<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 0-26938
HOME HEALTH CORPORATION OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2224800
- ------------------------------------------------ ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2200 Renaissance Boulevard
Suite 300
King of Prussia, PA 19406
- ------------------------------------------------ ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (610) 272-1717
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding at January 31, 1998
- ------------------------------ ---------------------------------
Common stock, no par value 9,269,592
Exhibit index is located on page 21
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 3
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997
AND DECEMBER 31, 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED DECEMBER 31, 1997 AND 1996 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ----------------------------
1996 1997 1996 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues $32,967 $45,742 $60,085 $92,788
Operating costs and expenses:
Patient care costs 15,700 21,659 28,959 43,587
General and administrative 11,784 18,875 21,227 36,284
Provision for doubtful accounts 1,274 1,404 2,369 2,876
Depreciation 338 593 617 1,096
Amortization 465 833 820 1,584
Interest expense, net 701 1,795 1,170 3,634
Merger and other nonrecurring expenses 1,584 4,880 1,584 4,880
Writedown of goodwill - 23,516 - 23,516
----------- ---------- ----------- ----------
Total operating costs and expenses 31,846 73,555 56,746 117,457
----------- ---------- ----------- ----------
Income (loss) before income taxes 1,121 (27,813) 3,339 (24,669)
Provision (benefit)for income taxes 432 (3,957) 1,295 (2,841)
----------- ---------- ----------- ----------
Net income (loss) $689 $(23,856) $2,044 $(21,828)
=========== ========== =========== ==========
Other data, including per share data:
Basic per share data:
Net income (loss) available to common
stockholders $689 $(23,856) $2,038 $(21,828)
=========== ========== =========== ==========
Net income (loss) per common share $0.08 $(2.60) $0.25 $(2.38)
=========== ========== =========== ==========
Weighted average shares used in computing
net income (loss) per common share 8,377 9,158 8,201 9,153
=========== ========== =========== ==========
Diluted per share data:
Net income (loss) available to common
stockholders $711 $(23,856) $2,121 $(21,828)
=========== ========== =========== ==========
Net income (loss) per common share $0.08 $(2.60) $0.24 $(2.38)
=========== ========== =========== ==========
Weighted average shares used in computing
net income (loss) per common share 8,732 9,158 8,684 9,153
=========== ========== =========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1997
------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $464 $2,129
Accounts receivable, net of allowance for doubtful accounts of
$10,847 and $12,461, respectively 56,410 58,497
Inventories 3,262 3,109
Prepaid expenses and other 2,018 3,685
Income taxes 2,566 5,185
------------- -------------
Total current assets 64,720 72,605
Property and equipment, net 18,261 17,150
Goodwill 68,202 48,068
Other assets, net 2,080 2,380
------------- -------------
Total assets $153,263 $140,203
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $6,263 $4,976
Accounts payable 5,705 5,242
Accrued salaries and related employee benefits 4,788 5,304
Restructuring and other nonrecurring liabilities 764 4,172
Other current liabilities 3,996 5,563
------------- -------------
Total current liabilities 21,516 25,257
Long-term debt, net of current portion 78,793 81,163
Restructuring and other nonrecurring liabilities 386 2,162
Other liabilities 1,996 2,685
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 9,250
shares issued, 9,129 and 9,158 outstanding at June 30 and December
31, respectively 43,927 44,119
Retained earnings (accumulated deficit) 6,645 (15,183)
------------- -------------
Total stockholders' equity 50,572 28,936
------------- -------------
Total liabilities and stockholders' equity $153,263 $140,203
============= =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
---------------------------------
1996 1997
----------- ------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $2,044 (21,828)
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,386 4,379
Provision for doubtful accounts 2,369 2,876
Deferred income taxes 52 -
Writedown of goodwill - 23,516
Write-off of terminated merger costs - 1,202
Net changes in certain assets and liabilities, net of acquisitions:
Accounts receivable (8,412) (7,726)
Inventories (613) 153
Prepaid expenses and other (609) (1,666)
Income taxes (27) (2,620)
Restructuring and other nonrecurring 1,150 2,843
Accounts payable, accrued expenses and other (4,903) 1,619
----------- ------------
Net cash flows provided by (used in) operating activities (6,563) 2,748
----------- ------------
Cash flows used in investing activities:
Purchases of property and equipment (2,107) (1,345)
Cash paid for acquisitions, net of cash acquired (14,141) (372)
Increase in other assets (585) (273)
----------- ------------
Net cash flows used in investing activities (16,833) (1,990)
----------- ------------
Cash flows provided by financing activities:
Proceeds from long-term debt 24,969 4,000
Repayments of long-term debt (1,080) (3,285)
Payment of deferred financing fees (209) -
Proceeds from issuance of common stock - 192
----------- ------------
Net cash flows provided by financing activities 23,680 907
----------- ------------
Net increase in cash and cash equivalents 284 1,665
Cash and cash equivalents, beginning of period 1,695 464
----------- ------------
Cash and cash equivalents, end of period $1,979 $2,129
=========== ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Home
Health Corporation of America, Inc. and Subsidiaries (the "Company" or "HHCA")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Additionally, although the June
30, 1997 condensed consolidated balance sheet was derived from audited financial
statements, it does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended December 31, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 1998. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
1997 included in the Company's Form 10-K/A filed with the Securities and
Exchange Commission.
2. PER SHARE DATA
The Company adopted Statement of Financial Accounting Standard No. 128 ("SFAS
128"), "Earnings Per Share," during the quarter ended December 31, 1997. The
adoption of SFAS 128 did not have a material effect on the Company's earnings
per share. Earnings per share and common shares outstanding for the three and
six months ended December 31, 1996 have been restated for comparative purposes.
Basic earnings per share. Basic earnings per share is calculated by dividing
income available to common stockholders (the basic numerator) by the weighted-
average number of common shares outstanding (the basic denominator) during the
period. Income available to common stockholders is computed by deducting
dividends declared in the period on preferred stock (whether or not paid) and
dividends accumulated for the period on cumulative preferred stock.
Diluted earnings per share. Diluted earnings per share is calculated by
adjusting the basic numerator to add back the after-tax amount of dividends and
interest recognized in the period associated with potentially issuable common
shares and for any other changes in income or loss that would result from the
assumed conversion or exercise of potentially issuable common shares.
Additionally, the basic denominator is increased to include the additional
number of common shares that would have been outstanding if the potentially
issuable common shares had been issued, if dilutive. The treasury stock method
is used to reflect the dilutive effect of outstanding options and warrants.
Under SFAS 128, the computation of diluted EPS does not assume the conversion or
exercise of securities that have an antidilutive effect on earnings per share
(i.e., increase the earnings-per-share amount or decrease the loss-per-share
amount).
