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As filed with the Securities and Exchange Commission October 8, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOME HEALTH CORPORATION OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
Pennsylvania 8082 23-2224800
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
2200 Renaissance Boulevard Bruce J. Feldman
Suite 300 President and
King of Prussia, PA 19406 Chief Executive Officer
(610) 272-1717 2200 Renaissance Boulevard
Address, including zip code, and Suite 300
telephone number, including King of Prussia, PA 19406
area code, of registrant's (610) 272-1717
principal executive offices) (Name, address, including zip code,
and telephone number, including
area code, of agent for service)
Copies to:
Sol Genauer, Esquire
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103-6998
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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<CAPTION>
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CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Title of each
class of Amount Proposed maximum Proposed maximum Amount of
securities to to be offering price aggregate offering registration
be registered registered per share price (1) fee
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Common Stock, no par value 280,669 Inapplicable $217,560 $64
===================================================================================================================
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(f) under the Securities Act of
1933, as amended. The securities are being registered in connection
with the dissolution and liquidation of partnerships affiliated with
the registrant and, in effect, the exchange by the limited partners of
their interests in the partnerships for the securities. Accordingly,
pursuant to Rule 457(f)(2) the registration fee has been calculated on
the basis of the book value of the partnerships, which as of the
latest practicable date was $217,560.
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The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
PROSPECTUS
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HOME HEALTH CORPORATION OF AMERICA, INC.
280,669 SHARES OF COMMON STOCK
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Home Health Corporation of America, Inc. is providing this Prospectus to
you as a limited partner of one of nine limited partnerships of which an
affiliate of the Company is a general partner. Each Partnership holds shares of
the Company's Common Stock as its sole asset. An aggregate of 280,669 shares of
the Company's Common Stock is held by all of the Partnerships. The general
partners are soliciting your vote to dissolve and liquidate the Partnership in
which you are a Partner. Each Partnership that receives the required vote of its
Partners will be dissolved and liquidated. If the Partnership in which you are a
Partner is dissolved and liquidated you will receive a distribution of a portion
of the Company Common Stock held by that Partnership. More detailed information
regarding the Partnerships and distribution of the Company Common Stock to the
Partners, including the name of each Partnership, the number of shares of
Company Common Stock held by each Partnership, the required vote to dissolve and
liquidate a Partnership and the procedure for determining the number of shares
of Company Common Stock that will be distributed to each Partner, is contained
in this Prospectus under "Plan of Distribution."
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "HHCA." On October 7, 1998, the last reported sale price of the
Company's Common Stock was $1.19.
The Company's principal executive offices are located at 2200 Renaissance
Boulevard, Suite 300, King of Prussia, PA 19406 and its telephone number is
(610) 272-1717.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN MATTERS
WHICH SHOULD BE CONSIDERED IN CONNECTION WITH YOUR VOTE TO DISSOLVE AND
LIQUIDATE THE PARTNERSHIP IN WHICH YOU ARE A PARTNER.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The date of this Prospectus is October 8, 1998.
<PAGE>
TABLE OF CONTENTS
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PROSPECTUS SUMMARY................1 CERTAIN TRANSACTIONS...............53
SUMMARY HISTORICAL
CONSOLIDATED FINANCIAL DATA.......4 PRINCIPAL SHAREHOLDERS.............54
RISK FACTORS......................5 DESCRIPTION OF CAPITAL STOCK.......56
USE OF PROCEEDS...................13 PLAN OF DISTRIBUTION...............58
CERTAIN FEDERAL INCOME TAX
CAPITALIZATION....................15 CONSEQUENCES.......................61
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA.......16 SHARES ELIGIBLE FOR FUTURE SALE....63
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........17 EXPERTS............................64
BUSINESS..........................30 AVAILABLE INFORMATION..............64
INDEX TO CONSOLIDATED
MANAGEMENT........................46 FINANCIAL STATEMENTS...............66
* * * * * *
As used in this Prospectus (a) the "Company" means Home Health Corporation
of America, Inc., (b) "Partnerships" means the limited partnerships described
under "Plan of Distribution" in which an affiliate of the Company is the General
Partner, and (c) "Partners" means the limited partners and general partners of
the Partnerships. References in this Prospectus to a particular fiscal year of
the Company are to the year which ends on June 30.
* * * * * *
Some of the statements contained in this Prospectus under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" are forward-looking. They include
statements concerning (a) strategy, (b) liquidity and capital resources, (c)
restructuring initiatives, (d) relationships with managed care companies, (e)
regulatory matters and (f) legal proceedings. Actual results may differ
materially from those suggested by the forward-looking statements for various
reasons, including those discussed under "Risk Factors."
