executive dies, then this Agreement and
--------------------
all of Executive's rights to compensation and benefits under this Agreement
shall terminate immediately, except that Executive's heirs, personal
representatives or estate shall be entitled to receive the unpaid portion of
Executive's Base Salary and any accrued benefits up to the date of death and to
any benefits that are to be continued or paid after the date of termination in
accordance with the terms of the corresponding benefit plans.
4.2 Termination by Employer for Disability. If Executive becomes
--------------------------------------
disabled, he shall continue to receive all of his compensation and benefits in
accordance with Section 3 for a period of 12 months following the Onset of
---------
Disability (as defined in this Section 4.2). If Executive's disability continues
-----------
for more than 12 months after the Onset of Disability or for periods aggregating
more than 12 months during any 24 month period, then Employer shall have the
right to terminate this Agreement and all of Executive's rights to compensation
and benefits under this
-2-
<PAGE>
Agreement immediately, except that Executive shall be entitled to receive the
unpaid portion of Executive's Base Salary, any accrued benefits up to the date
of Employer's termination pursuant to this Section 4.2 and any benefits that are
-----------
to be continued or paid after the date of termination in accordance with the
terms of the corresponding benefit plans. Any amounts due to Executive under
this Section 4.2 shall be reduced, dollar-for-dollar, by any amounts received by
-----------
Executive under any disability insurance policy or plan provided to Executive by
Employer. "Onset of Disability" means the first day on which Executive shall be
unable to perform his duties under this Agreement by reason of physical or
mental incapacity, sickness or infirmity.
4.3 Termination by Employer for Cause. Employer may, upon thirty (30)
---------------------------------
days prior written notice, terminate Executive's employment and his rights to
compensation and benefits under this Agreement for Cause (as defined in this
Section 4.3), except that Executive shall be entitled to receive any unpaid
- -----------
portion of Executive's Base Salary and benefits earned to the date of
termination and any benefits that are to be continued or paid after the date of
termination for Cause in accordance with the terms of the corresponding benefit
plans. "Cause" shall exist if Executive is convicted of a felony, is grossly
negligent in the performance of his duties under this Agreement, commits a
material act of dishonesty or breach of trust with respect to Employer or
materially breaches this Agreement, but only if Executive is given notice
specifying, in reasonable detail, the nature of the alleged cause and either (a)
Executive had a reasonable opportunity to take remedial action but failed or
refused to do so, or (b) an opportunity to take remedial action would not have
been meaningful or appropriate under the circumstances and the material breach
of this Agreement had a material adverse effect on Employer.
4.4 Termination by Executive for Good Reason. Executive may, upon
----------------------------------------
ninety (90) days prior written notice to Employer, resign his employment for
"Good Reason". Good Reason shall exist if:
(a) Executive is demoted, removed or not re-elected to any of his
positions or offices, or there is a material diminishment of Executive's
responsibilities, duties or status;
(b) there is a reduction in Executive's Base Salary or a material
reduction in Executive's benefits;
(c) Employer breaches a material provision of this Agreement;
(d) a "Change in Control" occurs, which for purposes of this
Agreement, shall mean a change in control of Employer of a nature that would be
required to reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), whether or not Employer is then subject to such reporting requirement;
provided that, without limitation, such a change in control shall be deemed to
have occurred if:
-3-
<PAGE>
(i) any person (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act), other than those persons in control of Employer
as of the date hereof, shall acquire the power, directly or indirectly, to
direct the management or policies of Employer or shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of 50% or more of the combined voting power of Employer's then
outstanding securities; or
(ii) during any period of two (2) consecutive years,
individuals who at the commencement of such period constitute the entire Board
shall cease for any reason to constitute at least a majority thereof unless the
election, or the nomination for election by Employer's shareholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the commencement of such period; provided,
however, that for purposes of this subsection, all directors elected in
accordance with the foregoing procedure shall be deemed to be directors at the
commencement of such period;
(e) any failure by Employer to obtain the assumption of this
Agreement by any successor or assign of Employer; or
(f) any purported termination of Executive for Cause that is not
effected pursuant to the method described in Section 4.3.
-----------
4.5 Termination Without Cause. Employer may, upon thirty (30) days
-------------------------
prior written notice to Employee, terminate his employment without Cause.
4.6 Benefits Upon Termination by Executive for Good Reason,
-------------------------------------------------------
Termination by Employer Without Cause or Termination upon Employer Notice. In
- -------------------------------------------------------------------------
the event that (i) Executive chooses to resign from his employment hereunder for
Good Reason pursuant to Section 4.4, (ii) Employer terminates Executive's
-----------
employment without Cause pursuant to Section 4.5 or (iii) Employer elects not to
-----------
extend this Agreement pursuant to Section 1, then: (1) Executive shall continue
---------
to receive for a period of twelve (12) months after such termination (the
"Severance Period"), his Base Salary payable in regular installments as if he
were still employed by Employer (the "Severance Payments"), provided, however,
-------- -------
that in the event Executive chooses to resign from his employment for Good
Reason pursuant to Section 4.4(d), the Severance Period shall be the greater of:
--------------
(a) twelve (12) months after such termination; or (b) the number of months
remaining in the Initial Term; (2) all of the stock options and awards issued to
Executive under any stock option plan of Employer (collectively, the "Options")
shall be fully vested as of the date his employment terminates, regardless of
the terms of any such stock option plan; and (3) health insurance of Executive
shall continue to be provided by Employer for a period of twelve (12) months
from the date of his termination.
4.7 Procedure upon Termination. Upon termination of his employment,
--------------------------
Executive shall promptly return to Employer all documents (including copies) and
other materials and property of Employer, or pertaining to its businesses,
including without limitation customer
-4-
<PAGE>
and prospect lists, contracts, files, manuals, letters, reports and records in
his possession or control, no matter from whom or in what manner acquired.
5. Discoveries. Executive shall communicate to Employer, in writing when
-----------
requested, and preserve as confidential information of Employer, all marketing
concepts and each discovery, idea, design, invention and improvement relating in
any manner to Employer's business that has been conceived, developed or made by
Executive, whether alone or jointly with others, at any time (during or after
business hours) during Executive's employment with Employer (such concepts,
ideas and designs are referred to as "Executive's Discoveries"). All of
Executive's Discoveries shall be Employer's exclusive property, and Executive
shall, at Employer's expense, sign all documents and take such other actions as
it may reasonably request to confirm its ownership of Executive's Discoveries.
Executive shall not, except with Employer's express prior written consent, or
except in the proper course of his employment with Employer, use any of
Executive's Discoveries for his own benefit or the benefit of any person or
disclose any of Executive's Discoveries to any third person through publication
or in any other manner.
6. Nondisclosure. At all times during and after the Term, except with
-------------
Employer's express prior written consent or in connection with the proper
performance of services under the Agreement, Executive shall not, directly or
indirectly, communicate, disclose or divulge to any person or use for the
benefit of any person, any confidential or proprietary knowledge or information,
no matter when or how acquired, concerning the conduct and details of the
business of Employer including, but not limited to, (a) names of customers,
prospects and suppliers, (b) details of customer, prospect and supplier
contracts and proposals, (c) budget and other non-public financial information
and (d) marketing methods, trade secrets and financial condition. For purposes
of this Section 6, confidential information shall not include any information
---------
that is now known by the general public, or that becomes known by the general
public other than as a result of any improper act or omission of Executive.
7. Noncompetition. Executive acknowledges that Employer's business is
--------------
highly competitive, and that the services Employer provides are complex and
sophisticated and require substantial and continuous expenditures of time and
money to develop, market and maintain. Accordingly, during the Non-Compete
Period (as hereinafter defined), except with Employer's express prior written
consent, Executive shall not, directly or indirectly, in any capacity, for the
benefit of any person:
(a) communicate with or solicit any person who is or during such
period becomes an executive employee or salesperson of Employer in any manner
that interferes or might interfere with such person's relationship with Employer
or in an effort to obtain such person as an employee of any person;
(b) communicate with or solicit any person who is or during such
period becomes a customer, supplier, agent or representative of Employer in any
manner that interferes or
-5-
<PAGE>
might interfere with such person's relationship with Employer, or in an effort
to obtain such person as a customer, supplier, agent or representative of any
person which conducts a business in competition with Employer; and/or
(c) establish, own, manage, operate or control, or participate in the
establishment, ownership, management, operation or control of, serve as an
employee, director, officer or consultant for, or make a material investment in,
any person that conducts a business in competition with Employer within a 100-
mile radius of any of Employer's offices; provided, however, that this provision
-------- -------
shall not be construed to prohibit the ownership by Executive of not more than
two percent (2%) of any class of securities of any corporation engaged in such a
business that has a class of securities registered pursuant to the Exchange Act.
For purposes of this Agreement, the Non-Compete Period shall mean the period
during which Executive is employed by Employer and continuing for a period of
time equal to the greater of (i) one (1) year after the termination of
Executive's employment hereunder or (ii) the Severance Period. Notwithstanding
the foregoing, in the event that Employer shall fail to provide Executive with
the compensation owed to Executive pursuant to Section 4.6, the Non-Compete
-----------
Period shall automatically terminate and Executive shall from that day forward
not be subject to the restrictions set forth in this Section 7.
---------
8. Remedy. Executive acknowledges that the covenants contained in
------
Sections 5, 6 and 7 of this Agreement ("Covenants") are a material part of the
- -------------------
consideration bargained for by Employer and that, without the agreement of
Executive to be bound by the Covenants, Employer would not have agreed to enter
into this Agreement. Executive acknowledges that any breach by him of any of the
Covenants will result in irreparable injury to Employer for which money damages
could not adequately compensate Employer. If there is such a breach, Employer
shall be entitled, in addition to all other rights and remedies which Employer
may have at law or in equity, to have an injunction issued by any competent
court enjoining and restraining Executive and all other persons and entities
involved therein from continuing such breach. The existence of any claim or
cause of action which Executive or any such other person or entity may have
against Employer shall not constitute a defense or bar to the enforcement of any
of such Covenants. If Employer must resort to legal proceedings to enforce any
Covenant that has a fixed term, then such term shall be extended for a period of
time equal to the period during which a breach of such Covenant had been
occurring, beginning on the date of a final order of a court or other tribunal
(without further right of appeal) holding that such a breach occurred or, if
later, the last day of the original fixed term of such Covenant. If any portion
of any such Covenant or its application is construed to be invalid, illegal or
unenforceable, then the other portions and their application shall not be
affected thereby and shall be enforceable without regard thereto. If any of the
Covenants is determined to be unenforceable because of its scope, duration,
geographical area or similar factor, then the court or tribunal making such
determination shall have the power to reduce or limit such scope, duration, area
or other factor, and such Covenant shall then be enforceable in its reduced or
limited form.
9. Indemnification. Executive shall be indemnified by Employer, to the
---------------
maximum
-6-
<PAGE>
extent permitted under applicable law and the articles of incorporation and
bylaws of Employer, for all acts of Executive as an officer of Employer and/or
any other company that Executive serves as an officer at the request of
Employer.
10. Prior Agreements. Executive represents to Employer (a) that there are
----------------
no restrictions, agreements or undertakings whatsoever to which Executive is a
party which would prevent or make unlawful his execution of this Agreement or
his employment hereunder, (b) that his execution of this Agreement or his
employment hereunder do not constitute a breach of any contract, agreement or
understanding, oral or written, to which he is a party or which he is bound and
(c) that he is free and able to execute this Agreement and to enter into
employment by Employer. All prior employment agreements between Executive and
Employer, including without limitation, Employment Agreements between Executive
and Employer, are hereby terminated as of the date hereof as fully performed on
both sides..