6
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3. MEDICARE REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
In 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 visits. For cost
reporting periods beginning on or after October 1, 1997, Medicare-reimbursed
home health agencies will have their cost limits determined as the lesser of (i)
their actual costs, (ii) cost limits based on 105% of median costs of
freestanding home health agencies, or (iii) an agency-specific per-patient cost
limits, based on 98% of 1994 costs adjusted for inflation. The new IPS cost
limits will apply to the Company for the cost reporting period beginning July 1,
1998, except for the Company's Medicare-certified nursing agency located in
Texas, for which the new cost limits will apply for the cost reporting period
beginning January 1, 1998. During the three months ended December 31, 1997,
various regulations and interpretations of the Budget Act were published which
enabled the Company to calculate the potential impact on reimbursement of the
new IPS cost limits. Management's analysis, without giving effect to the
restructuring discussed below, estimated the aggregate impact on reimbursement
to exceed $5.0 million for certain of the Company's Medicare-certified nursing
agencies. After giving effect to the restructuring, management estimates that
the aggregate impact on reimbursement will be between $2.0 to $4.5 million,
assuming no additional cost reductions are made during the remainder of fiscal
1998 or during fiscal 1999. Management is reviewing potential additional cost
reductions to reduce the estimated impact of the IPS.
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. Approximately 5.8% of the Company's net revenues are derived from
reimbursement of oxygen services affected by the reduction in the fee schedule,
which may result in a significant impact on the profitability of these services.
During the three months ended December 31, 1997, the Company developed a
restructuring plan to aggressively respond to the above reductions in Medicare
reimbursement by fundamentally reshaping the Company for long-term growth in the
changing environment. This plan, as well as management's assessment of the
continuing value of goodwill under the changing reimbursement environment,
resulted in pre-tax accounting charges during the three months ended December
31, 1997 of $28.4 million which was comprised of a writedown of goodwill of
$23.5 million, restructuring costs of $3.7 million and the write-off of deferred
costs aggregating $1.2 million related to a terminated acquisition.
The writedown of goodwill was required under Statement of Financial Accounting
Standard No. 121 ("SFAS 121), "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed of," based upon management's
estimate of the impact of the announced reductions in oxygen reimbursement and
the expected impact of the IPS on the Company's continuing operations.
Management determined that these impacts indicated the carrying value of
goodwill should be written down by $23.5 million, which is 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-
certified nursing agencies. This writedown is reflected in the accompanying
condensed consolidated statement of operations.
The restructuring costs of $3.7 million are comprised of (i) the closure and
consolidation of certain branch locations, including the accrual of estimated
facility exit costs and future lease costs, the
7
<PAGE>
write-off of leasehold improvements, and other exit costs aggregating $1.6
million, (ii) estimated employee severance costs in connection with the related
termination of employees, including certain former owners of businesses
acquired, aggregating $1.7 million and (iii) certain other costs related to the
restructuring aggregating $370,000. The restructuring plan is expected to be
substantially implemented by March 1998. The cash portion of the pre-tax
accounting charge is estimated to be approximately $3.7 million. No material
amounts were charged against the related accruals during the three months ended
December 31, 1997. The restructuring costs have been included in merger and
other nonrecurring expenses in the accompanying condensed consolidated statement
of operations.
On February 11, 1998, the Company and U.S. HomeCare Corporation ("USHO") agreed
to the termination of the proposed merger (the "Terminated Merger") between the
two companies. Deferred costs associated with the Terminated Merger of $1.2
million were written-off during the three months ended December 31, 1997 and
included in merger and other nonrecurring expenses in the accompanying
condensed consolidated statement of operations.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the six months ended
December 31:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
(in thousands)
<S> <C> <C>
Non-cash investing and financing activities:
Acquisitions:
Assets acquired and amounts paid to former owners $27,656 $ 372
Less:
Liabilities assumed and acquisition costs 7,940 -
Issuance of subordinated seller notes 3,625 -
Issuance of common stock 1,950 -
---------------- -----------------
Cash paid, net of cash acquired $14,141 $ 372
================ =================
Capital lease obligations incurred $ 755 $ 744
================ =================
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 shares for the Company's common stock
$ 1,250 -
================ =================
</TABLE>
8
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5. CREDIT FACILITY
On February 17, 1998, the Company's senior credit facility (the "Credit
Facility") was amended to limit aggregate borrowings under the Credit Facility,
increase the interest rate on such borrowings, and waived and amended certain
financial covenants. See "Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD OUTLOOK AND RISKS
The Company is subject to significant external factors which could significantly
impact its business, including changes in Medicare reimbursement, government
fraud and abuse initiatives and other such factors which are beyond the control
of the Company. Certain of these factors are discussed herein. Refer to the
Company's Form 10K/A for the year ended June 30, 1997 for a discussion of
additional factors which management believes may significantly impact the
Company. These factors, as well as future changes in reimbursement and changes
in interpretations of regulations, could cause future results to differ
materially from historical trends.
GENERAL
The financial condition and results of operations of the Company for the three
and six months ended December 31, 1997 compared with the three and six months
ended December 31, 1996 have been affected by both acquisitions and internal
growth.
ACQUISITIONS
The results of operations of the companies acquired during fiscal 1997 are
included in the Company's consolidated results of operations from their
respective acquisition dates, which occurred at various times during fiscal
1997. Accordingly, the operating results for any fiscal quarter are not
necessarily comparable with the results for any past or future fiscal quarter.
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. There were no acquisitions
from July 1, 1997 through December 31, 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 these acquisitions. The Company paid $372,000
in additional consideration for certain acquisitions during the six months ended
December 31, 1997. As a result of the changing reimbursement environment,
management expects a slowing of growth through acquisition. Additionally, the
Company is currently restricted by its senior credit facility from,
acquisitions. See "Liquidity and Capital Resources."
On February 11, 1998, the Company and U.S. HomeCare Corporation ("USHO") agreed
to the termination of the proposed merger (the "Terminated Merger") between the
two companies. Deferred costs associated with the Terminated Merger of $1.2
million were written-off during the three months ended December 31, 1997 and
included in merger and other nonrecurring expenses in the accompanying condensed
consolidated statement of operations.
INTERNAL GROWTH
Three months ended December 31, 1997 compared to the three months ended December
31. 1996. The Company experienced a decrease in its internal growth rate during
the three months ended December 31, 1997 to 4.2% from 14.5% for the comparable
period in fiscal 1997. Internal growth for the three months ended December 31,
1997 was comprised of an increase of 12.8%, or $1.5 million, in same-branch
Medicare cost-reimbursed nursing and related patient services net revenues,
offset by a decrease of 1.3% or $234,000, in net revenues for services and
products and non-Medicare nursing services (i.e., non-Medicare nursing and
related patient services, 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 10.7%
increase in visits from same-branch Medicare cost-reimbursed nursing branches
and increased costs incurred by these branches resulting in additional cost
reimbursement. The decrease in net revenues relating to services and products
and non-Medicare nursing services was due to various 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 and losing certain contracts due to the Company's
unwillingness to agree to rate reductions with certain managed care contracts.
These events primarily impacted the branches which provide durable medical
equipment and respiratory services, which experienced an aggregate decrease in
net revenue for these services for the three months ended December 31, 1997 of
15.9%, or $1.4 million. This decrease was offset by an increse in non-Medicare
nursing and infusion therapy services of 12.0%, or $1.2 million, which resulted
10
<PAGE>
from cross-selling of these services and increased patient referrals.
Six months ended December 31, 1997 compared to the six months ended December 31.