The data contained in this Prospectus relating to the home health care
industry have been derived from industry and other sources available to the
Company. Such data has not been independently verified and, accordingly, the
Company makes no representation as to the accuracy of such information.
ii
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PROSPECTUS SUMMARY
This Summary highlights information contained elsewhere in this Prospectus.
It is not complete and may not contain all of the information that you should
consider before voting whether the Partnership in which you are a partner should
be dissolved and liquidated. You should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and the notes
to those statements.
The Company
The Company is a leading provider of comprehensive home health care
services and products. The Company provides 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. The Balanced Budget Act of 1997 was enacted
during fiscal 1998. This new law caused significant changes to the Medicare
system of reimbursement including the implementation of an interim payment
system for the Company's Medicare cost-reimbursed nursing agencies and
reductions in Medicare oxygen services reimbursement rates. These changes have
had and are expected to continue to have a significant impact on the Company's
current and future operations. Additional changes could result from recent
legislation introduced into the U.S. Congress. The uncertainty of the outcome of
additional legislative and regulatory issues facing the home health care
industry have had a significant impact on this industry. See "Business --
Industry Overview," "--Payor Mix" and "-- Government Regulation."
The Company implemented a restructuring plan during fiscal 1998 in response
to the changes in the Medicare system of reimbursement. This plan included cost
reduction and office consolidation initiatives and an assessment of the
continuing value of goodwill under the changing reimbursement environment. This
plan resulted in the Company recording 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 that
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."
Business 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.
1
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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 Company's 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.
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 39.2% of the Company's
net revenues in fiscal 1998. 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.
Expand Through Acquisitions in Existing and New Markets. Generally, the
Company has followed an acquisition strategy of seeking to acquire home health
care businesses in existing and new markets. Between fiscal 1996 and fiscal 1997
the Company completed fourteen acquisitions in both 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 provides
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. As a result of the
uncertainty of the outcome of legislative and regulatory changes in the system
of Medicare reimbursement and restrictions under the Company's senior credit
facility, the Company has slowed its growth through acquisitions. The Company
completed no acquisitions in fiscal 1998. 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. However, the Company's acquisition strategy may change as a result of
the ongoing legislative and regulatory changes in the industry.
The Offering
The Company is providing this Prospectus to you as a limited partner of
one of the Partnerships. The Partnerships acquired the 280,669 shares of the
Company's Common stock owned by them in connection with the Company's
acquisition of Home Health Systems, Inc. in November 1996. In connection with
that acquisition the general partners of the Partnerships became indirect
subsidiaries of the Company. The Partnerships conduct no business and hold no
assets other than the Company's Common Stock.
The general partners of the Partnership are soliciting your vote to
dissolve and liquidate the Partnership in which you are a Partner. Each
Partnership that receives the required vote of its Partners will be dissolved
and liquidated and its assets will be distributed in accordance with the terms
of the partnership agreement of that
2
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Partnership. If the Partnership in which you are a Partner is dissolved and
liquidated you will receive a portion of the Company Common Stock held by that
Partnership.
More detailed information regarding the Partnerships and distribution
of the Company Common Stock to the Partners, including the name of each
Partnership, the number of shares of Company Common Stock held by each
Partnership, the required vote to dissolve and liquidate a Partnership and the
procedure for determining the number of shares of Company Common Stock that will
be distributed to each Partner, is contained in this Prospectus under "Plan of
Distribution."
3
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data presented 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 Consolidated Financial Statements
of the Company, including the notes thereto, which have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. The
summary historical consolidated financial data presented 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 restated for a
merger consummated in fiscal 1997. The information set forth below should be
read in conjunction with "Selected Historical Consolidated Financial
Data,""Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
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1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues $46,706 $64,149 $95,878 $150,232 $174,335
Patient care costs 21,761 32,378 46,212 71,818 82,708
General and administrative expenses 21,272 26,245 36,100 54,254 70,828
Provision for doubtful accounts 1,316 1,727 3,464 8,431 7,271
Depreciation and amortization 598 797 1,920 3,870 5,298
Interest expense, net 802 1,451 1,579 3,849 7,508
Merger and other nonrecurring
expenses(1)(2) -- -- 913 3,009 6,370
Writedown of goodwill (3) -- -- -- -- 23,516
Income (loss) before income taxes 957 1,551 5,690 5,001 (29,164)
Income (loss) from continuing operations 311 758 3,294 2,814 (24,848)
Net income (loss) (4) 555 758 2,133 2,814 (24,848)
Balance Sheet Data (at period end):
Working capital $11,201 $12,059 $20,346 $43,204 $48,382
Total assets 20,745 34,572 69,975 153,263 136,839
Total debt 8,471 16,676 19,975 85,056 89,522
Total shareholders' equity 3,275 4,938 37,648 50,572 26,093
</TABLE>
-----------------------
Notes to Summary Historical Consolidated Financial Data
(1) Merger and other nonrecurring expenses in fiscal 1996 represents
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. Merger and other
nonrecurring expenses in fiscal 1997 included merger costs of $1.6 million
as a result of a merger which occurred in November 1996, the write-off of
deferred costs aggregating $300,000 incurred in connection with an equity
offering which was not consummated and charges aggregating $1.1 million
for contractual severance obligations in connection with acquired
businesses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."