11. Mitigation. Executive shall not be required to mitigate the amount of
----------
any payment provided for in Sections 3 or 4 hereof by seeking employment or
---------------
otherwise. Employer shall not be entitled to setoff against the amounts payable
to Executive hereunder any amounts earned by Executive in other employment after
termination of his employment with Employer hereunder or any amounts that might
have been earned by Executive in other employment had he sought such other
employment. The amounts payable to Executive hereunder shall not be treated as
damages but as severance compensation to which Executive is entitled by reason
of termination of his employment in the circumstances contemplated by this
Agreement.
12. Notices. All notices, consents or other communications required or
-------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally against receipt,
(b) three business days after being mailed by first class certified mail, return
receipt requested, postage prepaid, or (c) one business day after being sent by
a reputable overnight delivery service, postage or delivery charges prepaid, to
the parties at their respective addresses stated on the first page of this
Agreement. Notices may also be given by prepaid telegram or telecopy and shall
be effective on the date transmitted if confirmed within 24 hours thereafter by
a signed original sent in the manner provided in the preceding sentence. Any
party may change its address for notice and the address to which copies must be
sent by giving notice of the new addresses to the other parties in accordance
with this Section 12, except that any such change of address notice shall not be
----------
effective unless and until received.
13. Entire Agreement. This Agreement is the entire agreement between the
----------------
parties with respect to the subject matter hereof and may not be terminated,
modified or amended except in a writing executed by each party hereto affected
by such termination, modification or amendment. This Agreement supersedes all
prior agreements and understandings among the parties with respect to its
subject matter, including without limitation, previous Employment Agreements
between Executive and Employer.
14. Assignment. This Agreement, being for the personal services of
----------
Executive, shall
-7-
<PAGE>
not be assignable by his.
15. No Waivers. No waiver with respect to this Agreement shall be
----------
enforceable unless in writing and signed by the party against whom enforcement
is sought. Except as otherwise expressly provided herein, no failure to
exercise, delay in exercising, or single or partial exercise of any right, power
or remedy by any party, and no course of dealing between or among any of the
parties, shall constitute a waiver of, or shall preclude any other or further
exercise of the same or any other right, power or remedy.
16. Severability. If any provision of this Agreement is construed to be
------------
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof.
18. Controlling Law. This Agreement is made under, and shall be construed
---------------
and enforced in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of the date first above
written.
EMPLOYER: EXECUTIVE:
HOME HEALTH CORPORATION
OF AMERICA, INC.
By:/s/ Bruce Feldman /s/ James J. Swiniuch
------------------------------------- --------------------------------
BRUCE FELDMAN JAMES J. SWINIUCH
President and Chief Executive Officer
-8-
<PAGE>
Exhibit 10.22
EMPLOYMENT AGREEMENT
--------------------
Parties: HOME HEALTH CORPORATION OF AMERICA, INC.
- -------
a Pennsylvania corporation ("Employer")
2200 Renaissance Boulevard, Suite 300
King of Prussia, PA 19406
JOSEPH J. GRILLI ("Executive")
273 Hemlock Terrace
Mountaintop, Pennsylvania 18707
Date: May 1, 1998
- ----
Background: Executive is currently employed as the Regional Vice President of
- ----------
Sales/Marketing of Employer. In consideration of Executive's past, present and
future corporate services to Employer, Employer desires to provide for the
payment of certain compensation and other benefits to Executive, all as more
fully described in this Agreement.
INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual covenants
and agreements stated below, Executive and Employer agree as follows:
1. Employment and Term. Employer hereby employs Executive and Executive
-------------------
accepts such employment, subject to all of the terms and conditions of this
Agreement, for a term of three (3) years beginning on the date of this Agreement
(the "Term"). The Term will automatically be extended for an additional one (1)
year period on April 30th of each year, unless sooner terminated in accordance
with other provisions of this Agreement or prior to such date either party gives
the other party written notice of its intention not to extend this Agreement.
2. Position and Duties. Employer shall employ Executive as its Regional
-------------------
President of Sales/Marketing. Executive shall report directly to the Employer's
Regional Vice President. Executive shall have responsibility for the sales and
marketing efforts on a regional basis of Employer's Northern Region, and shall
undertake such responsibilities and duties that may be assigned to him from time
to time by the Employer's President and Chief Executive Officer. Executive shall
devote all of his working time, energy, skill and best efforts to Employer's
business and affairs and to the promotion of Employer's interests as is required
for the fulfillment of his obligations and the performance of his duties under
this Agreement, except that Executive shall not be precluded from pursuing
personal investments, so long as such activities do not materially interfere
with Executive's performance of his duties under this Agreement.
<PAGE>
3. Compensation, Benefits and Expenses.
-----------------------------------
3.1 Salary. Employer shall pay to Executive a gross base salary of
------
One Hundred Twenty Nine Thousand Dollars ($129,000). Executive's Base Salary
shall be payable in accordance with Employer's normal payroll practices for
employees and Employer shall deduct or cause to be deducted from Executive's
Base Salary all taxes and amounts required by law to be withheld.
3.2 Benefits. Employer shall pay to Executive an automobile expense
--------
allowance of Four Hundred Fifty Dollars ($450.00) per month. To the extent he is
eligible under the general provisions thereof, Executive shall be entitled to
participate in and shall be included in all other employee benefit plans, group
insurance, disability, profit sharing, savings, bonus, health insurance, life
insurance, retirement, stock or similar plans or programs of Employer.
3.3 Bonuses. In addition to his Base Salary, Executive shall be
-------
eligible to participate in the Company's Executive Management Bonus Program (the
"Bonus") in the event that Employer and its subsidiaries achieve targeted
consolidated net income (the "Targeted Income").
3.4 Vacation. Executive shall be entitled to four weeks of vacation
--------
during each year.
3.5 Expenses. Executive is authorized to incur, and shall be promptly
--------
reimbursed by Employer for, ordinary, necessary and reasonable expenses in the
course of his performance of services under this Agreement. Executive shall
properly account for all such expenses.
3.6 Entire Compensation. The compensation provided for in this
-------------------
Section 3 shall be the full consideration for the services to be rendered by
- ---------
Executive to Employer under this Agreement.
4. Termination.
-----------
4.1 Termination by Death. If Executive dies, then this Agreement and
--------------------
all of Executive's rights to compensation and benefits under this Agreement
shall terminate immediately, except that Executive's heirs, personal
representatives or estate shall be entitled to receive the unpaid portion of
Executive's Base Salary and any accrued benefits up to the date of death and to
any benefits that are to be continued or paid after the date of termination in
accordance with the terms of the corresponding benefit plans.
4.2 Termination by Employer for Disability. If Executive becomes
--------------------------------------
disabled, he shall continue to receive all of his compensation and benefits in
accordance with Section 3 for a
---------
-2-
<PAGE>
period of 12 months following the Onset of Disability (as defined in this
Section 4.2). If Executive's disability continues for more than 12 months after
- -----------
the Onset of Disability or for periods aggregating more than 12 months during
any 24 month period, then Employer shall have the right to terminate this
Agreement and all of Executive's rights to compensation and benefits under this
Agreement immediately, except that Executive shall be entitled to receive the
unpaid portion of Executive's Base Salary, any accrued benefits up to the date
of Employer's termination pursuant to this Section 4.2 and any benefits that are
-----------
to be continued or paid after the date of termination in accordance with the
terms of the corresponding benefit plans. Any amounts due to Executive under
this Section 4.2 shall be reduced, dollar-for-dollar, by any amounts received by
-----------
Executive under any disability insurance policy or plan provided to Executive by
Employer. "Onset of Disability" means the first day on which Executive shall be
unable to perform his duties under this Agreement by reason of physical or
mental incapacity, sickness or infirmity.
4.3 Termination by Employer for Cause. Employer may, upon thirty
---------------------------------
(30) days prior written notice, terminate Executive's employment and his rights
to compensation and benefits under this Agreement for Cause (as defined in this
Section 4.3), except that Executive shall be entitled to receive any unpaid
- -----------
portion of Executive's Base Salary and benefits earned to the date of
termination and any benefits that are to be continued or paid after the date of
termination for Cause in accordance with the terms of the corresponding benefit
plans. "Cause' shall exist if Executive is convicted of a felony, is grossly
negligent in the performance of his duties under this Agreement, commits a
material act of dishonesty or breach of trust with respect to Employer or
materially breaches this Agreement, but only if Executive is given notice
specifying, in reasonable detail, the nature of the alleged cause and either (a)
Executive had a reasonable opportunity to take remedial action but failed or
refused to do so, or (b) an opportunity to take remedial action would not have
been meaningful or appropriate under the circumstances and the material breach
of this Agreement had a material adverse effect on Employer.
4.4 Termination by Executive for Good Reason. Executive may, upon
----------------------------------------
ninety (90) days prior written notice to Employer, resign his employment for
"Good Reason". Good Reason shall exist if:
(a) Executive is demoted, removed or not re-elected to any of his
positions or offices, or there is a material diminishment of Executive's
responsibilities, duties or status;
(b) there is a reduction in Executive's Base Salary or a material
reduction in Executive's benefits;
(c) Employer breaches a material provision of this Agreement;
(d) a "Change in Control" occurs, which for purposes of this
Agreement, shall mean a change in control of Employer of a nature that would be
required to reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities
-3-
<PAGE>
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not Employer
is then subject to such reporting requirement; provided that, without
limitation, such a change in control shall be deemed to have occurred if:
(i) any person (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act), other than those persons in control of Employer
as of the date hereof, shall acquire the power, directly or indirectly, to
direct the management or policies of Employer or shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of 50% or more of the combined voting power of Employer's then
outstanding securities; or
(ii) during any period of two (2) consecutive years,
individuals who at the commencement of such period constitute the entire Board
shall cease for any reason to constitute at least a majority thereof unless the
election, or the nomination for election by Employer's shareholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the commencement of such period; provided,
however, that for purposes of this subsection, all directors elected in
accordance with the foregoing procedure shall be deemed to be directors at the
commencement of such period;
(e) any failure by Employer to obtain the assumption of this
Agreement by any successor or assign of Employer; or
(f) any purported termination of Executive for Cause that is not
effected pursuant to the method described in Section 4.3.
-----------
4.5 Termination Without Cause. Employer may, upon thirty (30) days
-------------------------
prior written notice to Employee, terminate his employment without Cause.
4.6 Benefits Upon Termination by Executive for Good Reason,
-------------------------------------------------------
Termination by Employer Without Cause or Termination upon Employer Notice. In
- -------------------------------------------------------------------------
the event that (i) Executive chooses to resign from his employment hereunder for
Good Reason pursuant to Section 4.4, (ii) Employer terminates Executive's
-----------
employment without Cause pursuant to Section 4.5 or (iii) Employer elects not to
-----------
extend this Agreement pursuant to Section 1, then: (1) Executive shall continue
---------
to receive for a period of twelve (12) months after such termination (the
"Severance Period"), his Base Salary payable in regular installments as if he
were still employed by Employer (the "Severance Payments"), provided, however,
-------- -------
that in the event Executive chooses to resign from his employment for Good
Reason pursuant to Section 4.4(d), the Severance Period shall be the greater of:
--------------
(a) twelve (12) months after such termination; or (b) the number of months
remaining in the Initial Term; (2) all of the stock options and awards issued to
Executive under any stock option plan of Employer (collectively, the "Options")
shall be fully vested as of the date his employment terminates, regardless of
the terms of any such stock option plan; and (3) health insurance of Executive
shall continue to be provided by Employer for a period of twelve (12) months
from the date of his termination.