1996. The Company experienced an increase in its internal growth rate during the
six months ended December 31, 1997 of 13.3% as compared to 10.4% for the
comparable period in fiscal 1997. This increase was comprised of an increase of
3.2%, or $4.8 million, in same-branch Medicare cost-reimbursed nursing and
related patient services net revenues and an increase of 7.1%, or $2.3 million,
in net revenues for services and products and non-Medicare nursing services. The
increase in net revenues relating to Medicare cost-reimbursed nursing and
related patient services for these periods resulted from an 11.8% increase in
visits from same-branch Medicare cost-reimbursed nursing branches and increased
costs incurred by these branches resulting in additional cost reimbursement. The
increase in net revenues relating to services and products non-Medicare nursing
services was comprised of an increase of 16.7%, or $2.9 million, in non-Medicare
nursing and infusion therapy services, offset by a decrease of 4.0%, or
$601,000, in durable medical equipment and respiratory therapy services. The
increase in non-Medicare nursing and infusion therapy services resulted from
effective cross-selling of these services and increased patient referrals. The
decrease in durable medical equipment and respiratory therapy services was due
to various 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 and losing
certain contracts due to the Company's unwillingness to agree to rate reductions
with certain managed care contracts.
The Company may continue to experience a decrease in the internal growth rate
related to respiratory therapy services as a result of the reduction on January
1, 1998 in Medicare reimbursement for oxygen services. Additionally, the Company
may experience a decrease in the internal growth rate for its Medicare-certified
nursing agencies when it is subject to the IPS. 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.
11
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RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUE FOR PERCENTAGE OF NET REVENUE FOR
THE THREE MONTHS ENDED THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ----------------------------------
1996 1997 1996 1997
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Patient care costs 47.6 47.4 48.2 47.0
General and administrative 35.7 41.3 35.3 39.1
Provision for doubtful accounts 3.9 3.1 3.9 3.1
Depreciation 1.0 1.3 1.0 1.2
Amortization 1.4 1.8 1.4 1.7
Interest expense, net 2.1 3.9 1.9 3.9
Merger and restructuring costs 4.8 10.7 2.6 5.3
Writedown of goodwill - 51.4 - 25.3
------------ -------------- ------------- --------------
Income (loss) before income taxes 3.5 (60.9) 5.7 (26.6)
Income tax expense (benefit) 1.3 (8.7) 2.2 (3.1)
------------ -------------- ------------- --------------
Net income (loss) 2.2% (52.2)% 3.5% (23.5)%
============ ============== ============= ==============
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1996.
Net revenues. For the three months ended December 31, 1997, net revenues
increased to $45.7 million. This represented an increase of $12.8 million, or
38.8%, over the three months ended December 31, 1996. Of this increase, $11.5
million, or 90.2%, was attributable to acquisitions completed during the second,
third and fourth quarters of fiscal 1997. The balance of the increase was due
to internal growth of 4.2%, or $1.3 million. See "Internal Growth." Net
revenues from nursing and related patient services increased from $20.8 million
for the three months ended December 31, 1996 to $30.6 million for the three
months ended December 31, 1997, a 47% increase. Total Medicare nursing visits
increased 56% to 264,000 visits for the three months ended December 31, 1997.
Total non-Medicare nursing hourly and visit volume increased 40% and 11%,
respectively, to 305,000 hours and 53,000 visits, respectively, for the three
months ended December 31, 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 $3.0 million, or 24.3%, to $15.2 million for the three months ended
December 31, 1997, from $12.2 million for the three months ended December 31,
1996, primarily as a result of acquisitions, as well as increased referrals and
effective cross-selling of infusion therapy services to the Company's nursing
patients. Durable medical equipment and respiratory therapy net revenues,
excluding net revenues from acquisitions, decreased $1.4 million, or 15.9%, for
the three months ended December 31, 1997 from the three months ended December
31, 1996. See "Internal Growth."
Patient care costs. For the three months ended December 31, 1997, patient care
costs increased to $21.7 million. This represented an increase of $6.0 million,
or 38.0%, over the three months
12
<PAGE>
ended December 31, 1996. This increase principally related to increases in net
revenues of $12.8 million. These costs decreased slightly as a percentage of net
revenues from 47.6% to 47.4%. The Company may experience an increase in patient
care costs as a percentage of net revenues in the future as a result of the
reduction on January 1, 1998 in Medicare oxygen reimbursement, continued
pressure by managed care payors to reduce their reimbursement to the Company for
its products and services and the lower IPS cost limits for the Medicare-
certified nursing agencies. Conversely, as the Company continues to cease
providing services and products to selected managed care companies whose
contracted rates are marginally profitable, the Company may experience a
decrease in patient care costs as a percentage of net revenues.
General and administrative expenses. For the three months ended December 31,
1997, general and administrative expenses increased to $18.9 million. This
represented an increase of $7.1 million, or 60.2%, over the three months ended
December 31, 1996. These costs increased as a percentage of net revenues from
35.7% to 41.3%. These increases were due to various factors including $4.3
million related to the acquisitions completed during the second, third and
fourth quarters of fiscal 1997, with the balance resulting from increases in
costs such as increased staffing in certain departments, including credit and
collections, management information services and key management positions within
the Company to support the Company's current and anticipated future growth,
increased costs associated with implementing the Company's regional coordinated
care centers, and increases in insurance, telecommunication and other operating
expenses as a result of the growth in net revenues and volumes. In an effort to
reduce operating costs in the future, the Company recorded a restructuring
charge during the three months ended December 31, 1997. See "Merger and Other
nonrecurring expenses."
Provision for doubtful accounts. For the three months ended December 31, 1997,
provision for doubtful accounts increased to $1.4 million. This represented an
increase of $130,000, or 10.2%, over the three months ended December 31, 1996.
Provision for doubtful accounts decreased slightly as a percentage of net
revenues from 3.9% to 3.1%. This was due principally to the increase in Medicare
cost-reimbursed nursing and related patient services net revenues as a
percentage of total net revenues to 43.5% for the three months ended December
31, 1997 from 38.8% for the three months ended December 31, 1996, which
do not require a provision for doubtful accounts.
Depreciation. For the three months ended December 31, 1997, depreciation
expense increased to $593,000. This represented an increase of $255,000, or
75.4%, over the three months ended December 31, 1996. This increase was
attributable to fixed assets acquired in connection with acquisitions and
capital expenditures related to vehicles, management information systems and
equipment to support the Company's internal growth.
Amortization. For the three months ended December 31, 1997, amortization
increased to $833,000. This represented an increase of $368,000, or 79.1%, over
the three months ended December 31, 1996. This increase was attributable to
amortization of goodwill arising from acquisitions in fiscal 1997.
Interest expense, net. Interest expense, net, increased $1.1 million, or
156.1%, to $1.8 million during the three months ended December 31, 1997 compared
with the three months ended December 31, 1996. This increase resulted from
increased borrowings for acquisitions in fiscal 1997 and increased borrowings to
finance working capital requirements for internal growth.
Merger and other nonrecurring expenses During the three months ended December
31, 1997, the Company recorded a charge in connection with restructuring of the
Company's operations. The Company evaluated the impact of reductions in
reimbursement for oxygen services and the IPS and, where appropriate, is closing
offices and reducing administrative personnel resulting in an
13
<PAGE>
an expected annual reduction in operating costs aggregating $4 million. As a
result of these restructuring activities, the Company recorded a pre-tax charge
of $3.7 million in connection with (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 aggregating $1.6 million, (ii) estimated employee severance costs in
connection with the related termination of employees, including certain former
owners of businesses acquired, aggregating $1.7 million, and (iii) certain other
costs related to the restructuring aggregating $370,000. Management believes
that the restructuring plan, which is expected to be substantially implemented
by the end of March 1998, will position the Company as a lower cost provider
under the Medicare prospective payment system that is scheduled to be
implemented October 1, 1999, as well as reduce the impact on the Company of the
reduction in Medicare reimbursement for oxygen services and the IPS limits.