(2) Merger and other nonrecurring expenses recorded in fiscal 1998 included
restructuring costs of $5.2 million and the write-off of deferred costs
aggregating $1.2 million related to a terminated acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations."
(3) The Company recorded a writedown of goodwill in fiscal 1998 based upon the
estimated impact of certain reductions in Medicare reimbursements on the
Company's continuing operations. See "Management Discussion and Analysis
of Financial Condition and Results of Operations -- Restructuring
Initiatives."
(4) Net income reflects the cumulative effect of a change in accounting
principles of $244,000 in fiscal 1994 and an extraordinary loss of $1.2
million in fiscal 1996 which resulted from the early extinguishment of
indebtedness. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Results of Operations."
4
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RISK FACTORS
You should carefully consider the following factors and other
information in this Prospectus in connection with your vote to dissolve and
liquidate the Partnership in which you are a Partner.
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. The Balanced Budget Act of
1997 was enacted during fiscal 1998. This new law caused significant changes to
the Medicare system of reimbursement. While the Balanced Budget Act of 1997 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 "--
Government Regulation."
Medicare Reimbursement. The Balanced Budget Act of 1997 caused
significant changes to the Medicare system of reimbursement, including the
implementation of an interim payment system, a reduction in reimbursement rates
for oxygen services and a requirement that a prospective payment system be
implemented by October 1, 1999 with up to a four-year phase-in period.
The implementation of the interim payment system has 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."
Effective January 1, 1998 reimbursement from Medicare for oxygen
services was reduced by 25%. An additional 5% reduction becomes effective on
January 1, 1999. These reductions have had and are expected to continue to have
a materially adverse impact to the Company's internal growth in net revenues.
The impact of the implementation of the prospective payment system 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 prospective payment system and the
Company's ability to deliver its services at a cost below the prospective
payment system rates. There can be no assurances that such reimbursement rates
would cover the costs incurred by the Company to provide home health services.
5
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The Balanced Budget Act of 1997 has caused many other changes in the
system of Medicare reimbursement. For example, all home health agencies will be
required to obtain surety bonds in the amount of at least $50,000. 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.
For additional information regarding changes to the Medicare system of
reimbursement and the impact of these changes on the Company see "Business --
Payor Mix" and "-- Government Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Internal Growth,"
"-- Net Revenues" and "-- Results of Operations -- Fiscal 1998 Compared with
Fiscal 1997."
Reimbursement Payments. Eight of the Company's cost-reimbursed nursing
agencies receive periodic interim payments for services provided. These
payments, which are received bi-weekly and are adjusted quarterly to reflect the
volume of home health services actually provided, are scheduled to be
discontinued upon implementation of the prospective payment system. The
discontinuance of periodic interim payments could result in a material adverse
effect on the Company's cash flow. See "Business -- Payor Mix" and "--
Reimbursement Payments."
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.
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- 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 net
revenues 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 "-- Dependence on
Relationships with Referral Sources." There can be no assurance that the
Company's days net revenues outstanding will not continue to increase if these
payors continue to delay
6
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reimbursing the Company for its services. See "Business-- Payor Mix" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 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 "-- 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 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Restructuring
Initiatives." There can be no assurance that 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, the Company may be required to
adjust its cost structure, delay or abandon its development and expansion plans,
and/or 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
7
<PAGE>
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 branch locations in nine states. Since fiscal 1995, 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Internal Growth." Because of
matters discussed in this Prospectus 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 organizations continuing to
subject the Company to increasingly protracted payment terms and increasing
attempts 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 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
8
<PAGE>
scheduled by the vendors to be Year 2000 compliant by December 31, 1999. The
Company expects to be Year 2000 compliant by December 31, 1999 and does not
expect to incur significant costs in attaining compliance. However, there can be
no assurance the Company has adequately assessed or identified all aspects of
its business which may be impacted by Year 2000 issues which may arise after
December 31, 1999. Additionally, there can be no assurance that vendors who
supply the Company's major management information system software will
adequately address and correct any and all Year 2000 issues 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," "-- 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.