-4-
<PAGE>
4.7 Procedure upon Termination. Upon termination of his employment,
--------------------------
Executive shall promptly return to Employer all documents (including copies) and
other materials and property of Employer, or pertaining to its businesses,
including without limitation customer and prospect lists, contracts, files,
manuals, letters, reports and records in his possession or control, no matter
from whom or in what manner acquired.
5. Discoveries. Executive shall communicate to Employer, in writing when
-----------
requested, and preserve as confidential information of Employer, all marketing
concepts and each discovery, idea, design, invention and improvement relating in
any manner to Employer's business that has been conceived, developed or made by
Executive, whether alone or jointly with others, at any time (during or after
business hours) during Executive's employment with Employer (such concepts,
ideas and designs are referred to as "Executive's Discoveries"). All of
Executive's Discoveries shall be Employer's exclusive property, and Executive
shall, at Employer's expense, sign all documents and take such other actions as
it may reasonably request to confirm its ownership of Executive's Discoveries.
Executive shall not, except with Employer's express prior written consent, or
except in the proper course of his employment with Employer, use any of
Executive's Discoveries for his own benefit or the benefit of any person or
disclose any of Executive's Discoveries to any third person through publication
or in any other manner.
6. Nondisclosure. At all times during and after the Term, except with
-------------
Employer's express prior written consent or in connection with the proper
performance of services under this Agreement, Executive shall not, directly or
indirectly, communicate, disclose or divulge to any person or use for the
benefit of any person, any confidential or proprietary knowledge or information,
no matter when or how acquired, concerning the conduct and details of the
business of Employer including, but not limited to, (a) names of customers,
prospects and suppliers, (b) details of customer, prospect and supplier
contracts and proposals, (c) budget and other non-public financial information
and (d) marketing methods, trade secrets and financial condition. For purposes
of this Section 6, confidential information shall not include any information
---------
that is now known by the general public, or that becomes known by the general
public other than as a result of any improper act or omission of Executive.
-5-
<PAGE>
7. Noncompetition. Executive acknowledges that Employer's business is
--------------
highly competitive, and that the services Employer provides are complex and
sophisticated and require substantial and continuous expenditures of time and
money to develop, market and maintain. Accordingly, during the Non-Compete
Period (as hereinafter defined), except with Employer's express prior written
consent, Executive shall not, directly or indirectly, in any capacity, for the
benefit of any person:
(a) communicate with or solicit any person who is or during such
period becomes an executive employee or salesperson of Employer in any manner
that interferes or might interfere with such person's relationship with Employer
or in an effort to obtain such person as an employee of any person;
(b) communicate with or solicit any person who is or during such
period becomes a customer, supplier, agent or representative of Employer in any
manner that interferes or might interfere with such person's relationship with
Employer, or in an effort to obtain such person as a customer, supplier, agent
or representative of any person which conducts a business in competition with
Employer; and/or
(c) establish, own, manage, operate or control, or participate in the
establishment, ownership, management, operation or control of, serve as an
employee, director, officer or consultant for, or make a material investment in,
any person that conducts a business in competition with Employer within a 100-
mile radius of any of Employer's offices; provided, however, that this provision
--------- -------
shall not be construed to prohibit the ownership by Executive of not more than
two percent (2%) of any class of securities of any corporation engaged in such a
business that has a class of securities registered pursuant to the Exchange Act.
For purposes of this Agreement, the Non-Compete Period shall mean the period
during which Executive is employed by Employer and continuing for a period of
time equal to the greater of (i) two (2) years after the termination of
Executive's employment hereunder or (ii) the Severance Period. Notwithstanding
the foregoing, in the event that Employer shall fail to provide Executive with
the compensation owed to Executive pursuant to Section 4.6, the Non-Compete
-----------
Period shall automatically terminate and Executive shall from that day forward
not be subject to the restrictions set forth in this Section 7.
---------
8. Remedy. Executive acknowledges that the covenants contained in Sections
------ --------
5, 6 and 7 of this Agreement ("Covenants") are a material part of the
- ----------
consideration bargained for by Employer and that, without the agreement of
Executive to be bound by the Covenants, Employer would not have agreed to enter
into this Agreement. Executive acknowledges that any breach by him of any of the
Covenants will result in irreparable injury to Employer for which money damages
could not adequately compensate Employer. If there is such a breach, Employer
shall be entitled, in addition to all other rights and remedies which Employer
may have at law or in equity, to have an injunction issued by any competent
court enjoining and restraining Executive and all other persons and entities
involved therein from continuing such breach. The existence of any claim or
-6-
<PAGE>
cause of action which Executive or any such other person or entity may have
against Employer shall not constitute a defense or bar to the enforcement of any
of such Covenants. If Employer must resort to legal proceedings to enforce any
Covenant that has a fixed term, then such term shall be extended for a period of
time equal to the period during which a breach of such Covenant had been
occurring, beginning on the date of a final order of a court or other tribunal
(without further right of appeal) holding that such a breach occurred or, if
later, the last day of the original fixed term of such Covenant. If any portion
of any such Covenant or its application is construed to be invalid, illegal or
unenforceable, then the other portions and their application shall not be
affected thereby and shall be enforceable without regard thereto. If any of the
Covenants is determined to be unenforceable because of its scope, duration,
geographical area or similar factor, then the court or tribunal making such
determination shall have the power to reduce or limit such scope, duration, area
or other factor, and such Covenant shall then be enforceable in its reduced or
limited form.
9. Indemnification. Executive shall be indemnified by Employer, to the
---------------
maximum extent permitted under applicable law and the articles of incorporation
and bylaws of Employer, for all acts of Executive as an officer of Employer
and/or any other company that Executive serves as an officer at the request of
Employer.
10. Prior Agreements. Executive represents to Employer (a) that there are
----------------
no restrictions, agreements or undertakings whatsoever to which Executive is a
party which would prevent or make unlawful his execution of this Agreement or
his employment hereunder, (b) that his execution of this Agreement or his
employment hereunder do not constitute a breach of any contract, agreement or
understanding, oral or written, to which he is a party or which he is bound and
(c) that he is free and able to execute this Agreement and to enter into
employment by Employer. All prior employment agreements between Executive and
Employer, including without limitation, certain Employment Agreements between
Executive and Employer, are hereby terminated as of the date hereof as fully
performed on both sides.
11. Mitigation. Executive shall not be required to mitigate the amount of
----------
any payment provided for in Sections 3 or 4 hereof by seeking employment or
---------------
otherwise. Employer shall not be entitled to setoff against the amounts payable
to Executive hereunder any amounts earned by Executive in other employment after
termination of his employment with Employer hereunder or any amounts that might
have been earned by Executive in other employment had he sought such other
employment. The amounts payable to Executive hereunder shall not be treated as
damages but as severance compensation to which Executive is entitled by reason
of termination of his employment in the circumstances contemplated by this
Agreement.
12. Notices. All notices, consents or other communications required or
-------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally against receipt,
(b) three business days after being mailed by first class certified mail, return
receipt requested, postage prepaid, or (c) one business day after being sent by
a reputable overnight delivery service, postage or delivery charges prepaid, to
the parties at their respective addresses stated on the first page of this
Agreement. Notices may also be given by
-7-
<PAGE>
prepaid telegram or telecopy and shall be effective on the date transmitted if
confirmed within 24 hours thereafter by a signed original sent in the manner
provided in the preceding sentence. Any party may change its address for notice
and the address to which copies must be sent by giving notice of the new
addresses to the other parties in accordance with this Section 12, except that
----------
any such change of address notice shall not be effective unless and until
received.
13. Entire Agreement. This Agreement is the entire agreement between the
----------------
parties with respect to the subject matter hereof and may not be terminated,
modified or amended except in a writing executed by each party hereto affected
by such termination, modification or amendment. This Agreement supersedes all
prior agreements and understandings among the parties with respect to its
subject matter, including without limitation, previous Employment Agreements
between Executive and Employer.
14. Assignment. This Agreement, being for the personal services of
----------
Executive, shall not be assignable by him.
15. No Waivers. No waiver with respect to this Agreement shall be
----------
enforceable unless in writing and signed by the party against whom enforcement
is sought. Except as otherwise expressly provided herein, no failure to
exercise, delay in exercising, or single or partial exercise of any right, power
or remedy by any party, and no course of dealing between or among any of the
parties, shall constitute a waiver of, or shall preclude any other or further
exercise of the same or any other right, power or remedy.
16. Severability. If any provision of this Agreement is construed to be
------------
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof.
18. Controlling Law. This Agreement is made under, and shall be construed
---------------
and enforced in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of the date first above
written.
-8-
<PAGE>
EMPLOYER: EXECUTIVE:
HOME HEALTH CORPORATION
OF AMERICA, INC.
By: /s/ Bruce Feldman /s/ Joseph J. Grilli
------------------------------------- ---------------------------------
BRUCE FELDMAN JOSEPH J. GRILLI
President and Chief Executive Officer
-9-
<PAGE>
FIFTH AMENDMENT TO
------------------
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
This FIFTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the
"Agreement") is entered into as of September 23, 1998 between HOME HEALTH
CORPORATION OF DELAWARE, INC., a Delaware corporation (the "Borrower"); each of
the Guarantors set forth on the signature pages hereto (each individually, a
"Guarantor" and collectively, the "Guarantors"); FIRST UNION NATIONAL BANK, a
national banking association and successor by merger to CoreStates Bank, N.A.,
("First Union") and the other banks identified on the signature pages hereto
(each individually a "Bank" and individually and collectively, "Banks"); and
First Union as agent for the Banks ("Agent").
BACKGROUND
----------
A. The Borrower, the Banks and the Agent are parties to that certain Third
Amended and Restated Credit Agreement dated March 13, 1997 as amended by
Amendment No.1 to Third Amended and Restated Credit Agreement dated September
26, 1997, as further amended by Amendment No. 2 to Third Amended and Restated
Credit Agreement dated November 14, 1997, as further amended by Amendment No. 3
to Third Amended and Restated Credit Agreement dated February 13, 1998, and as
further amended by Amendment No. 4 to Third Amended and Restated Credit
Agreement ("Amendment No. 4") dated May 15, 1998 (collectively, the "Credit
Agreement") pursuant to which the Banks agreed to make available to the Borrower
various credit facilities upon the terms and conditions specified in the Credit
Agreement.
B. Home Health Corporation of America, Inc. ("Parent") and certain of its
subsidiaries other than the 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 the Banks in connection with the Credit
Agreement.
C. The Borrower has provided the Banks with information that, as more
particularly set forth herein, it is in default under certain provisions set
forth in the Credit Agreement.
D. The Borrower has requested, and the Banks have agreed to, subject to
the terms and conditions hereof, certain amendments and waivers under the Credit
Agreement as set forth herein.
E. All terms capitalized but not otherwise defined herein shall have the
meanings ascribed to them in the Credit Agreement.