Additionally, deferred costs aggregating $1.2 million associated with the
Terminated Merger have been written off during the quarter ended December 31,
1997.
For the three months ended December 31, 1996, certain nonrecurring expenses of
$1.6 million were recorded as a result of a merger which occurred in November
1996. Such costs were comprised of transaction fees, legal and accounting costs
and other nonrecurring expenses associated with the merger.
Writedown of Goodwill. The Company recorded a writedown of goodwill previously
recorded in connection with certain acquisitions. The Company determined the
writedown of goodwill was required under SFAS 121 based upon management's
estimate of the impact of the announced reductions in Medicare reimbursement for
oxygen services and the expected impact of the IPS on the Company's continuing
operations. Management determined that these impacts indicated that the
carrying value of goodwill should be written down by $23.5 million, which is
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-certified nursing agencies.
The Company will continue to evaluate the continuing value of goodwill in
accordance with SFAS 121. There can no assurance that the remaining balance of
goodwill of $48.1 million at December 31, 1997 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 $1.1 million at December 31, 1997. Mobile diagnostic
services represent less than 3% of the Company's current net revenues.
Provision (Benefit) for Income Taxes. The Company recorded a tax benefit of
14.2% of pretax income for the three months ended December 31, 1997, principally
as a result of the merger and restructuring charges and the writedown of
goodwill recorded during this period. 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.
14
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE SIX MONTHS ENDED DECEMBER
31, 1996.
Net revenues. For the six months ended December 31, 1997, net revenues increased
to $92.8 million. This represented an increase of $32.7 million, or 54.4%, over
the six months ended December 31, 1996. Of this increase, $25.6 million, or
78.3%, was attributable to acquisitions completed during fiscal 1997. The
balance of the increase was due to internal growth of 13.3%, or $7.1 million.
See "Internal Growth." Net revenues from nursing and related patient services
increased from $37.0 million for the six months ended December 31, 1996 to $61.4
million for the six months ended December 31, 1997, a 65.8% increase. Total
Medicare nursing visits increased 80% to 538,000 visits for the six months ended
December 31, 1997. Total non-Medicare nursing hourly and visit volume increased
61% and 69%, respectively, to 627,000 hours and 105,000 visits, respectively,
for the six months ended December 31, 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 $8.3 million, or 36.1%, to $31.4 million for the six
months ended December 31, 1997, from $23.1 million for the six months ended
December 31, 1996 as a result of acquisitions, and increased referrals and
effective cross-selling of infusion therapy services to the Company's nursing
patients. Durable medical equipment and respiratory therapy net revenues,
excluding net revenues from acquisitions, decreased $601,000, or 4%, for the six
months ended December 31, 1997 from the six months ended December 31, 1996. See
"Internal Growth."
Patient care costs. For the six months ended December 31, 1997, patient care
costs increased to $43.6 million. This represented an increase of $14.6
million, or 50.5%, over the six months ended December 31, 1996. This increase
principally related to increases in net revenues. These costs decreased
slightly as a percentage of net revenues from 48.2% to 47.0%. The Company may
experience an increase in patient care costs as a percentage of net revenues in
the future as a result of the reduction on January 1, 1998 in Medicare oxygen
reimbursement, a continued pressure by managed care payors to reduce their
reimbursement to the Company for its products and services and the lower IPS
cost limits for the Medicare-certified nursing agencies. Conversely, as the
Company continues to cease providing services and products to selected managed
care companies whose contracted rates are marginally profitable, the Company may
experience a decrease in patient care costs as a percentage of net revenues.
General and administrative expenses. For the six months ended December 31, 1997,
general and administrative expenses increased to $36.3 million. This represented
an increase of $15.1 million, or 70.9%, over the six months ended December 31,
1996. These costs increased as a percentage of net revenues from 35.3% to 39.1%.
These increases were due to various factors including $8.6 million related to
the acquisitions completed during the second, third and fourth quarters of
fiscal 1997, with the balance resulting from increases in costs such as
increased staffing in credit and collections, management information services
and key management positions within the Company to support the Company's current
and anticipated future growth, increased costs associated with implementing the
Company's regional coordinated care centers, and increases in insurance,
telecommunication and other operating expenses as a result of the growth in net
revenues and volumes. In an effort to reduce operating costs, the Company
recorded a restructuring charge during the three months ended December 31, 1997.
See "Merger and other nonrecurring expenses."
15
<PAGE>
Provision for doubtful accounts. For the six months ended December 31, 1997,
provision for doubtful accounts increased to $2.9 million. This represented an
increase of $507,000, or 21.4%, over the six months ended December 31, 1996.
This increase was due to increases in net revenues for the six months ended
December 31, 1997. Provision for doubtful accounts decreased slightly as a
percentage of net revenues from 3.9% to 3.1%. This was due principally to the
increase in Medicare cost-reimbursed nursing and related patient services net
revenues as a percentage of total net revenues to 43.3% for six months ended
December 31, 1997, from 37.3% for the six months ended December 31, 1996, which
do not require a provision for doubtful accounts.
Depreciation. For the six months ended December 31, 1997, depreciation expense
increased to $1.1 million. This represented an increase of $480,000, or 77.8%,
over the six months ended December 31, 1996. This increase was attributable to
fixed assets acquired in connection with acquisitions and capital expenditures
related to vehicle, management information systems and equipment to support the
Company's internal growth.
Amortization. For the six months ended December 31, 1997, amortization
increased to $1.6 million. This represented an increase of $764,000, or 93.2%
over the six months ended December 31, 1996. This increase was attributable to
amortization of goodwill arising from acquisitions in fiscal 1997.
Interest expense, net. Interest expense, net, increased $2.4 million, or
210.5%, to $3.6 million during the six months ended December 31, 1997 compared
with the six months ended December 31, 1996. This increase resulted from
increased borrowings for acquisitions in fiscal 1997 and increased borrowings to
finance working capital requirements for internal growth.
Merger and Other Nonrecurring expenses. See "Three Months Ended December 31,
1997 Compared with the Three Months Ended December 31, 1996 - Merger and Other
Nonrecurring expenses."
Writedown of Goodwill. See "Three Months Ended December 31, 1997 Compared with
the Three Months Ended December 31, 1996 - Writedown of Goodwill."
Provision (Benefit) for Income Taxes. The Company recorded a tax benefit of
11.5% of pretax income for the six months ended December 31, 1997, principally
as a result of the merger and restructuring charges and the writedown of
goodwill recorded during the second quarter of 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $47.3 million at December 31, 1997 from $43.2
million at June 30, 1997, an increase of $4.1 million. The increase primarily
resulted from an increase in current assets of $7.9 million, offset by an
increase in current liabilities of $3.7 million. Accounts receivable, net,
increased $2.1 million from June 30, 1997 to December 31, 1997. This increase
was principally due to acquisitions, internal growth and an increase in days net
revenues outstanding from 92 to 110 for this period. The increase in days net
revenues outstanding resulted from a decrease in net revenue of $2.1 million
from the three months ended June 30, 1997 to the three months ended December 31,
1997, as well as an increase of $2.1 million in net accounts receivable from
June 30, 1997 to December 31, 1997. The increase in accounts
16
<PAGE>
receivable is due principally to certain managed care payors continuing to
subject the Company to protracted payment terms and increasing attempts by these
and other third-party payors to deny payments for appropriate products and
services furnished to their subscribers. Cash flow provided by operations was
$2.7 million for the six months ended December 31, 1997 compared with $6.6
million used in operations in the six months ended December 31, 1996.