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, 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, may also require the
redesignation of branch offices as separate providers. 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 providers, seeking to acquire home
9
<PAGE>
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Restructuring
Initiatives."
Competition. The home health care industry is highly competitive and
includes national, regional and local providers. The Company competes with a
large number of companies in all areas in which its operations are located. The
Company's competitors include major national and regional companies,
hospital-based programs, numerous local providers and nursing agencies. Some
current and potential competitors have or may obtain significantly greater
financial and marketing resources than the Company. Accordingly, other
companies, including managed care organizations, hospitals, long-term care
providers and health care providers that currently are not serving the home
health care market, may become competitors. As a result, the Company could
encounter increased competition in the future that may limit its ability to
maintain or increase its market share or otherwise materially adversely affect
the Company's financial condition or results of operations.
Regulatory Environment. 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,
10
<PAGE>
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 goods, 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 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
11
<PAGE>
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 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 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 "Business - 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
12
<PAGE>
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.
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, the Department of Health and Human
Services ("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.
USE OF PROCEEDS
The shares of Company Common Stock which are owned by the Partnerships
will be distributed upon liquidation and dissolution of the Partnerships. The
Company will not receive any proceeds upon the distribution of these shares.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "HHCA." The following table sets forth the quarterly range of
high and low sales prices of the common stock on the Nasdaq National Market for
each quarter in fiscal 1998 and 1997:
Quarter Ended High Low
----------------------------------- --------------- ----------------
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
As of August 31, 1998, there were 9,765,764 shares of the Company's
Common Stock outstanding and approximately 163 stockholders of record of the
Company's 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.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998. This table should be read in conjunction with Consolidated
Financial Statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As of
June 30, 1998
---------------------
(in thousands)
Current maturities of long-term debt $ 4,211
=========
Long-term debt, net of current portion $ 85,311
Shareholders' equity $ 26,093
--------
Total capitalization $111,404
========
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below as
of June 30, 1997 and 1998 and for each of the years in the three-year period
ended June 30, 1998 have been derived from the Consolidated Financial Statements
of the Company, including the notes thereto, which have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. The
selected historical consolidated financial data presented below as of June 30,
1994 and 1995 and for the fiscal years ended June 30, 1994, 1995 and 1996 have
been derived from the Consolidated Financial Statements of the Company, as
restated for the merger with Home Health Systems, Inc. (See Note 3, Pooling of
Interests, to the Consolidated Financial Statements of the Company). The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net revenues.................................$ 46,706 $ 64,149 $ 95,878 $ 150,232 $ 174,335
Operating costs and expenses:
Patient care............................... 21,761 32,378 46,212 71,818 82,708
General and administrative................. 21,272 26,245 36,100 54,254 70,828
Provision for doubtful accounts............ 1,316 1,727 3,464 8,431 7,271
Depreciation and amortization.............. 598 797 1,920 3,870 5,298
Interest, net.............................. 802 1,451 1,579 3,849 7,508
Merger and other nonrecurring
expenses (1)(2).......................... -- -- 913 3,009 6,370
Writedown of goodwill (3).................. -- -- -- -- 23,516
Total operating costs and expenses........... 45,749 62,598 90,188 145,231 203,449
Income (loss) before income taxes............ 957 1,551 5,690 5,001 (29,164)
Provision (benefit) for income taxes......... 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)
Extraordinary item......................... -- -- 1,161 -- --
Income (loss) before change in accounting.... 311 758 2,133 2,814 (24,848)
Change in accounting....................... 244 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)............................$ 555 $ 758 $ 2,133 $ 2,814 $ (24,848)
========= ========= ========= ========= =========
Diluted earnings (loss) per 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
========= ========= ========= ========= =========
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
Total debt.................................. 8,471 16,676 19,875 85,056 89,522
Total shareholders' equity.................. 3,275 4,938 37,648 50,572 26,093
</TABLE>
- ----------------------------
(1) Merger and other nonrecurring expenses in fiscal 1996 represents
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. Merger and other
nonrecurring expenses in fiscal 1997 include merger costs of $1.6 million
as a result of a merger which occurred in November 1996, the write-off of
deferred costs aggregating $300,000 incurred in connection with an equity
offering which was not consummated and charges aggregating $1.1 million for
contractual severance obligations in connection with acquired businesses.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations."
(2) Merger and other nonrecurring expenses in fiscal 1998 included
restructuring costs of $5.2 million and the write-off of deferred costs
aggregating $1.2 million related to a terminated acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
(3) The Company recorded a writedown of goodwill in fiscal 1998 based upon the
estimated impact of certain reductions in Medicare reimbursements on the
Company's continuing operations. See "Management Discussion and Analysis of
Financial Condition and Results of Operations - Restructuring Initiatives."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial
condition and consolidated results of operations of the Company should be read
in conjunction with the more detailed information contained in the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
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 Balanced Budget Act of
1997. 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
Balanced Budget Act of 1997. 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 Balanced Budget Act of 1997 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 "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.