<PAGE>
AGREEMENT
---------
NOW, THEREFORE, incorporating the Background Section herein, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereby agree
as follows:
Section 1. Acknowledgment of Events of Default; Waiver of Notice; Waiver
-------------------------------------------------------------
of Defaults; Validity and Enforceability of Documents.
- ------------------------------------------------------
1.1 The Borrower acknowledges and agrees that Events of Default exist and
are continuing under the Credit Agreement and each of the other Loan Documents
(the "Existing Defaults") because, inter alia, the Borrower has failed to comply
----- ----
with certain provisions of the Credit Agreement as set forth on Schedules 2, 3
and 4 which are attached hereto in accordance with paragraphs 7(f), 7(g) and
7(i) hereof. As used herein, the term "Existing Defaults" includes any covenant
defaults of the Borrower that are directly attributable to the accounts
receivable owing by the affiliates of Allegheny Health Education and Research
Foundation or any of its affiliates. The Borrower acknowledges and agrees that
the Existing Defaults are material in nature, and waives any defenses, set-offs
or counterclaims that exist in connection with the Existing Defaults. The Banks
hereby waive the Existing Defaults and their rights to exercise any of the
remedies available to them in connection with the Existing Defaults either under
the Loan Documents or under applicable law. Notwithstanding the foregoing
sentence, nothing contained herein shall constitute or be deemed to constitute a
waiver by the Banks of any of their rights or remedies in connection with any
Events of Default, other than the Existing Defaults, whether presently existing
or occurring subsequent to the date hereof.
1.2 Except as amended and supplemented hereby, all of the terms and
provisions of the Loan Documents shall remain in full force and effect and,
except as expressly amended hereby, are hereby ratified and confirmed. The
Borrower and the Guarantors hereby ratify and confirm that the Loan Documents,
as amended or supplemented hereby, are valid and binding obligations and
enforceable in accordance with their respective terms subject only to
bankruptcy, insolvency, reorganization moratorium or other laws or equitable
principles affecting creditors rights generally. All obligations presently or
hereafter outstanding under the Credit Agreement, the Notes and the other Loan
Documents shall continue to be secured by, among other things, the Collateral,
and this Agreement does not constitute a novation of the Credit Agreement or the
Notes. Nothing contained herein shall alter, amend, modify, or extinguish the
obligations of the Borrower to repay the Loans.
Section 2. Acknowledgment of Obligations. The Borrower acknowledges and
------------------------------
agrees that, as of the date hereof, the Borrower is indebted to the Banks in the
total principal amounts reflected on Schedule 1 attached hereto (which principal
amounts the Borrower acknowledges may increase as a result of borrowings under
the Revolving Loan) together with accrued and unpaid interest, expenses and
fees, all without offset, counterclaims, or defenses of any kind.
-2-
<PAGE>
Section 3. Acknowledgment of Liens. The Borrower acknowledges and agrees
------------------------
that Agent holds duly perfected, first priority security interests in and liens
on the Collateral, and that these liens and security interests secure the Loans.
Section 4. Amendments to the Loan Agreement.
--------------------------------
4.1 Paragraph 1.1 of the Credit Agreement is supplemented by adding the
following definitions thereto:
"Fifth Amendment" means the Fifth Amendment to Third Amended and
Restated Credit Agreement dated September 23, 1998 by and among the
Borrower, the Guarantors, the Banks and the Agent.
"Temporary Supplemental Loan" means the loan made available by
the Banks to the Borrower pursuant to Paragraph 2.1(i) hereof.
"Temporary Supplemental Notes" means the notes, in form and
substance satisfactory to the Banks, executed and delivered by the
Borrower to the Banks in connection with the Temporary Supplemental
Loan, as such notes may be amended, modified, extended, consolidated
or restated from time to time.
"Professional Fee Loan" means the loan made available by the
Banks to the Borrower pursuant to Paragraph 2.1(h) hereof.
"Professional Fee Notes" means the notes, in form and substance
satisfactory to the Banks, executed and delivered by the Borrower to
the Banks in connection with the Professional Fee Loan, as such notes
may be amended, modified, extended, consolidated or restated from time
to time.
"Seller Notes" shall mean the Subordinated Seller Notes and the
Unsubordinated Seller Notes.
"Subordinated Seller Notes" shall mean the notes and other earn-
out obligations of the Companies set forth on Exhibit "A" attached to
the Fifth Amendment.
"Unsubordinated Seller Notes" shall mean the notes and the other
earn-out obligations of the Companies set forth on Exhibit "B"
attached to the Fifth Amendment.
-3-
<PAGE>
4.2 The following definitions contained in Paragraph 1.1 of the Credit
Agreement are amended and restated as follows:
"Acquisition Commitment" means the aggregate principal amount
which Banks have agreed to make available under Paragraph 2.1(b)
hereof, being Sixty Million Dollars ($60,000,000) on the date hereof,
subject to adjustment from time to time in accordance with Paragraphs
2.1(e) and 2.8 hereof; except, however, that from and after the date
of the Fifth Amendment, such aggregate principal amount shall be not
more than $42,458,135.25.
"Adjusted EBITDA" shall mean EBITDA for the immediately preceding
two (2) fiscal quarters for Parent and its consolidated Subsidiaries,
multiplied by two (2).
"Adjusted EBITDAR" shall mean EBITDAR for the immediately
preceding two (2) fiscal quarters for Parent and its consolidated
Subsidiaries, multiplied by two (2).
"Agent" means First Union National Bank (successor by merger to
CoreStates Bank, N.A.), in its capacity as agent for the Banks
hereunder and any successor appointed pursuant to Paragraph 9.15 and
9.16 hereof.
"Collateral" means the collateral security afforded to Agent, for
the benefit of the Banks, under the Pledge Agreements, the Security
Agreement, the Guaranty and this Agreement.
"EBITDA" means for any period, the sum of operating income for
such period, plus depreciation of equipment held for rental. For
purposes of this definition, the term "operating income" shall mean
net revenues less direct expenses (which shall include depreciation of
equipment held for rental) less indirect expenses less bad debt
expenses (other than with respect to accounts receivable due and owing
from Allegheny Health Education and Research Foundation and its
affiliates which are reflected on the Borrower's financial statements
dated June 30, 1998 in the approximate amount of $1,248,000), all of
the foregoing to be calculated in accordance with GAAP and the
Borrower's past practices. For purposes of this definition, the terms
"direct expenses" and "indirect expenses" shall not include the
following expenses: depreciation (other than of equipment held for
rental as set forth above), amortization, interest, taxes,
Professional Fees, and any and all legal fees incurred by the
Companies due to the failure by the Companies to make required
payments of Subordinated Debt, Unsubordinated Seller Debt or earn-out
payments or other payments to sellers in connection with acquisitions.
For purposes of this definition, the term "Professional Fees" shall be
limited to those fees being paid by the Borrower with funds advanced
under the Professional Fee Loan together with: (i)any future
professional fees incurred by any of the Banks and which must be paid
by the Borrower; and(ii)any professional fees incurred by the Borrower
for professionals retained by the Borrower at the suggestion of the
Banks.
-4-
<PAGE>
"Loan" means the aggregate outstanding principal balance of
Indebtedness advanced under the Acquisition Commitment, the Revolving
Commitment, the RSD Commitment, the LHS Commitment, the Temporary
Supplemental Loan, the Professional Fee Loan, and without duplication
the amount available to be drawn under all Letters of Credit and the
amount of all unreimbursed draws under Letters of Credit, together
with interest accrued and fees and expenses incurred in connection
with any of the foregoing.
"Note" means individually and "Notes" means individually and
collectively the Acquisition Notes, the Revolving Notes, the RSD
Notes, the LHS Notes, the Temporary Supplemental Notes and the
Professional Fee Notes.
"Restricted Payments" means redemptions, repurchases, dividends
and distributions of any kind (including redemptions in exchange for
real or tangible personal property held by a Company) in respect of
any class of capital stock of Parent (whether common or preferred, in
any class or series) and payments of principal and interest or other
amounts on Subordinated Debt, including, without limitation, the
obligations of the Borrower or any Guarantor under notes or agreements
entered into or executed by the Borrower or any Guarantor in
connection with any acquisitions of the Borrower or any Guarantor and
all earn out payments associated with any of the foregoing.
"Revolving Commitment" means the maximum aggregate principal
amount which Banks have agreed to make available under Paragraph
2.1(a) hereof, being Thirty Million Dollars ($30,000,000) on the date
hereof, subject to adjustment from time to time in accordance with
Paragraphs 2.1(e) and 2.8 hereof; except, however, that from and after
the date of the Fifth Amendment, such aggregate principal amount shall
be not more than $32,405,255.14.
"RSD Commitment" means the aggregate principal amount which Banks
have agreed to make available under Paragraph 2.1(c) hereof, being Six
Million Dollars ($6,000,000)on the date hereof, subject to adjustment
from time to time in accordance with Paragraph 2.1(e) and Paragraph
2.8 hereof; except, however, that from and after the date of the Fifth
Amendment, such aggregate principal amount shall be not more than
$4,523,104.17.
"Subordinated Debt" means (i) the Existing Subordinated Debt,
-----------------
(ii) the LHS II Subordinated Debt and the Nahatan Subordinated Debt,
(iii) additional Indebtedness incurred in favor of sellers in
Permitted Acquisitions evidencing a portion of the purchase price in
such Permitted Acquisitions in an aggregate principal amount under
this clause (iii) not to exceed Three Million Seven Hundred Fifty
Thousand Dollars ($3,750,000) in any one transaction or Five Million
Dollars ($5,000,000) for all transactions in any fiscal year, which
Indebtedness has been subordinated to the obligations of the Companies
to Banks pursuant to a Subordination Agreement, and (iv) to the extent
not included in any of the foregoing, the Subordinated Seller Notes.
-5-
<PAGE>
4.3 Paragraph 2.1 of the Credit Agreement is supplemented by adding the
following subparagraphs thereto:
(g) Termination of Advances. Notwithstanding anything to the
-----------------------
contrary contained herein, as of the date of the Fifth Amendment, no
further advances will be made by the Banks to the Borrower under the
Acquisition Loan, the RSD Loan or the LHS Loan. In addition, any
principal repayments of the Acquisition Loan, the RSD Loan or the LHS
Loan subsequent to the date of the Fifth Amendment shall permanently
reduce the principal balances outstanding thereunder and shall not be
available for reborrowing.
(h) Professional Fee Loan. Beginning on the date of the Fifth
---------------------
Amendment and continuing through December 31, 1998 (the "Professional
Loan Revolving Period"), the Banks agree to make available to the
Borrower Professional Fee Loans in the aggregate maximum principal
amount of $500,000 (the "Professional Fee Loan Commitment"). Upon the
request of the Borrower during the Professional Loan Revolving Period,
each Bank severally agrees to make advances to the Borrower in amounts
not to exceed in the aggregate at any one time outstanding the amount
of such Bank's Pro Rata Share of the Professional Fee Loan Commitment.