Cash expenditures for acquisitions were $14.1 million for the six months ended
December 31, 1996. There were no acquisitions consummated during the six months
ended December 31, 1997. During the six months ended December 31, 1997, the
Company paid $372,000 in additional consideration for acquisitions consummated
prior to fiscal 1998. As a result of the changing reimbursement environment,
management expects a slowing of growth through acquisition.
Goodwill was $48.1 million at December 31, 1997, after a $23.5 million writedown
recorded during the three months ended December 31, 1997. The Company will
continue to evaluate the continuing value of goodwill in accordance with SFAS
121. There can be no assurance that the remaining balance of goodwill at
December 31, 1997 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
$1.1 million at December 31, 1997. Mobile diagnostic services represent less
than 3% of the Company's current net revenues.
Expenditures for purchases of capital equipment were $1.3 million and $2.1
million for the six months ended December 31, 1997 and 1996, respectively,
including $744,000 of purchases in fiscal 1998 funded through a secured master
lease agreement. The Company expects to spend approximately $5.8 million for
capital expenditures for the remainder of fiscal 1998. The Company typically
funds a significant portion of its capital expenditures through a secured master
lease arrangement.
The Company's Medicare-certified nursing agencies are subject to the
Medicare surety bond requirement imposed by the Budget Act. The Company is
required to have surety bonds in place no later than February 27, 1998 for these
agencies and is in the process of complying with these requirements. Management
estimates the aggregate cost of these surety bonds to be between $100,000 to
$500,000 for the first six months of coverage. A date has not been established
for surety bond coverage for durable medical equipment providers as the proposed
rules for such providers have not been finalized yet. Due to the nature of the
surety bonds serving as a Medicare fraud and abuse deterrent and the potential
for insurers to have significant risk under the bonds, many insurers are
unwilling to provide surety bond coverage that complies with all the
specifications of the regulation. As a result, there can be no assurance the
Company will be able to obtain surety bond coverage that complies with the
regulations or that such coverage will be adequate or available to the Company
in the future on satisfactory terms, if at all. Additionally, there can be no
assurance that any judgments, settlements or costs relating to pending or future
claims under these surety bonds will not have a material adverse effect on the
Company's results of operations or financial condition.
17
<PAGE>
The Company had a $100 million senior credit facility (the "Credit
Facility")available for acquisitions, working capital and other general
corporate purposes. As a result of the merger and restructuring costs and
writedown of goodwill which were recorded during the three months ended December
31, 1997, the Company was not in compliance with certain covenants of the Credit
Facility. The Company received a waiver of these covenants and is in compliance
at December 31, 1997. Additionally, on February 17, 1998, the Credit Facility
was amended to limit aggregate borrowings for working capital purposes to $48
million and no longer permits the Company to borrow for acquisition purposes
until it meets certain criteria as defined by the Credit Facility. Additionally,
the interest rates available to the Company on borrowings under the Credit
Facility were increased by 0.5% per annum. On February 17, 1998, the Company had
$79.1 million outstanding under the Credit Facility bearing interest at a
weighted average interest rate of 8.0% and $9.9 million of unused commitment
available for working capital purposes.
Management anticipates the Company's available lines of credit and cash flow
generated from operations will be adequate to enable the Company to fund its
operations, capital expenditures and anticipated internal growth for at least
the next twelve months. However, the Company will be unable to continue to
acquire other businesses due to, among other factors, limitations on access to
additional funds which have been imposed by the Credit Facility financial
covenants. The Company is currently reviewing long-term financing alternatives.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed with this report are listed in the index on page 20.
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K on October 7, 1997 and under Item
5 therein disclosed its proposed merger with U.S. HomeCare Corporation.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME HEALTH CORPORATION OF AMERICA, INC.
<TABLE>
Date: February 17, 1998 /s/ Bruce J. Feldman
-----------------------------------------
<S> <C>
President and Chief Executive Officer
(Duly Authorized Officer and Principal Financial Officer)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. DESCRIPTION
- -------------- -----------
<S> <C>
* 3.1 Amended and Restated Articles of Incorporation of the Company.
* 3.2 Amended and Restated Bylaws of the Company.
** 10.1 Stock Purchase Agreement among HHCA, Home Health Corporation of New Hampshire, Randy DiSalvo,
R.S.D. Management Services, Inc., Nursing Services Home Care, Inc. and Nursing Services Home Care, Ltd.
*** 10.2 Asset Acquisition Agreement Among Home Health Corporation of America, Inc. and its Nominees, LHS
Holdings, Inc., Liberty Health Services, Inc., Nurses Today M/C, Inc. and Mark H. O'Brien.
*** 10.3 Asset Acquisition Agreement Among Home Health Corporation of America, Inc. and its Nominees,
PDN, Inc., Medical I.V., Inc. and Mark H. O'Brien.
*** 10.4 Indemnification Agreement Among Home Health Corporation of America, Inc. and its Nominees, LHS
Holdings, Inc., Liberty Health Services, Inc., Nurses Today M/C, Inc., PDN, Inc., Medical I.V.,
Inc. and Mark H. O'Brien.
* 10.5 Asset Acquisition Agreement among Home Care Medical Supply and Equipment, Inc., Alpha Home Care
Services, Inc., Joel Schreiber, and Joseph J. D'Alessandro, including schedules and exhibits thereto.
* 10.6 Subordination Agreement among CoreStates Bank, N.A., Summit Ventures II, L.P., Summit Investors II, L.P., CoreStates
Enterprise Fund, and Alpha Home Care Services, Inc.
* 10.7 Stock Purchase Agreement by and between Home Health Corporation of Delaware, Inc.,William Moses, Milton Altshuler,
Steven R. Altshuler, and Jane Altshuler, relating to Delaware Acquisition.
* 10.8 Asset Acquisition Agreement between HHCDME, Inc., and Master Medical Supply Co., Inc., relating to Delaware
Acquisition.
* 10.9 Asset Acquisition Agreement between HHCD, Inc., and Professional Home Health Care Agency, Inc.,
relating to Delaware Acquisition.
* 10.10 Indemnification Agreement relating to Delaware Acquisition.
* 10.11 Agreement among Home Health Care Corporation of Delaware Inc., HHCD, Inc., HHCDME, Inc., Master Medical Supply Co.,
Inc., Professional Home Health Services, Inc., Professional Home Health Care Agency, Inc., William Moses, Andra H.
Moses, Steven R. Altshuler, and Jane Altshuler, relating to Delaware Acquisition.
* 10.12 Full Payment Guaranty of the Company relating to Delaware Acquisition.
* 10.13 Subordination Agreement among CoreStates Bank, N.A., Summit Ventures II, L.P., Summit Investors II, L.P., CoreStates
Enterprise Fund, and parties to Delaware Acquisition transaction documents.
* 10.14 Separation Agreement among Home Health Corporation of America, Inc., Home Health Corporation of Delaware, Inc.,
HHCD, Inc., HHCDME, Inc., Steven R. Altshuler, Jane E. Altshuler, William W. Moses and Andra H. Moses
* 10.15 Asset Purchase Agreement between Pennsylvania Home Care, Inc. and Healthcare Professionals, Inc.