17
<PAGE>
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 Consolidated Financial Statements.
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 "Risk Factors -- Restructuring Initiatives."
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 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>
18
<PAGE>
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 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," " --
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.
During fiscal 1996, the Company expanded its operations into the
Tampa/St. Petersburg, Florida market with four acquisitions which included
nursing and related patient services, durable medical equipment and respiratory
services. During fiscal 1997, the Company entered the Texas and New England
regions with five acquisitions, expanding its operations into Texas,
Massachusetts, New Hampshire, Rhode Island and Maine. Additionally, during
fiscal 1997, the Company expanded its ongoing operations in Pennsylvania, New
Jersey, Maryland and the Tampa/St. Petersburg, Florida market with five
acquisitions, and also expanded into Illinois as a result of a merger
transaction. The acquisitions in fiscal 1997 included nursing and related
patient services, infusion therapy, durable medical equipment and respiratory
services. The merger was accounted for as a pooling of interests 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
19
<PAGE>
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 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 "Business -- 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
Consolidated Financial Statements.
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 Consolidated Financial Statements.
Internal Growth
The Company experienced internal growth of 4% during fiscal 1998,
compared to 16% 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.
20
<PAGE>
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.
21
<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 % 100.0 % 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 revenues from managed care and
other non-governmental payors to continue to increase. See "Business -- Payor
Mix."
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
22
<PAGE>
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 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."
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
23
<PAGE>
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.
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
24
<PAGE>
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.
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 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.
25
<PAGE>
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.
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-
26
<PAGE>
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 "--
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 fiscal year or predictive
of future periods. See "--Internal Growth."
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98
----------- ---------- ----------- ----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share information)
Statement of income data:
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
27
<PAGE>
managed care organizations or other payors or the Company's inability to
decrease days net revenues outstanding could have a material adverse effect on
the Company's financial condition or results of operations. There can be no
assurance that the Company's days net revenues outstanding will not continue to
increase if these payors continue to follow protracted payment terms in
reimbursing the Company for its services. See "Business -- Payor Mix" and "Risks
Factors -- Risks Related to Collection of Accounts Receivable."
While the Company completed fourteen acquisitions between fiscal 1996
and 1997, no acquisitions were completed 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
"-- Acquisitions" and "Business - Strategy."
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 "Business -- 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
Consolidated Financial Statements.
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 credit facility (the "Credit Facility"). The Credit Facility,
as amended, limits the maximum amount of borrowings under
28
<PAGE>
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 Consolidated Financial
Statements.
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, delay or abandon its
development and expansion plans, and/or seek additional funds.
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. 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 for information
relating to the impact on the Company of new accounting pronouncements.
29
<PAGE>
BUSINESS
The Company
The Company is a leading provider of comprehensive home health care
services and products. The Company provides 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. The Balanced Budget Act of 1997 (the
"Budget Act") was enacted during fiscal 1998. This new law caused significant
changes to the Medicare system of reimbursement including the implementation of
an interim payment system (the "IPS") for the Company's Medicare cost-reimbursed
nursing agencies and reductions in Medicare oxygen services reimbursement rates.
These changes have had and are expected to continue to have a significant impact
on the Company's current and future operations. Additional changes could result
from recent legislation introduced into the U.S. Congress. The uncertainty of
the outcome of additional legislative and regulatory issues facing the home
health care industry have had a significant impact on this industry. See
Business -- Industry Overview", "-- Payor Mix" and "-- Government Regulation."
The Company implemented a restructuring plan during fiscal 1998 in
response to the changes in the Medicare system of reimbursement. This plan
included cost reduction and office consolidation initiatives and an assessment
of the continuing value of goodwill under the changing reimbursement
environment. This plan resulted in the Company recording 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 that 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."
Industry Overview
The importance of home health care is increasing as a result of
significant economic pressures within the health care industry. Total
expenditures within the health care industry, which have increased at twice the
rate of inflation in recent years, were approximately $1.1 trillion in 1995. The
ongoing pressure to contain health care costs, while maintaining high quality
care, is accelerating the growth of alternate site care, such as home health
care, that reduces hospital admissions and lengths of hospital stays. Home
health care, one of the fastest growing segments of the health care industry,
had total expenditures in 1995 of approximately $36.1 billion, including $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,
30
<PAGE>
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.
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.
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 Company's 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.