The Borrower may use the Professional Fee Loans during the
Professional Loan Revolving Period by borrowing, repaying and
reborrowing in accordance with the terms of this Agreement. The
aggregate outstanding principal under the Professional Fee Loans at
any time shall not exceed the Professional Fee Loan Commitment. If,
at any time, the aggregate outstanding principal under the
Professional Fee Loans exceeds the Professional Fee Loan Commitment,
then without any requirement of demand or notice from the Agent or the
Banks, the Borrower shall immediately pay to the Agent, for the
benefit of the Banks, the amount of such excess. On December 31,
1998, the Banks' commitment to make Professional Fee Loans shall
terminate. The entire principal amount outstanding under the
Professional Fee Loans together with any accrued and unpaid interest
shall be due and payable in full on the earlier to occur of: (i) at
the option of the Required Banks, the occurrence and continuation of
an Event of Default; or (ii) March 31, 2000.
-6-
<PAGE>
(i) Temporary Supplemental Loan. Beginning on the date of the
---------------------------
Fifth Amendment and continuing through December 31, 1998 (the
"Temporary Supplemental Loan Revolving Period") and subject to the
provisions contained in Paragraph 2.9(e) hereof, the Banks agree to
make available to the Borrower Temporary Supplemental Loans in the
aggregate maximum principal amount of $1,389,462 (the "Temporary
Supplemental Loan Commitment"). Upon the request of the Borrower
during the Temporary Supplemental Loan Revolving Period, each Bank
severally agrees to make advances to the Borrower in amounts not to
exceed in the aggregate at any one time outstanding the amount of such
Bank's Pro Rata Share of the Temporary Supplemental Loan Commitment.
The Borrower may use the Temporary Supplemental Loans during the
Temporary Supplemental Loan Revolving Period by borrowing, repaying
and reborrowing in accordance with the terms of this Agreement and
subject to the following additional conditions: (i) each borrowing
under the Temporary Supplemental Loan must be paid in full before the
Borrower will be permitted to make any additional borrowings under the
Temporary Supplemental Loan; (ii) each borrowing under the Temporary
Supplemental Loan must be paid in full within seven (7) calendar days
after the borrowing is advanced by the Banks; (iii) no borrowings will
be permitted under the Temporary Supplemental Loan during the seven
calendar days immediately following the repayment in full of a
borrowing under the Temporary Supplemental Loan. The aggregate
outstanding principal under the Temporary Supplemental Loans at any
time shall not exceed the Temporary Supplemental Loan Commitment. If,
at any time, the aggregate outstanding principal under the Temporary
Supplemental Loans exceeds the Temporary Supplemental Loan Commitment,
then without any requirement of demand or notice from the Agent or the
Banks, the Borrower shall immediately pay to the Agent, for the
benefit of the Banks the amount of such excess. On December 31, 1998,
the Banks' commitment to make Temporary Supplemental Loans shall
terminate and all amounts outstanding thereunder shall be immediately
due and payable in full.
4.4 Subparagraph 2.1(e)(ii) of the Credit Agreement is supplemented by
adding the following subparagraph (G) thereto:
(G) Subsequent to the date of the Fifth Amendment, no Adjustment
Request shall be effective.
4.5 The first paragraph of Paragraph 2.2 of the Credit Agreement is
supplemented by adding the following two sentences thereto:
-7-
<PAGE>
The Indebtedness of the Borrower to each Bank under the Professional
Fee Loan will be evidenced by a Professional Fee Note executed by the
Borrower in favor of such Bank. The Indebtedness of the Borrower to
each Bank under the Temporary Supplemental Loan will be evidenced by a
Temporary Supplemental Note executed by the Borrower in favor of such
Bank.
4.6 Paragraph 2.3 of the Credit Agreement is supplemented by adding the
following sentence thereto:
Each Bank shall be a lender in the Professional Fee Loan and the
Temporary Supplemental Loan in an amount equal to such Bank's Pro Rata
Share of the Professional Fee Loan Commitment and the Temporary
Supplemental Loan Commitment, respectively.
4.7 Paragraph 2.4 of the Credit Agreement is supplemented by adding the
following subparagraph (e) thereto:
(e) Funds advanced under the Professional Fee Loan shall be used
solely to pay the Extension Fee required under the Fifth Amendment and
the Professional Fees. Funds advanced under the Temporary
Supplemental Loan shall be used solely to pay payroll, payroll taxes
and other expenses directly related thereto.
4.8 The definition of "Applicable Margin" contained in Paragraph 2.6 of
the Credit Agreement shall be amended and restated as follows:
"Applicable Margin" means 1.75% with respect to Base Rate
Portions and 3.25% with respect to Libor Portions.
4.9 Subparagraph 2.7(a) of the Credit Agreement is supplemented by adding
the following sentence thereto:
Notwithstanding the foregoing, subsequent to the date of the Fifth
Amendment, the Banks shall make no further advances to the Borrower
under the Acquisition Commitment, the RSD Commitment or the LHS
Commitment.
4.10 Subparagraphs 2.8(b) and (c) of the Credit Agreement are amended and
restated in its entirety as follows:
(b) Banks. Required Banks shall have the right to terminate or
-----
reduce the Revolving Commitment, the Acquisition Commitment, the RSD
Commitment, the LHS Commitment, the Commitment or any of them at any
time, in their discretion and upon notice to Borrower , upon the
occurrence and during the continuation of any Event of Default
hereunder (except if an Event of Default described in Paragraph 8.1(i)
shall occur, in which case termination of the Commitment shall occur
automatically).
-8-
<PAGE>
(c) Restoration Only With Consent. Except as provided in
-----------------------------
Paragraph 2.1(e) hereof, any termination or reduction of the Revolving
Commitment, the Acquisition Commitment, the RSD Commitment, the LHS
Commitment, the Commitment or any of them pursuant to subparagraphs
2.8(a) and (b) shall be permanent, and any such Commitment cannot
thereafter be restored or increased without the written consent of the
Required Banks.
4.11 Paragraph 2.9 of the Credit Agreement is supplemented by adding the
following subparagraphs (d) and (e) thereto:
(d) Subsequent to the date of the Fifth Amendment, the Borrower
shall pay to the Agent, immediately upon receipt thereof, the
following: (i) any payments received by the Borrower outside the
Borrower's ordinary course of business (including, without limitation,
any and all tax refunds); and (ii) all proceeds from sales of assets
other than from sales in the ordinary course of the Borrower's
business, together with accrued and unpaid interest on the principal
amount being repaid. Any and all mandatory prepayments received by
the Agent or the Banks shall be applied to the Loans in the manner
deemed appropriate by the Agent and the Banks; provided however, that
if the Banks' preference is to apply such prepayment to a Libor
Portion and such application would result in a loss of earnings
payment due and owing by the Borrower under Paragraph 2.6(g) of the
Credit Agreement, such prepayment shall be held by the Agent in an
interest-bearing escrow account and applied to such Libor Portion on
the first date that such payment will not result in a loss of earnings
as described in Paragraph 2.6(g) hereof.
(e) Any new money raised by the Borrower by selling equity in the
Borrower or any subordinated debt obtained by the Borrower
(collectively, "New Equity") may be used by the Borrower in its
business as working capital or for acquisitions (subject to all other
terms, conditions and limitations contained in this Credit Agreement),
and shall not be payable to the Agent or Banks until and unless there
occurs and is continuing an Event of Default and an acceleration of
the Loans. During the existence of an Event of Default, all New
Equity generated by the Borrower shall be paid to the Agent, for the
benefit of the Banks. Notwithstanding the foregoing, if any New
Equity is generated by the Borrower prior to December 31, 1998, the
Borrower must pay the New Equity to the Banks in an amount sufficient
to pay in full all amounts owing to the Banks under the Temporary
Supplemental Loan. If the amount paid to the Bank pursuant to the
preceding sentence is not sufficient to pay in full all amounts owing
by the Borrower under the Temporary Supplemental Loan, such payment
shall constitute a permanent reduction of the amount available under
the Temporary Supplemental Loan. If the New Equity paid to the Banks
is sufficient to pay in full all amounts owing to the Banks under the
Temporary Supplemental Loan, the Temporary Supplemental Loan shall be
terminated. If New Equity is generated prior to December 31, 1998 and
no amounts are outstanding under the Temporary Supplemental Loan, the
Temporary Supplemental Loan Commitment shall be automatically and
permanently reduced by the amount of such New Equity.
-9-
<PAGE>
4.12 Paragraph 2.11 of the Credit Agreement is amended as follows:
(a) The first sentence of paragraph 2.11 is amended and restated in its
entirety as follows:
Borrower shall pay to Agent, for the benefit of Banks in accordance
with their Pro Rata Shares, a non-refundable commitment fee at the
rate of three-eighths of one percent (3/8%) per annum on the
unborrowed portion of the Revolving Commitment, Acquisition
Commitment, RSD Commitment and LHS Commitment (other than the
principal amount of any unborrowed portions of any such Commitments
that the Companies are prohibited from borrowing) from the date hereof
through the Revolving Commitment Termination Date, the Acquisition
Commitment Termination Date, the RSD Commitment Termination Date or
the LHS Commitment Termination Date, respectively, which fees shall be
payable at the offices of Agent quarterly in arrears on the first day
of each June, September, December and March and on the applicable
Termination Date.
(b) Paragraph 2.11 of the Credit Agreement is supplemented by adding the
following sentence thereto:
On June 1, 1999, the Borrower shall pay to the Agent, for the benefit
of the Banks, a fee equal to $300,000, provided that on such date the
Credit Agreement is in full force and effect.
4.13 Paragraph 2.13 of the Credit Agreement is supplemented by adding the
following sentence thereto:
Subsequent to the date of the Fifth Amendment, Borrower shall pay to
Agent a fee equal to: (a) $6,000 per month through March 31, 1999;
and (b) $10,000 per month from April 1, 1999 through March 31, 2000,
such fee to be payable on the first day of each calendar month.
-10-
<PAGE>
4.14 Paragraph 2A of the Credit Agreement is supplemented by adding the
following Paragraph 2A.8 thereto:
2A.8. Termination of Credits. From and after the date of the
----------------------
Fifth Amendment, no Letters of Credit will be issued by the Agent or
the Banks for the account of the Borrower or any of the Guarantors.
4.15 Paragraph 5.8 of the Credit Agreement is amended and restated in its
entirety as follows:
5.8. Books and Records. Keep and maintain accurate and
-----------------
complete books and records of Borrower's assets, liabilities and
operations consistent with sound business practices and in accordance
with GAAP, and, at reasonable times and upon reasonable advance notice
to the Companies (provided, however, that notice shall not be required
during the existence of an Event of Default), make or cause such books
and records together with the Borrower's real and personal property to
be available to the Agent, the Banks and/or their duly authorized
employees, agents and representatives as the Agent and/or the Banks
deem necessary for the purpose of reviewing collateral, auditing the
books, appraising collateral and for any other purpose deemed
necessary by the Agent and/or the Banks in their sole and absolute
discretion. The cost of all audits and appraisals performed by the
Agent and/or the Banks shall be borne by the Borrower.