**** 10.16 Third Amended and Restated Credit Agreement.
***** 10.17 Amendment No. 1 to the Third Amended and Restated Credit Agreement.
* 10.18 Lease between the Company and Swedeland Road Corporation, relating to the Company's principal executive offices.
* 10.19 Employment Agreement between the Company and Bruce J. Feldman. (a)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
* 10.20 Employment Agreement between the Company and Fred J. Nicholas. (a)
***** 10.21 Employment Agreement between the Company and Bruce Colburn. (a)
* 10.22 Employment Agreement between the Company and Joseph Grilli. (a)
* 10.23 1995 Employee and Consultant Equity Plan. (a)
* 10.24 1984 Employee Stock Option Plan (Qualified and Non-Qualified), as amended and restated. (a)
* 10.25 Consent and Amendment to Note and Stock Purchase Agreement, dated September 29, 1995, among the company, certain
subsidiaries of the Company, Summit Ventures II, L.P., Summit Investors II, L.P.
* 10.26 Subordination Agreement, dated September 29, 1995, among CoreStates Bank, N.A., Summit Ventures II, L.P., Summit
Investors II, L.P., Summit Subordinated Debt Fund, L.P., CoreStates Enterprise Fund and Preferred Diagnostic
Services, Inc.
* 10.27 Asset Acquisition Agreement among the Company, Home Health Corporation of America, Inc. - Tampa, Preferred
Diagnostic & Medical Services, Inc., Preferred Diagnostic Services, Inc., G&S Industries, Inc., and Joel M.
Grossman, Jeffrey Grossman, Joseph Sterensis, Barbara Sterensis and Richard Levitt.
* 10.28 Registration Rights Agreement, dated September 28, 1995, among the Company, a subsidiary of the Company, Preferred
Diagnostic & Medical Services, Inc. and Preferred Diagnostic Services, Inc.
****** 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.
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.
10.31 Amendment No. 3 to Third Amended and Restated Credit Agreement
11.1 Computation of basic and diluted loss per share for the three and six months ended December 31, 1997.
11.2 Computation of basic and diluted earnings per share for the three and six months ended December 31, 1996.
27.1 Financial data schedule for the six month period ended December 31, 1997.
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-96888) dated November 8,
1995, as amended.
** Incorporated by reference to the Company's Form 10-Q dated September 30, 1996 and filed November 14, 1996.
*** Incorporated by reference to the Company's Form 8-K dated January 10, 1997 and filed January 24, 1997.
**** Incorporated by reference to the Company's Form 10-Q dated March 31, 1997 and filed May 14, 1997.
***** Incorporated by reference to the Company's Form 10-K/A dated June 30, 1997 and filed October 28, 1997.
****** Incorporated by reference to the Company's Form 8-K dated September 26, 1997 and filed October 7, 1997.
(a) Represents management contract or compensatory plan
</TABLE>
22
<PAGE>
EXHIBIT 10.30
February 11, 1998
Mr. Jay Huffard
U.S. HomeCare Corporation
Two Hartford Square West
Hartford, CT 06130
Re: Amended and Restated Agreement and Plan of Merger
-------------------------------------------------
Dear Jay:
Reference is made to the Amended and Restated Agreement and Plan of Merger,
dated as of September 26, 1997 ("Agreement"), among Home Health Corporation of
America, Inc. ("Acquiror"), HHCA Acquisition Corporation, Inc. ("Acquisition
Subsidiary") and U.S. HomeCare Corporation ("Company"). Unless the context
otherwise requires, all capitalized terms used in this letter shall have the
meanings ascribed to such terms in the Agreement.
As we discussed, the Board of Directors of the Acquiror and the Company have
each determined that the Agreement be terminated pursuant to Section 7.1(a) of
the Agreement. As provided in Section 7.2 of the Agreement, as a result of such
termination, the Agreement is now void and the Acquiror, Acquisition Subsidiary
and the Company as well as their respective officers and directors have no
liability or obligations to each other, except that the provisions of Sections
5.2, 7.2 and 8.1 of the Agreement continue in full force and effect. In
addition, notwithstanding anything to the contrary contained in the Agreement,
the Acquiror and the Company have each agreed to release each other from any
claims or liabilities which each may have against the other in connection with
the Agreement or its termination.
Please acknowledge your agreement to the termination and release expressed in
this letter by signing and returning to me the enclosed copy of this letter.
Very truly yours,
/s/ Bruce Feldman
- -----------------
Bruce Feldman
President
Acknowledged and Agreed
this 11th day of February, 1998
U.S. HOMECARE CORPORATION
By: /s/ Jay C. Huffard
------------------
Name: Jay C. Huffard
Title: President
<PAGE>
AMENDMENT NO. 3 TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment No. 3") is made as of the 13th day of February, 1998 by and
among HOME HEALTH CORPORATION OF DELAWARE, INC., a Delaware corporation
("Borrower"); CORESTATES BANK, N.A., a national banking association
("CoreStates") and the other banks identified on the signature pages hereto
(each individually a "Bank" and individually and collectively, "Banks"); and
CoreStates as agent for the Banks ("Agent").
WITNESSETH:
----------
WHEREAS, Borrower, Banks and Agent are parties to that certain Third
Amended and Restated Credit Agreement dated March 13, 1997, as amended (as
amended from time to time, including by this Amendment No. 3, the "Credit
Agreement"); and
WHEREAS, Home Health Corporation of America, Inc. ("Parent") and
certain of its subsidiaries other than Borrower have executed (or joined in)
that certain Amended and Restated Guaranty dated March 13, 1997 (as amended from
time to time, the "Guaranty") in favor of Banks in connection with the Credit
Agreement; and
WHEREAS, Borrower has requested, and the Banks have agreed to, subject
to the terms and conditions hereof, certain amendments and waivers under the
Credit Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and the agreements
herein set forth and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions
-----------
a. General Rule. Unless otherwise defined herein, terms used
------------
herein which are defined in the Credit Agreement shall have the meanings
assigned to them in the Credit Agreement.
b. Additional Definition. The following definition is hereby
---------------------
added to Section 1 of the Credit Agreement to read in its entirety as follows:
"Amendment No. 3" shall mean the Amendment No. 3 to Credit Agreement
---------------
by and among Borrower, Agent and Banks.
c. Amended Definition. The following definition set forth in
------------------
Section 1 of the Credit Agreement is hereby amended and restated to read in its
entirety as follows:
"EBITDA" means, for any period, the sum of net income for such period
------
as defined in accordance with GAAP, plus (i) interest paid in cash, (ii)
original issue discount paid in cash, (iii) taxes, (iv) depreciation and
amortization, (v) charges related to extinguishment of debt, (vi) write-off
of expenses associated with the registration statement filed in November
1996 (not to exceed $300,000), (vii) charges associated with Permitted
<PAGE>
Acquisitions accounted for as a pooling of interests for such period,
(viii) for any calculation thereof which includes the fiscal quarter ended
June 30, 1997, the amount of non-recurring charges taken during that
quarter and deducted in calculating net income (i.e., a $3.0 million charge
to reflect an increase in bad debt reserves and a $1.1 million
restructuring charge) and (ix) for any calculation thereof which includes
the fiscal quarter ended December 31, 1997, the write-off of goodwill and
the non-recurring restructuring and merger charges taken during that
quarter as reflected in the 10-Q for the Parent, in each case as defined in
accordance with GAAP and to the extent each has been deducted in
determining net income.