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 39.2% of the Company's
net revenues in fiscal 1998. 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
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<PAGE>
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.
Expand Through Acquisitions in Existing and New Markets. Generally, the
Company has followed an acquisition strategy of seeking to acquire home health
care businesses in existing and new markets. Between fiscal 1996 and fiscal 1997
the Company completed fourteen acquisitions in both 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 provides
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. As a result of the
uncertainty of the outcome of legislative and regulatory changes in the system
of Medicare reimbursement and restrictions under the Company's senior credit
facility, the Company has slowed its growth through acquisitions. The Company
completed no acquisitions in fiscal 1998. 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. However, the Company's acquisition strategy may change as a result of
the ongoing legislative and regulatory changes in the industry. 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."
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>
Nursing and Related Patient Services. The Company offers a broad range
of nursing and related patient services, including:
32
<PAGE>
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.
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:
33
<PAGE>
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 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
34
<PAGE>
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 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 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.
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
35
<PAGE>
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," and "-- Liquidity and Capital
Resources."
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.
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.
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
36
<PAGE>
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 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.
37
<PAGE>
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.
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 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 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
38
<PAGE>
in net revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Internal Growth."
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 "Risk Factors -- 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 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.
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."
39
<PAGE>
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. See "-- Medicare Programs."
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.
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 Consolidated Financial
Statements. 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.
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
40
<PAGE>
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."
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 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.
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
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("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 (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
42
<PAGE>
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
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.
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<PAGE>
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 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.
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.
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
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<PAGE>
maintains a health care agency professional liability insurance policy with
limits of $4.0 million per occurrence and an annual aggregate limit of $6.0
million. Health care professionals with whom the Company has contracted must
provide evidence that they carry at least $1.0 million of insurance coverage,
although there is no assurance that such providers will continue to do so, or
that such insurance is, or will continue to be, adequate or available to protect
the Company, or that the Company will not have liability independent of that of
such providers and/or their insurance coverage. While the Company believes that
it has adequate insurance coverage, there can be no assurance that any such
insurance will be sufficient to cover any judgments, settlements or costs
relating to any pending or future legal proceedings (including any related
judgments, settlements or costs) or that any such insurance will be available to
the Company in the future on satisfactory terms, if at all. Any judgments,
settlements or costs relating to pending or future legal proceedings which are
not covered by insurance could have a material adverse effect on the Company's
results of operations or financial condition.
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.
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
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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
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. The Company filed a motion to dismiss or alternatively to
transfer the action. This motion was recently denied by 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
Consolidated Financial Statements.
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 any recovery of 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.
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------------------- ---------- ----------------------------------------------------------------
<S> <C> <C>
Bruce J. Feldman..................................... 49 President, Chief Executive Officer and Chairman of the Board
David S. Geller...................................... 39 Chief Financial Officer
Colleen M. Lederer................................... 42 Corporate Vice President of Professional Services
Wanda Monical........................................ 44 Corporate Senior Vice President - Business Development and
Planning
Susan V. Juris....................................... 42 Corporate Vice President - Sales and Marketing
Joseph J. Grilli..................................... 47 Area Vice President, Northeast
James Weinstein...................................... 44 Area Vice President, Mid-Atlantic
Jerry G. Carroll..................................... 56 Senior Vice President, Southern Region
G. Michael Bellenghi................................. 50 Director
Harvey Machaver...................................... 73 Director
Donald M. Gleklen.................................... 61 Director
</TABLE>
Bruce J. Feldman, the founder of the Company, has served as President,
Chief Executive Officer and Chairman of the Board of the Company since it was
founded in December 1982. Prior to
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founding the Company, Mr. Feldman owned a Medicare-certified home health agency,
which became a subsidiary of the Company in 1982.
David S. Geller, became Chief Financial Officer in July 1998. From
February 1996 to July 1998, Mr. Geller was Senior Vice President/Chief Financial
Officer for Physician Support Systems, Inc., a provider of business management
services to physicians and hospitals. From May 1990 to February 1996, Mr. Geller
was a Senior Audit Manager for Deloitte & Touche, certified public accountants.
Colleen M. Lederer became Corporate Vice President of Professional
Services in July 1994. From 1987 to 1994, Ms. Lederer was Director of
Professional Services of the Company.
Wanda Monical became Corporate Senior Vice President - Business
Development and Planning in July 1998. From June 1997 to July 1998, Ms. Monical
was Corporate Vice President - Women's and Children's Health Services. From
March 1995 to March 1997, Ms. Monical was Vice President for Interim Healthcare,
Inc., a regional nursing services provider. From October 1992 to December 1994,
Ms. Monical served in senior development capacities at Olsten Kimberly Quality
Care, a national provider of nursing services.