4.16 Paragraphs 5.15, 5.16, 5.17 and 5.24 of the Credit Agreement are
amended and restated as follows:
5.15 Maximum Funded Debt to Adjusted EBITDA Ratio. Maintain as
--------------------------------------------
of the end of each fiscal quarter set forth in the left hand column
below a ratio of (i) Funded Debt of Parent and its consolidated
Subsidiaries to (ii) Adjusted EBITDA, of not greater than the ratio
set forth in the right hand column below:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Ratio
-------------------- ------
<S> <C>
September 30, 1998 7.25:1.00
December 31, 1998 6.50:1.00
March 31, 1999 5.50:1.00
June 30, 1999 5.00:1.00
September 30, 1999 4.50:1.00
December 31, 1999 4.50:1.00
March 31, 2000 4.50:1.00
</TABLE>
-11-
<PAGE>
5.16 Fixed Charge Coverage Ratio. Maintain as of the end of
---------------------------
each fiscal quarter set forth in the left hand column below a
consolidated Fixed Charge Coverage Ratio of not less than the ratio
set forth in the right hand column below:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Ratio
-------------------- ------
<S> <C>
September 30, 1998 0.80:1.00
December 31, 1998 0.85:1.00
March 31, 1999 0.90:1.00
June 30, 1999 1.00:1.00
September 30, 1999 1.00:1.00
December 31, 1999 1.00:1.00
March 31, 2000 1.00:1.00
</TABLE>
5.17 Maximum Leverage Ratio. Maintain as of the end of each
----------------------
fiscal quarter a ratio of consolidated Funded Debt to consolidated
Total Capitalization of not greater than 0.8:1.0.
5.24 Minimum EBITDA. Maintain as of the end of each fiscal
--------------
quarter set forth in the left hand column below EBITDA of not less
than the amount set forth in the right hand column below:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Minimum EBITDA
-------------------- --------------
<S> <C>
September 30, 1998 $3,250,000
December 31, 1998 $4,060,000
March 31, 1999 $5,008,000
June 30, 1999 $5,305,000
September 30, 1999 $5,450,000
December 31, 1999 $5,563,000
March 31, 2000 $5,701,000
</TABLE>
4.17 Paragraph 5 of the Credit Agreement is supplemented by adding the
following Paragraphs 5.25 through 5.28 thereto:
5.25. Conversion of Subordinated Seller Notes to Equity.
-------------------------------------------------
Borrower shall use its best efforts (which shall not include the
requirement by the Borrower to pay money) to convert to equity all
amounts outstanding under the Subordinated Seller Notes.
5.26. Reports from Borrower. With Respect to any month end that
---------------------
is not also a fiscal quarter or fiscal year end of the Borrower,
furnish to the Agent within 25 days after such month end the
following: (a) an income statement for such month (including a
comparison of actual vs. budgeted amounts), (b) a balance sheet as of
the end of such month, (c) a statement of cash flows for such month,
(d) an accounts receivable aging report as of the end of such month,
(e) an accounts payable aging report as of the end of such month, and
(f) a cash flow projection for the next succeeding two months.
-12-
<PAGE>
5.27. Tax Refunds. Upon request by the Agent, execute
-----------
documentation, in form and substance satisfactory to the Agent and the
Banks, to assign to the Agent, for the benefit of the Banks, any and
all federal, state, or other tax returns to which the Borrower or any
of the Companies is entitled.
5.28. Business Plan. Furnish to the Agent on or before June 1,
-------------
1999 a business plan, in form and substance satisfactory to the Agent
and the Banks, for the Borrower's fiscal year ending June 30, 2000.
4.18 Paragraph 6.1 of the Credit Agreement is amended by deleting the
dollar amount "Eight Million Dollars ($8,000,000)" where it appears and
replacing it with a dollar amount of "Eleven Million Dollars ($11,000,000)".
4.19 Paragraph 8.1(e) of the Credit Agreement is amended by substituting
the words "fifteen (15) days" in lieu of "thirty (30) days".
4.20 The name and address of the Agent in Paragraph 10.8 of the Credit
Agreement is amended and restated in its entirety as follows:
First Union National Bank
Capital Markets Special Situations
1339 Chestnut Street, 4th Floor
PA 4810
Philadelphia, PA 19107
Attention: Don D. Mishler, Senior Vice President
Telecopier: 215-973-6680
Section 5. Amendments to Amendment No. 4
-----------------------------
5.1 Notwithstanding the provisions contained in paragraph 4 of Amendment
No. 4, the Temporary Additional Fee for the period from August 16, 1998 through
the date hereof has been calculated at a rate of .0625% per month.
5.2 The obligations of the Companies pursuant to paragraphs 16 and 21 of
Amendment No. 4 have either been satisfied by the Companies or waived by the
Banks, it being agreed that any and all such obligations shall be given no
further force or effect. The provisions contained in paragraphs 17(b) and 17(c)
of Amendment No. 4 shall be given no further force or effect.
-13-
<PAGE>
Section 6. Release. In consideration for the Agent's and Banks' agreement
--------
to enter into this Agreement and for other valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the Borrower and each of the
Guarantors, on behalf of themselves and all persons or entities claiming by,
through, or under the Borrower or any Guarantor (collectively, the "Releasors")
do hereby unconditionally remise, release and forever discharge the Agent and
each Bank, their parents, subsidiaries, affiliated companies, past and present
stockholders, partners, officers, directors, employees, agents, attorneys,
divisions, successors and assigns (the "Releasees") from any and all manner of
actions, causes of action, suits, claims, counterclaims, crossclaims, defenses
and demands whatsoever, arising from any and all debts, demands, proceedings,
agreements, contracts, judgments, damages, accounts, reckonings, executions,
controversies, claims, liabilities, and facts whatsoever which the Releasors
have knowledge of or should have knowledge of as of the date hereof, whether
contingent or fixed, liquidated or unliquidated, at law or at equity, if any,
which the Releasors ever had, now have, and/or hereafter may have against the
Releasees, for or by reason of any cause, matter or thing whatsoever arising
from the beginning of the world through the date hereof, including, but not
limited to, all claims relating to the lending relationships between the
Releasors and the Releasees.
Section 7. Representations and Warranties. To induce the Agent and Banks
-------------------------------
to enter into this Agreement, each Company makes the following representations
and warranties to the Agent and Banks, each and all of which shall survive the
execution and delivery of this Agreement:
(a) All corporate actions by each Company and its officers, directors
and stockholders necessary for the due authorization, execution, delivery and
performance of this Agreement or any agreement executed, delivered or performed
by such Company have been taken.
(b) Each person executing the Agreement or any agreement executed in
connection therewith on behalf of each Company is an authorized officer of such
Company and is duly authorized by such Company to execute same.
(c) This Agreement and each document executed by the Companies
pursuant hereto, will be the legal, valid and binding obligation of each
Company, enforceable against them in accordance with their respective terms,
subject only to bankruptcy, insolvency, reorganization, moratorium or other laws
or equitable principles affecting creditors' rights generally.
(d) Each Company is in compliance in all material respects with all
laws (including all applicable environmental laws), regulations, and
requirements applicable to its business and has not received, and has no
knowledge of, any order or notice of any governmental investigation or of any
violation or claim of violation of any law, regulation or other governmental
requirement which would have a material adverse effect upon its business
operations or financial condition.
-14-
<PAGE>
(e) The execution, delivery and performance of this Agreement does not
and will not (i) conflict with, violate or result in a material breach of any
provision of any applicable law, rule, regulation or order or (ii) conflict or
result in a breach of any provision of the Articles of Incorporation, Charter or
Bylaws of any Company. No authorization, consent or approval or other action
by, and no notice of or filing with, any governmental authority or regulatory
bodies are required to be obtained or made by any Company for the due execution,
delivery and performance of this Agreement.
(f) Except as set forth on Schedule 2 attached hereto all other
representations and warranties (other than those made only as of a specific
date) made by the Companies in the Credit Agreement and the Loan Documents are
true and correct as of the date of this Agreement as if such representations and
warranties have been made on the date hereof.
(g) Except as provided in Section 1 hereof and except as set forth on
Schedule 3 attached hereto, the Borrower is in full compliance with all of the
covenants and conditions of the Credit Agreement and the Loan Documents, as
amended hereby.
(h) The Agent, on behalf of the Banks holds properly perfected
security interests in all of the Collateral pursuant to the terms and conditions
of, among other things, the Loan Documents, which liens and security interests
secure the payment and performance by the Borrower of the Loans. The Borrower
reaffirms the granting of the aforesaid liens and security interests to the
Agent to secure all of the Loans. The Borrower also reaffirms all of the terms
and conditions of the Security Agreement and acknowledges that the terms of the
Security Agreement and the other Loan Documents continue to be valid and binding
upon the Borrower subject only to bankruptcy, insolvency, reorganization,
moratorium or other laws or equitable principles affecting creditors' rights
generally.
(i) Except as provided in Section 1 hereof and except as set forth on
Schedule 4 attached hereto, no default of Event of Default has occurred and is
continuing under the Loan Documents and no event has occurred which, with the
passage of time, the giving of notice, or both, would result in a default or
Event of Default under the Loan Agreement or the Loan Documents.
(j) Set forth on Schedule 5 is a list of all depository bank accounts
maintained by the Companies, other than depository bank accounts maintained by
the Companies with either the Agent or the Banks.
Section 8. Conditions Precedent to Enforceability of Agreement. This
----------------------------------------------------
Agreement shall be deemed effective only after the occurrence of the following
events:
(a) Each Company's execution and delivery to the Agent of this
Agreement in form and substance satisfactory to the Agent;
-15-
<PAGE>
(b) The Borrower's execution and delivery to the Agent of the
Temporary Supplemental Notes and the Professional Fee Notes;
(c) Delivery to the Agent of the draft financial statements for the
Borrower's fiscal year ending June 30, 1998, together with actual financial
statements for the calendar month ending July 31, 1998;
(d) Delivery to the Agent of a certificate in form and substance
satisfactory to the Agent identifying the locations of the books and records of
each Company;
(e) Except as set forth on Schedule 8(e) hereto, the Borrower's
delivery to the Agent of the opinion of Borrower's counsel, dated as of the date
hereof, in form and substance satisfactory to the Agent;
(f) Except as set forth on Schedule 8(f) hereto, each Company's
delivery to the Agent of corporate resolutions of its Board of Directors,
certified by its corporate secretary, authorizing the appropriate officer of
such Company Borrower to execute on such Company's behalf this Agreement and
authorizing such Company to perform all of such Company's obligations
thereunder, together with the governing documents and good standing certificates
for each Company;
(g) The Borrower's payment to the Agent at the closing of an amount
sufficient to cover all of the Agent's fees, costs and expenses to date,
including, without limitation, the Agent's fees, costs and expenses incurred in
connection with the preparation and negotiation of the this Agreement (including
the fees of the Agent's counsel), which fees, costs and expenses the Borrower
authorizes the Agent to pay by setting off the Borrower's account at the Agent
by such amount;
(h) The Borrower's payment to the Agent of an Extension Fee equal to
$213,000; and
(i) The Borrower's execution and delivery or causing the execution and
delivery to the Bank of such agreements and documents as the Agent or the Banks,
in their sole discretion, request.
Section 9. Miscellaneous.
--------------
9.1 Whether or not the transactions contemplated by this Agreement are
fully consummated, the Borrower shall promptly pay (or reimburse, as the Agent
may elect) all fees, costs and expenses which the Agent and the Banks have
incurred or may hereafter incur in
-16-
<PAGE>
connection with the negotiation, preparation, reproduction, interpretation, and
enforcement of this Agreement, the collection of all amounts due hereunder and
thereunder, and any amendment, modification, consent or waiver which may be
hereafter requested by the Borrower or otherwise required. Such fees, costs and
expenses shall include, without limitation, the fees and disbursements of
counsel to the Agent or any of the Banks, appraisal and/or examination fees,
searches of public records, costs of filing and recording documents with public
offices, and similar costs and expenses incurred by the Agent or any of the
Banks. The Borrower's reimbursement obligations under this Section shall survive
any termination of the Loan Documents or this Agreement.