2. Amendment to Definition of Applicable Margin. Notwithstanding the
--------------------------------------------
definition of Applicable Margin set forth in Paragraph 2.6 of the Credit
Agreement, the Applicable Margin with respect to Libor Portions shall be 2.75%
and the Applicable Margin with respect to Base Rate Portions shall be 1.25%;
provided however, that if the ratio of Funded Debt to Adjusted EBITDA for Parent
and its consolidated Subsidiaries is less than or equal to 3.00 to 1 as of March
31, 1998 or is less than or equal to 2.75 to 1 as of June 30, 1998 or
thereafter, then effective on the day following delivery of the applicable
Compliance Certificate the Applicable Margin shall be calculated as set forth in
the Credit Agreement without regard to this Paragraph 2.
3. Amendment to Paragraph 5.15 (Maximum Funded Debt to Adjusted
------------------------------------------------------------
EBITDA Ratio). Paragraph 5.15 of the Credit Agreement is hereby amended and
- -------------
restated to read in its entirety as follows:
5.15 Maximum Funded Debt to Adjusted EBITDA Ratio. Maintain as of the
--------------------------------------------
end of each fiscal quarter during the periods set forth in the left hand
column below a ratio of (i) Funded Debt of Parent and its consolidated
Subsidiaries to (ii) Adjusted EBITDA, of not greater than the ratio set
forth in the right hand column below:
Period Ratio
------ -----
Date of the Credit Agreement
through 9/30/97 3.25 to 1
10/1/97 through 3/31/98 4.75 to 1
4/1/98 through 6/30/98 4.50 to 1
7/1/98 through 12/31/98 2.75 to 1
1/1/99 and thereafter 2.50 to 1
4. Amendment to Paragraph 5.17 (Maximum Leverage Ratio). Paragraph
---------------------------------------------------
5.17 of the Credit Agreement is hereby amended and restated to read in its
entirety as follows:
5.17 Maximum Leverage Ratio. Maintain as of the end of each fiscal
----------------------
quarter during the periods set forth in the left hand column below a ratio
of consolidated Funded Debt to consolidated Total Capitalization of not
greater than the ratio set forth in the right hand column below:
-2-
<PAGE>
Period Ratio
------ -----
Date of the Credit Agreement
through 9/30/97 0.65 to 1
10/1/97 through 6/30/98 0.80 to 1
7/1/98 through 3/31/99 0.55 to 1
4/1/99 and thereafter 0.50 to 1
5. Additional Reporting. In addition to any other information and
--------------------
reports required pursuant to the Credit Agreement, the Companies shall furnish
to Agent, on a monthly basis within twenty-five (25) days after the end of each
month a monthly visit trend report, profit and loss statement, cash collection
report, and accounts receivable aging, each in form and substance satisfactory
to Agent.
6. Waivers; Restrictions on Advances.
---------------------------------
a. Banks hereby waive the defaults by Borrower under Paragraph
5.15 (Maximum Funded Debt to Adjusted EBITDA Ratio) and Paragraph 5.17 (Maximum
Leverage Ratio) as in effect prior to the date hereof; provided, that nothing
herein shall be construed as a waiver of any defaults under Paragraph 5.15 or
Paragraph 5.17, as amended hereby, or any other provisions of the Credit
Agreement.
b. Banks hereby waive the requirements of Paragraph 5.5(b)
(relating to establishment and maintenance of reserves with respect to
receivables, and write-off of receivables) as of December 31, 1997 and through
June 30, 1998, provided, that nothing herein shall be construed as a waiver of
any default under such paragraph as of any date prior to December 31, 1997 or
after June 30, 1998, or any other provisions of the Credit Agreement. Borrower
shall submit a revised policy with respect to reserves and write-offs not later
than April 30, 1998. Banks shall be permitted to engage a third party to review
and audit such policy and the Companies compliance therewith at the expense of
Borrower. Such policy shall not replace the policy as in effect as of the date
of the Credit Agreement for purposes of Paragraph 5.5(b) of the Credit Agreement
unless and until Required Banks have agreed thereto in writing in their sole
discretion.
c. Unless and until Borrower is in compliance with Paragraph
5.15 and 5.17 of the Credit Agreement as in effect prior to this Amendment No.
3, (i) no Advance shall be made under the Acquisition Commitment, and (ii)
Borrower may not make any adjustment in the commitment amounts under Paragraph
2.1(e), except that Borrower may make one such adjustment from the Acquisition
Commitment to the Revolving Commitment in an amount not to exceed $8,000,000.
7. Amendment Fee. Borrower shall pay to each Bank that executes
-------------
this Amendment No. 3 an amendment fee in the amount of 15 basis points on such
Bank's Maximum Principal Amount.
8. Representations and Warranties. Borrower and Guarantors hereby
------------------------------
represent and warrant to Banks as follows:
a. Representations. The representations and warranties set
---------------
forth in Section Three of the Credit Agreement (other than those made only as of
a specific date) are true and correct in all material respects as of the date
-3-
<PAGE>
hereof; no Event of Default or Default under the Credit Agreement is in
existence except as expressly waived pursuant to Paragraph 6 hereof; and there
has been no event or circumstance since March 13, 1997, which has caused or is
reasonably likely to cause a Material Adverse Effect.
b. Power and Authority; Enforceability. Borrower has the power
-----------------------------------
and authority under the laws of its state of incorporation and its certificate
of incorporation and bylaws to enter into and perform, to the extent applicable
to it, this Amendment No. 3; and all actions necessary or appropriate for the
execution and performance by Borrower of this Amendment No. 3 have been taken
and upon their execution, the same will constitute the legal, valid and binding
obligations of Borrower, enforceable in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency and other similar laws
affecting the rights of creditors generally.
c. No Violation of Laws or Agreements. The making and
----------------------------------
performance of this Amendment No. 3 and actions required of Borrower hereunder
will not violate any provisions of any federal, state or local law or
regulation, or result in any breach or violation of, or constitute a default
under, any agreement by which Borrower or its property may be bound.
9. Conditions to Effectiveness of Amendment. This Amendment No. 3
----------------------------------------
shall be effective upon Agent's receipt of the following documents and
satisfaction of the following conditions, each in form satisfactory to Banks:
a. Amendment No. 3. This Amendment No. 3, duly executed by
---------------
Borrower, Guarantors, Banks and Agent.
b. Other Documents. Such additional documents as Agent shall
---------------
reasonably request.
10. Affirmation. Borrower and Guarantors hereby affirm all of the
-----------
provisions of the Credit Agreement, as amended (including by this Amendment No.
3) and the other Loan Documents and agree that the terms and conditions of the
Credit Agreement as amended (including by this Amendment No. 3) and the other
Loan Documents shall continue in full force and effect as supplemented and
amended hereby.
11. Miscellaneous.
-------------
a. This Amendment No. 3 shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
b. Borrower agrees to reimburse Agent for all reasonable costs
and expenses (including but not limited to, reasonable attorneys' fees and
reasonable disbursements) which Agent may pay or incur in connection with the
preparation of this Amendment No. 3 and the preparation or review of other
documents executed or delivered in connection herewith.
c. All terms and provisions of this Amendment No. 3 shall be
for the benefit of and be binding upon and enforceable by the respective
successors and assigns of the parties hereto.