Susan V. Juris became Corporate Vice President - Sales and Marketing
in July 1998. From February 1997 to July, 1998, Ms. Juris was Corporate Vice
President - Managed Care Services. From 1994 to 1997, Ms. Juris was a health
care consultant for Alternacare, Inc., which she founded in 1994 to provide
specialty consulting to home health and managed care companies. From 1989 to
1994, Ms. Juris was Executive Vice President and Chief Operating Officer of SNI
Home Care, Inc., a fully integrated, regional home care system and contract
management company.
Joseph J. Grilli became Area Vice President, Northeast in March 1997,
when the Mid-Atlantic Region was split into the Mid-Atlantic and Northeast
Regions. From July 1996 to April 1997, Mr. Grilli was the Vice President,
Mid-Atlantic Region and has been employed by the Company since 1988 in various
positions.
James Weinstein became Area Vice President, Mid-Atlantic in March 1997.
From 1991 to 1997, Mr. Weinstein was President of GHS Home Medical Services, a
home care provider owned by Graduate Health System, a vertically integrated
hospital system located in the Metropolitan Philadelphia area.
Jerry G. Carroll became Senior Vice President, Southern Region in
September 1997. From April 1996 to June 1997, Mr. Carroll was Division Vice
President for Columbia/HCA, a provider of home health care. From September 1995
to February 1996, Mr. Carroll was Area Vice President for Coram, a provider of
home infusion therapy. From April 1993 to September 1995, Mr. Carroll was Area
Vice President of HMSS Inc., a provider of home infusion therapy.
G. Michael Bellenghi has been a director of the Company since October
1994. Since January 1996, he has been the Chairman and Chief Executive Officer
of Recordex Services, Inc., a medical records retrieval company located in
Malvern, Pennsylvania. Mr. Bellenghi also serves as a director of F.Y.I.
Incorporated, the parent company of Recordex Services, Inc., a company with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934. From 1990 to 1996, Mr. Bellenghi was the Chief Executive Officer of
Paragon Management Group, Inc., a health care consulting company located in
Malvern, Pennsylvania.
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Harvey Machaver has been a director of the Company since December
1985. Since 1990, Mr. Machaver has been President of Scopus Evaluation Services
("Scopus"), a health care consulting firm located in New York, New York. Mr.
Machaver is a fellow of the American College of Health Care Executives and a
fellow of the New York Academy of Medicine.
Donald M. Gleklen has been a director of the Company since April 1998.
Since July 1996, he has been the Chairman and Chief Executive Officer of
Intelihealth, Inc., a provider of healthcare information and products to
consumers. Since March 1998 he has also served as Vice Chairman of the Maine
Merchant Bank. From February 1995 to December 1997 he was President of Jocard
Financial, an investment management firm. From March 1994 to February 1995, Mr.
Gleklen was special counsel to R.J. Brobyn & Associates, a law firm.
Director Compensation
Directors' Fees. Each director of the Company who is not also an
officer or employee of the Company receives a fee of $1,000 for each meeting of
the board of directors or any committee of the board of directors attended.
Consulting Arrangements. The Company has a consulting arrangement with
Scopus, of which Mr. Machaver is the principal stockholder. In fiscal 1998, 1997
and 1996, the Company paid consulting fees of approximately $44,000, $44,000 and
$40,000, respectively, to Scopus.
Stock Options. Under the Plan, Mr. Bellenghi and Mr. Machaver, non-
employee directors, were each granted on November 13, 1995 an option to purchase
10,000 shares of Common Stock at an exercise price of $7.50 (the "Directors'
Options"). The Directors Options are currently exercisable. Mr. Gleklen, a non-
employee director, was granted on April 14, 1998 an option to purchase 10,000
shares of Common Stock at an exercise price of $2.75. These options vest equally
over the three year period from the grant date through April 14, 2001.
Executive Compensation
Summary Compensation Table
The following table sets forth certain information regarding the
compensation paid to the Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company for services rendered in
all capacities to the Company for fiscal 1998, 1997 and 1996 (collectively the
"named executive officers"):
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<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation
---------------------- ---------------
Securities
Name and Fiscal Underlying All Other
Principal Position Year Salary Bonus Options Compensation
-------------------- ------ ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Bruce J. Feldman, 1998 $ 325,904 $ - - $15,460(2)
President and Chief 1997 300,000 - 100,000 33,792(3)
Executive Officer 1996 254,000 43,600 75,000 33,792(3)
Fred J. Nicholas 1998 194,135 - - -
Chief Operating 1997 165,000 - 50,000 -
Officer, Corporate (4) 1996 155,000 15,500 50,000 -
James Weinstein, 1998 138,137 - - -
Area Vice President-- 1997 28,846 - - -
Mid-Atlantic(5)
Joseph J. Grilli 1998 131,858 - 50,000(6) -
Area Vice President-- 1997 125,000 - 15,000 -
Northeast 1996 110,000 11,000 10,000 -
Colleen M. Lederer, 1998 112,167 - 5,000(7) -
Vice President of 1997 102,942 - - -
Professional Services, 1996 98,000 - 5,000 -
Corporate
</TABLE>
- -----------------------------
(1) Does not include the value of perquisites provided to certain executive
officers which in the aggregate did not exceed the lesser of $50,000 or
10% of such officer's salary and bonus.