9.2 Except as expressly amended hereby, the Credit Agreement, the Loan
Documents, and all the other documents executed in connection therewith remain
in full force and effect and the Companies, the Agent and the Banks hereby
ratify and confirm their rights, duties and obligations under the Credit
Agreement, the Loan Documents, and all of the other documents executed in
connection therewith.
9.3 The Companies agree to take such further action to execute and deliver
to each other such additional agreements, instruments and documents as may
reasonably be required to carry out the purposes of this Agreement.
9.4 This Agreement shall be governed and construed in accordance with the
internal laws of the Commonwealth of Pennsylvania.
9.5 This Agreement contains the entire agreement between the parties
hereto with respect to the subject matter hereof and may not be modified or
changed in any way except in writing signed by all parties.
-17-
<PAGE>
IN WITNESS WHEREOF, and agreeing to be legally bound hereby, the
undersigned have caused this Agreement to be executed by their duly authorized
officers on the date and year first written.
Attest: HOME HEALTH CORPORATION OF DELAWARE, INC.
By: /s/ David S. Geller By: /s/ Bruce J. Feldman
-------------------- -------------------------------
Title: Chief Financial Officer Title: President
------------------------ ----------------------------
FIRST UNION NATIONAL BANK, for itself and
as Agent
By: /s/ Don D. Mishler
------------------------------
Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Martin E. Mueller
------------------------------
Title: Vice President
---------------------------
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By: /s/ Ivy L. Bibler
------------------------------
Title: First Vice President
---------------------------
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<PAGE>
TORONTO DOMINION (NEW YORK), N.C.
By: /s/ Jorge A. Garcia
------------------------------
Title: Vice President
---------------------------
FLEET NATIONAL BANK
By: /s/ Fred M. Manning
----------------------------
Title: Senior Vice President
-------------------------
-19-
<PAGE>
The undersigned Guarantors hereby acknowledge and agree to the foregoing
Fifth Amendment to Third Amended and Restated Credit Agreement and agree that
the Guaranty continues in full force and effect and guaranties all obligations
under the Credit Agreement, as amended thereby:
HOME HEALTH CORPORATION
OF AMERICA, INC. HOME HEALTH CORPORATION OF
PENNSYLVANIA HOME HEALTH AMERICA, INC.-TAMPA NURSING
SERVICES/PHILADELPHIA, INC. PENNSYLVANIA HOME HEALTH
PENNSYLVANIA HOME HEALTH SERVICES/SUBURBAN, INC.
SERVICES/NORTHEAST, INC. HHCA, INC.-DELAWARE
PENNSYLVANIA HOME CARE, INC. HHCA - SERVICE CO.
HOME CARE MEDICAL SUPPLY AND HOME HEALTH CORPORATION OF
EQUIPMENT, INC. AMERICA, INC. - EASTERN SHORE
NUTRITIONAL HOME HEALTH HOME HEALTH SYSTEMS, INC.
SERVICES, INC. HHCA TEXAS HOLDINGS, INC.
ALL CARE HEALTH SERVICES, INC. HHCA TEXAS GP, INC.
ALL-CARE HOME HEALTH SERVICES, HHCA TEXAS HEALTH SERVICES,
INC. L.P., by HHCA TEXAS GP, INC., its
HOME HEALTH CORPORATION OF general partner
AMERICA, INC./FT. PIERCE HHCA TEXAS INFUSION SERVICES,
HOME HEALTH SERVICES L.P., by HHCA TEXAS GP, INC., its
HHCD, INC. general partner
HHCDME, INC. HHCA TEXAS PRIVATE NURSING
PROFESSIONAL HOME HEALTH SERVICES, L.P., by HHCA TEXAS GP,
SERVICES, INC. INC., its general partner
HOME HEALTH CORPORATION OF HHCA TEXAS MEDICAL EQUIPMENT,
AMERICA, INC.-TAMPA L.P., by HHCA TEXAS GP, INC., its
HOME HEALTH CORPORATION OF general partner
AMERICA, INC.-TAMPA R.S.D. MANAGEMENT, INC.
DIAGNOSTIC SERVICES NURSING SERVICES HOME CARE, INC.
HOME HEALTH CORPORATION OF NURSING SERVICES HOME CARE, INC.
AMERICA, INC.-PINELLAS NURSING SERVICES STAFFING OF
HOME HEALTH CORPORATION OF N.H., INC.
AMERICA, INC.-ST. PETERSBURG NURSING SERVICES, INC.
(continued in next column) NAHATAN DRUG, INC.
ATTEST:
By: /s/ David S. Geller By: /s/ Bruce J. Feldman
-------------------------- ------------------------
Name: David S. Geller Name: Bruce J. Feldman
Title: Chief Financial Officer Title: President
-20-
<PAGE>
SCHEDULE 1
OUTSTANDING PRINCIPAL UNDER LOANS
AS OF September 23, 1998
a. Revolving Loan: $32,405,255.14
b. Acquisition Loan: $42,458,135.25
c. RSD Loan: $4,523,104.17
d. LHS Loan: $4,000,000
-21-
<PAGE>
SCHEDULE 2
Exceptions to Accuracy of Representations and Warranties
--------------------------------------------------------
3.1 -- As of the date hereof, the Companies have been advised that the
following entities are not in good standing due to the failure by the Companies
to pay all required annual taxes:
HHCA Texas Infusion Services, L.P.
HHCA Texas Private Nursing Services, L.P.
HHCA Texas Medical Equipment, L.P.
Nursing Services Home Care, Inc.
Nursing Services Homecare, Ltd.
Nursing Services, Inc.
Nahatan Drug, Inc.
Nursing Services Staffing of N.H., Inc.
3.4 -- Attached hereto are revisions to Exhibit F to the Credit Agreement.
3.6 --
(a) Pending Litigation --
(1) On February 19, 1998, a shareholder commenced litigation
against HHCA and certain named officers of HHCA. In the
lawsuit, entitled Koenig v. Feldman, et al., which was filed
-------------------------
in the United States District Court for the Eastern District
of Pennsylvania, the plaintiff alleges that the defendants,
in violation of federal securities laws, engaged in a scheme
to artificially inflate and maintain the market price of
HHCA's common stock by, among other things, making false and
misleading statements or failing to disclose material facts
in documents filed with the Securities and Exchange
Commission or in press releases issued by HHCA, particularly
with respect to HHCA's efforts to obtain timely payment for
HHCA's products and services and HHCA's termination of
business with certain managed care companies. The
plaintiff, who filed the lawsuit on behalf of himself and
all others similarly situated, seeks certification of the
lawsuit as a class action on behalf of all persons who
purchased HHCA's common stock between September 3, 1997 and
February 16, 1998.
(2) The former owners of an acquired business (Nahatan) have
commenced litigation against the Company for nonperformance
under certain provisions of the acquisition documents.
(b) Threatened Litigation -- The holders of the Seller Notes have
threatened to commence litigation to collect the amounts due thereunder.
3.8 -- The regulatory modification of the reimbursement structure has
materially and adversely affected (and the regulatory modification scheduled to
take effect in October 1999 may further materially and adversely affect) the
business, properties, operations and condition of the Companies.
-22-
<PAGE>
SCHEDULE 2
SECTION 3.4
SUPPLEMENT TO EXHIBIT F
Material Contracts (updates to Exhibit F)
- -------------------------------------------------------------------------------
. Employee Benefit Plans
. Profit Sharing Plan terminated during fiscal 1998
. Employee Benefit Plans HHSI
. Benefit plans terminated and benefits granted to Home Health System,
Inc. employees integrated with Home Health Corporation of America
benefit plans.
. Real Property Leases
. Replace Attachment B with Revised Attachment B September 1998
. Capital Lease Agreements
. Replace Attachment C with Revised Attachment C September 1998
. Other Agreements
. Management Agreement dated January 10, 1997 among Home Health
Corporation of America, Inc., PDN, Inc., Medical I.V., Inc., and Mark
H. O'Brien terminated April 1997.
. Mercy Northeast Management Agreement terminated August 1998
. Add St. Agnes Medical Center Management Agreement beginning August 1998.
. Financing Agreements
. Delete section in its entirety and replace with Revised Attachment C.
. Business Broker Agreement
. First Renaissance Ventures, Inc. Acquisition Fee Agreement expired
September 16, 1997
. First Union Capital Markets Corp. Fee Arrangement expired December
17, 1997
. Managed Care
Pennsylvania/New Jersey
- -----------------------
. Delete -- First Option Health Plan/Pennsylvania
. Delete -- Garden State Health Plan
. Delete -- MetraHealth
. Delete -- Oxford/Oak Tree Health Plan
. Add United Healthcare of the MidAtlantic
. Add Healthguard of Lancaster
New England
- -----------
. Delete New England Life Care
Delaware
- --------
. Delete -- Principal of Delaware (DelwareCare Medical Assistance)
Home Health Systems, Inc.
- ------------------------
. Delete Attachment D in it entirety and replace with Revised
Attachment D. Substantially all Managed Care Contracts have been
integrated into Home Health Corporation of America.
-23-
<PAGE>
SCHEDULE 2
SECTION 3.4
SUPPLEMENT TO EXHIBIT F
Revised Attachment B
Real Estate Leases
Schedule of Real Estate Leases
-24-
<PAGE>
SCHEDULE 2
SECTION 3.4
SUPPLEMENT TO EXHIBIT F
Revised Attachment B
Financing Agreements
Schedule of financing agreements.
-25-
<PAGE>
SCHEDULE 2
SECTION 3.4
SUPPLEMENT TO EXHIBIT F
Revised Attachment D
Material Contracts (updates to Exhibit F)
- -----------------------------------------
Chicago
- -------
. American HMO
. Celtic
. Chicago HMO
. The Dreyer Medical Clinic, S.C.
. Management Agreement dated October 10, 1994 between Dreyer
Medical Clinic, S.C. and Home Health Systems, Inc.
. Dreyers Health Plans Health Maintenance Organization
Consultant Provider Agreement dated August 1, 1993 between
Dreyer Health Plans and Total Care.
The Partnership Agreements with the following HHSI Partnerships provide
for each of them to pay management fees to their respective general
partners:
. Total Care Limited Partnership
. Total Care Limited Partnership II
. Personal Care Limited Partnership
. Total Care of Maryland Limited Partnership
. Total Care Company of Southcentral Pennsylvania
. Total Care of Northern Virginia Limited Partnership
. Total Care Health Systems Company of Eastern Pennsylvania
. Total Care Company of Central New Jersey, LP
. Total Care of Baltimore Limited Partnership
. Total Care Health Systems of Greater Philadelphia Limited Partnership
. Total Care of Chicago, LP
. Gulf Coast Total Care, LP
. Potomac Total Care, LP
-26-
<PAGE>
SCHEDULE 2
SECTION 3.11
SUPPLEMENT TO EXHIBIT F
MANAGEMENT AND CONSULTING AGREEMENTS
FOR SENIOR EXECUTIVE SERVICES
Unless otherwise noted, agreements whose term expired have not been renewed.