-4-
<PAGE>
d. This Amendment No. 3 may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document and each such counterpart shall be deemed an original.
e. Except as expressly set forth in Paragraph 6 above, the
execution, delivery and performance of this Amendment No. 3 shall not effect a
waiver of any right, power or remedy of Agent or Banks under applicable law or
under the Credit Agreement and the agreements and documents executed in
connection therewith or constitute a waiver of any provision thereof.
IN WITNESS WHEREOF, the undersigned by their duly authorized officers,
have executed this Amendment No. 3, effective as of the day and year first
written above.
HOME HEALTH CORPORATION OF
Attest: DELAWARE, INC.
By:_______________________ By:_____________________________
Name: Name: Bruce Feldman
Title: Title: President
CORESTATES BANK, N.A., for itself and as Agent
By:_____________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:_____________________________
Name:
Title:
[EXECUTIONS CONTINUED]
-5-
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By:_____________________________
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
N.A.
By: ____________________________
Name:
Title:
TORONTO DOMINION (NEW YORK), INC.
By:____________________________
Name:
Title:
FLEET NATIONAL BANK
By:-___________________________
Name:
Title:
-6-
<PAGE>
The undersigned Guarantors hereby acknowledge and agree to the foregoing
Amendment No. 3, affirm the representations set forth in Paragraph 7 thereof,
and agree that the Guaranty continues in full force and effect and guarantees
all obligations under the Credit Agreement, as amended thereby:
HOME HEALTH CORPORATION OF HOME HEALTH CORPORATION OF
AMERICA, INC. AMERICA, INC. - TAMPA NURSING
PENNSYLVANIA HOME HEALTH PENNSYLVANIA HOME HEALTH
SERVICES/PHILADELPHIA, INC. SERVICES/SUBURBAN, INC.
PENNSYLVANIA HOME HEALTH HHCA, INC. - DELAWARE
SERVICES/NORTHEAST, INC. HHCA - SERVICE CO.
PENNSYLVANIA HOME CARE, INC. HOME HEALTH CORPORATION OF
HOME CARE MEDICAL SUPPLY AND AMERICA, INC. - EASTERN SHORE
EQUIPMENT, INC. HOME HEALTH SYSTEMS, INC.
NUTRITIONAL HOME HEALTH HHCA TEXAS HOLDINGS, INC.
SERVICES, INC. HHCA TEXAS GP, INC.
ALL CARE HEALTH SERVICES, INC. HHCA TEXAS HEALTH SERVICES,
ALL-CARE HOME HEALTH L.P., by HHCA TEXAS GP, INC.,
SERVICES, INC. its general partner
HOME HEALTH CORPORATION OF HHCA TEXAS INFUSION SERVICES,
AMERICA, INC./FT. PIERCE HOME L.P., by HHCA TEXAS GP, INC.,
HEALTH SERVICES its general partner
HHCD, INC. HHCA TEXAS PRIVATE NURSING
HHCDME, INC. SERVICES, L.P., by HHCA TEXAS GP,
PROFESSIONAL HOME HEALTH INC., its general partner
SERVICES, INC. HHCA TEXAS MEDICAL EQUIPMENT,
HOME HEALTH CORPORATION OF L.P., by HHCA TEXAS GP, INC.,
AMERICA, INC.-TAMPA its general partner
HOME HEALTH CORPORATION OF R.S.D. MANAGEMENT, INC.
AMERICA, INC.-TAMPA NURSING SERVICES HOME CARE,
DIAGNOSTIC SERVICES INC.
HOME HEALTH CORPORATION OF NURSING SERVICES HOME CARE,
AMERICA, INC. - PINELLAS LTD.
HOME HEALTH CORPORATION OF NURSING SERVICES STAFFING OF
AMERICA, INC.- ST. PETERSBURG N.H., INC.
(continued in next column) NURSING SERVICES, INC.
NAHATAN DRUG, INC.
By:_______________________ By:___________________________
Name: Name: Bruce Feldman
Title: Title: President
-7-
<PAGE>
EXHIBIT 11.1
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, 1997 December 31, 1997
----------------------------------- ----------------------------------
Basic Diluted Basic Diluted
-------------- ----------------- -------------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss available to common
stockholders $(23,856) $(23,856) $(21,828) $(21,828)
============== ================= ============== ================
Weighted average number of common
shares outstanding during period 9,158 9,158 9,153 9,153
Weighted average number of common
shares subject to exercise under
outstanding stock options and
warrants, net of treasury shares
assumed repurchased (a) - - - -
-------------- ----------------- -------------- ----------------
Weighted average number of common
shares outstanding 9,158 9,158 9,153 9,153
============== ================= ============== ================
Net loss per share $(2.60) $(2.60) $(2.38) $(2.38)
============== ================= ============== ================
(a) No shares are assumed outstanding for the diluted calculation as such Shares were anti-dilutive and decreased the
loss per Share to $2.57 and $2.35 for the three and six months ended December 31, 1997, respectively.
</TABLE>
<PAGE>
EXHIBIT 11.2
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1996
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, 1996 December 31, 1996
---------------------------------- ----------------------------------
Basic Diluted Basic Diluted
------------- ----------------- ------------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $689 $689 $2,044 $2,044
Dividends on preferred
stock - - (6) (6)
Interest and dividends on
convertible securities,
net of tax - 22 - 83
------------- ----------------- ------------- -----------------
Net income available to
common stockholders $689 $711 $2,038 $2,121
============= ================= ============= =================
Weighted average number of
common shares outstanding
during period 8,377 8,444 8,201 8,234
Weighted average number of
common shares subject to
exercise under outstanding
stock options and warrants,
net of treasury shares assumed
repurchased - 136 - 148
Shares assumed issued in
connection with
conversion of convertible
securities, as of the
beginning of the period - 152 - 302
------------- ----------------- ------------- -----------------
Weighted average number of
common shares outstanding 8,377 8,732 8,201 8,684
============= ================= ============= =================
Net income per share $0.08 $0.08 $0.25 $0.24
============= ================= ============= =================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,129
<SECURITIES> 0
<RECEIVABLES> 70,958
<ALLOWANCES> 12,461
<INVENTORY> 3,109
<CURRENT-ASSETS> 72,605
<PP&E> 30,372
<DEPRECIATION> 13,222
<TOTAL-ASSETS> 140,203
<CURRENT-LIABILITIES> 25,257
<BONDS> 0
0
0
<COMMON> 44,119
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 140,203
<SALES> 92,788
<TOTAL-REVENUES> 92,788
<CGS> 43,587
<TOTAL-COSTS> 85,427
<OTHER-EXPENSES> 28,396<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,634
<INCOME-PRETAX> (24,669)
<INCOME-TAX> (2,841)
<INCOME-CONTINUING> (21,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,828)
<EPS-PRIMARY> (2.38)
<EPS-DILUTED> (2.38)
<FN>
<F1>Other expenses includes pretax accounting charges during the three months
ended December 31, 1997 of $28.4 million which was comprised of a writedown of
goodwill of $23.5 million, restructuring costs of $3.7 million and the writeoff
of deferred costs aggregating $1.2 million related to a terminated acquisition.
</FN>
</TABLE>