Employment Agreements--
<TABLE>
<CAPTION>
Acquisition Employee Annual Salary Term
- ------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
N/A Bruce Feldman $342,000 Aug 1998 - Aug 1999
N/A David Geller $165,000 July 1998 - July 2001
N/A Joseph Grilli $129,000 May 1998 - May 2001
N/A James Swiniuch $110,000 July 1998 - July 2001
</TABLE>
-27-
<PAGE>
SCHEDULE 3
Exceptions to Accuracy of Covenants
-----------------------------------
5.1 -- See the matters described on Schedule 2 re: 3.1.
5.7 -- The Companies failed to timely provide to Agent the Form S-3
registration statement filed in February/March 1998 in connection with the
registration of the Nahatan shares. The Companies have delivered such document
in connection with the execution of this Amendment.
5.10 -- See the matters described on Schedule 2 re: 3.6.
5.11 -- See the matters described on Schedule 2 re: 3.1.
5.12 -- The Companies have not paid all of the amounts constituting
Professional Fees.
5.15 -- The Companies were not in compliance with this covenant as of June
30, 1998.
5.16 -- The Companies were not in compliance with this covenant as of June
30, 1998.
5.22 -- The Companies failed to deliver to Agent July's monthly financial
statements. The Companies have delivered such financial statements in connection
with the execution of this Amendment.
5.24 -- The Companies were not in compliance with this covenant as of
June 30, 1998 and July 31, 1998.
6.4 -- The Companies have been advised recently that one of the holders of
Unsubordinated Seller Debt has confessed judgment against Pennsylvania Home Care
and Home Health Corporation of America, Inc. in the amount of $36,717.89.
6.6 -- In July 1998 the Companies made a payment in the amount of
$42,678.14 on account of the RSD Note, which payment was approved in advance by
the banks and for which a waiver was granted.
-28-
<PAGE>
SCHEDULE 4
Exceptions to No Defaults
-------------------------
8.1(a) -- See the matters described on Schedule 3 re: 5.12.
8.1(b) -- See the matters described on Schedule 2.
8.1(c) -- Since May 1998 the Companies have not been permitted to make
required payments to the holders of Seller Notes.
8.1(d) -- See the matters described on Schedule 3.
8.1(e) -- See the matters described on Schedule 3.
-29-
<PAGE>
SCHEDULE 5
List of Depository Bank Accounts
-30-
<PAGE>
EXHIBIT A
Principal Balance of Subordinated Seller Notes as of June 30, 1998
-31-
<PAGE>
EXHIBIT B
Principal Balance of Unsubordinated Seller Notes as of June 30, 1998
-32-
<PAGE>
EXHIBIT 11.1
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1998
The following calculation is submitted in accordance with the Securities Act of
1934:
1996 1996(1) 1997 1998
------ ------ ------ --------
(amounts in thousands,
except per share data)
Net income (loss) $3,294 $2,133 $2,814 $(24,848)
Write-off of discount on preferred stock (787) (787) - -
Dividends on preferred stock (117) (117) (6) -
------ ------ ------ --------
Net income (loss) available to common
stockholders $2,390 $1,229 $2,808 $(24,848)
====== ====== ====== ========
Weighted average number of common
shares outstanding 6,535 6,535 8,549 9,316
====== ====== ====== ========
Net income (loss) per share $ 0.37 $ 0.19 $ 0.33 $ (2.67)
====== ====== ====== ========
(1) Reflects net income and net income per share after extraordinary loss of
$1,160 on early extinguishment of indebtedness.
<PAGE>
EXHIBIT 11.2
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1998
The following calculation is submitted in accordance with the Securities Act of
1934:
1996 1996(1) 1997 1998
------ ------- ------ --------
(amounts in thousands,
except per share data)
Net income (loss) $3,294 $2,133 $2,814 $(24,848)
Write-off of discount on preferred stock (787) (787) - -
Dividends on preferred stock (117) (117) (6) -
------ ------ ------ --------
Net income (loss) available to common
stockholders $2,390 $1,229 $2,808 $(24,848)
====== ====== ====== ========
Weighted average number of maximum
shares outstanding during year 6,535 6,535 8,549 9,316
Weighted average number of maximum
shares subject to exercise under
outstanding stock options and
warrants, net of treasury shares
assumed repurchased 118 118 138 -
------ ------ ------ --------
Weighted average number of common and
common equivalent shares outstanding 6,653 6,653 8,687 9,316
====== ====== ====== ========
Net income (loss) per share $ 0.36 $ 0.18 $ 0.32 $ (2.67)
====== ====== ====== ========
(1) Reflects net income and net income per share after extraordinary loss of
$1,160 on early extinguishment of indebtedness.
<PAGE>
EXHIBIT 21
HOME HEALTH CORPORATION OF AMERICA, INC.
SUBSIDIARIES OF THE COMPANY
AS OF JUNE 30, 1998
State or Jurisdiction in
Subsidiary which Incorporated
---------- ------------------------
Pennsylvania Home Health Services/Philadelphia, Inc. Pennsylvania
Pennsylvania Home Health Service/Northeast, Inc. Pennsylvania
Pennsylvania Home Care, Inc. Pennsylvania
Home Care Medical Supply and Equipment, Inc. Pennsylvania
Nutritional Home Health Services, Inc. Pennsylvania
All Care Health Services, Inc. Florida
All-Care Home Health Services, Inc. Delaware
Home Health Corporation of America, Inc./Ft. Pierce
Home Health Services Florida
HHCD, Inc. Delaware
HHCDME, Inc. Delaware
Professional Home Health Services, Inc. Delaware
Home Health Corporation of America, Inc. - Tampa Florida
Home Health Corporation of America, Inc. - Tampa
Diagnostic Services Florida
Home Health Corporation of America, Inc. - Pinellas Florida
Home Health Corporation of America, Inc. - St. Petersburg Florida
Home Health Corporation of America, Inc. - Tampa Nursing Florida
(continued)
<PAGE>
EXHIBIT 21
HOME HEALTH CORPORATION OF AMERICA, INC.
SUBSIDIARIES OF THE COMPANY
AS OF JUNE 30, 1998
(continued)
State or Jurisdiction in
Subsidiary which Incorporated
---------- ------------------------
Pennsylvania Home Health Services/Suburban, Inc. Pennsylvania
Home Health Corporation of Delaware, Inc. Delaware
Nahatan Drug, Inc. Massachusetts
HHCA, Inc. - Delaware Delaware
HHCA - Service Co. Pennsylvania
Home Health Corporation of America, Inc. - Eastern Shore Maryland
Home Health Systems, Inc. Delaware
HHCA Texas Holdings, Inc. Delaware
HHCA Texas GP, Inc. Delaware
R.S.D. Management, Inc. New Hampshire
Nursing Services Homecare, Inc. Massachusetts
Nursing Services Homecare, Ltd. Massachusetts
Nursing Services Staffing of N.H., Inc. New Hampshire
Nursing Services, Inc. Massachusetts
Limited Partnerships Jurisdiction of Formation
- -------------------- -------------------------
HHCA Texas Health Services, L.P. Delaware
HHCA Texas Infusion Services, L.P. Delaware
HHCA Texas Private Nursing Services, L.P. Delaware
HHCA Texas Medical Equipment, L.P. Delaware
<PAGE>
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 September 2, 1998, except for paragraph 1 of note 5, for which the
date is September 23, 1998, on our audits of the consolidated financial
statements and financial statement schedule of the Company as of June 30, 1997
and 1998, and for each of the three years in the period ended June 30, 1998,
which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998 AND THE RELATED STATEMENT OF OPERATIONS FOR THE YEAR
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,639
<SECURITIES> 0
<RECEIVABLES> 71,095
<ALLOWANCES> 12,187
<INVENTORY> 2,257
<CURRENT-ASSETS> 70,722
<PP&E> 32,605
<DEPRECIATION> 15,869
<TOTAL-ASSETS> 136,839
<CURRENT-LIABILITIES> 22,340
<BONDS> 0
0
0
<COMMON> 44,296
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 136,839
<SALES> 174,335
<TOTAL-REVENUES> 174,335
<CGS> 82,708
<TOTAL-COSTS> 166,055
<OTHER-EXPENSES> 29,886<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,508
<INCOME-PRETAX> (29,164)
<INCOME-TAX> (4,316)
<INCOME-CONTINUING> (24,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,848)
<EPS-PRIMARY> (2.67)
<EPS-DILUTED> (2.67)
<FN>
<F1>Other expenses includes pretax accounting charges during the year ended June
30, 1998 of $29.9 million comprised of a writedown of goodwill of $23.5
million, restructuring costs of $5.2 million and the write-off of deferred
costs of $1.2 million related to a terminated acquisition.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 464
<SECURITIES> 0
<RECEIVABLES> 67,257
<ALLOWANCES> 10,847
<INVENTORY> 3,262
<CURRENT-ASSETS> 64,720
<PP&E> 28,872
<DEPRECIATION> 10,611
<TOTAL-ASSETS> 153,263
<CURRENT-LIABILITIES> 21,516
<BONDS> 0
0
0
<COMMON> 43,927
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 153,263
<SALES> 150,232
<TOTAL-REVENUES> 150,232
<CGS> 71,818
<TOTAL-COSTS> 138,373
<OTHER-EXPENSES> 3,009<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,849
<INCOME-PRETAX> 5,001
<INCOME-TAX> 2,187
<INCOME-CONTINUING> 2,814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,814
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
<FN>
<F1>OTHER EXPENSES ARE COMPRISED OF $1,584 RELATED TO MERGER COSTS INCURRED IN
CONNECTION WITH A POOLING TRANSACTION IN NOVEMBER 1996, $300 RELATED TO THE
WRITE-OFF OF DEFERRED OFFERING COSTS AS A RESULT OF THE CANCELLATION ON
DECEMBER 30, 1996 OF A REGISTRATION OF SHARES OF THE COMPANY'S COMMON STOCK,
AND $1,125 RELATED TO A 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.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1996 AND THE RELATED STATEMENT OF OPERATIONS FOR THE YEAR
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,695
<SECURITIES> 0
<RECEIVABLES> 33,698
<ALLOWANCES> 5,656
<INVENTORY> 1,583
<CURRENT-ASSETS> 33,428
<PP&E> 13,903
<DEPRECIATION> 4,958
<TOTAL-ASSETS> 69,975
<CURRENT-LIABILITIES> 13,082
<BONDS> 0
500
0
<COMMON> 33,725
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 69,975
<SALES> 95,878
<TOTAL-REVENUES> 95,878
<CGS> 46,212
<TOTAL-COSTS> 87,696
<OTHER-EXPENSES> 913<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,579
<INCOME-PRETAX> 5,690
<INCOME-TAX> 2,396
<INCOME-CONTINUING> 3,294
<DISCONTINUED> 0
<EXTRAORDINARY> (1,161)<F2>
<CHANGES> 0
<NET-INCOME> 2,133
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
<FN>
<F1>OTHER EXPENSES INCLUDES THE WRITE-OFF OF DEFERRED FINANCING FEES, THE
UNAMORTIZED DISCOUNT ON CERTAIN NOTES PAYABLE REDEEMED IN CONNECTION WITH THE
COMPANY'S INITIAL PUBLIC OFFERING AND INTEREST AND OTHER COSTS INCURRED IN
CONNECTION WITH CERTAIN BRIDGE FINANCING.
<F2>EXTRAORDINARY ITEM REPRESENTS LOSS ON EARLY EXTINGUISHMENT OF DEBT.
</FN>
</TABLE>