(2) Consists of $15,460 of premiums on a split-dollar life insurance policy.
(3) Consists of $15,460 of premiums on a split-dollar life insurance policy
and $18,324 relating to indebtedness to the Company that was forgiven upon
the attainment of certain operating results.
(4) Mr. Nicholas resigned as Chief Operating Officer effective July 1, 1998.
(5) Mr. Weinstein started with the Company in April 1997.
(6) Reflects options to purchase 15,000, 15,000 and 10,000 shares of Common
Stock granted in July 1997, July 1996 and December 1995, respectively,
which were repriced during April 1998 to $3.00 per share from $12.00,
$10.00 and $7.50 per share, respectively. Additionally, includes an option
to purchase 10,000 shares of Common Stock granted in June 1998 at $3.44
per share.
(7) Reflects option to purchase 5,000 shares of Common Stock granted in
December 1995 which was repriced during April 1998 to $3.00 per share from
$7.50 per share.
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning stock
options granted during fiscal 1998 to the named executive officers. The
following table also sets forth the potential realizable value over the term of
the options (the period from grant date to the expiration date), based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
amounts do not represent the Company's estimate of future stock price. Actual
realizable values, if any, of stock options will depend on the future
performance of the Company's common stock.
49
<PAGE>
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual
Rates of Stock Price
Appreciation For
Individual Grants Option Term (1)
---------------------------------------------------------- ------------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees In Exercise Expiration
Name Granted Fiscal Year Price Date 5% 10%
- ------------------------------- ------------- --------------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Feldman......... - - - - - -
Fred J. Nicholas......... - - - - - -
James Weinstein.......... - - - - - -
Joseph J. Grilli......... 40,000(2) 8.2% $3.00 (2) - -
10,000 2.0% 3.44 6/14/08 - -
Colleen M. Lederer....... 5,000(3) 1.0% 3.00 12/14/05 - -
</TABLE>
- --------------------------
(1) Represents the difference between the market value of the Company's common
stock for which the option may be exercised, assuming that the market
value of the common stock appreciates in value from the date of grant to
the end of the option term at annualized rates of 5% and 10%,
respectively, and the exercise price of the option. The rates of
appreciation used in this table are prescribed by regulations of the
Securities and Exchange Commission and are not intended to forecast future
appreciation of the market value of the common stock.
(2) Reflects options to purchase 15,000, 15,000 and 10,000 shares of Common
Stock granted in July 1997, July 1996 and December 1995, respectively,
which were repriced during April 1998 to $3.00 per share from $12.00,
$10.00 and $7.50 per share, respectively, and which expire December 2005,
July 2006 and July 2007, respectively.
(3) Reflects option to purchase 5,000 shares of Common Stock granted in
December 1995 which was repriced during April 1998 to $3.00 per share from
$7.50 per share.
50
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth certain information concerning the
exercise of stock options during fiscal 1998 and the number and value of
unexercised options held at the end of fiscal 1998 by the named executive
officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Year-end Fiscal Year-End(2)
------------------------------ ------------------------------
Shares
Acquired on Value
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bruce J. Feldman - - 175,000 - - -
Fred J. Nicholas - - 93,333 8,334 $2,188 -
James Weinstein - - - - - -
Joseph J. Grilli 5,000 $56,875 21,666 28,334 - -
Colleen M. Lederer - - 3,333 1,667 - -
</TABLE>
(1) Calculated by determining the difference between the last reported sales
price of the common stock underlying the exercised Options on the date of
exercise and the exercise price.
(2) Calculated by determining the difference between the last reported sales
price of the common stock underlying the Options on June 30, 1998 and the
exercise price for those Options where the exercise price of the Options
exceeded the last reported sales price of the common stock.
Employment Agreements
Bruce J. Feldman. On September 1, 1995, the Company entered into an
employment agreement with Bruce J. Feldman, President and Chief Executive
Officer of the Company, for an initial term of three years, subject to automatic
annual extensions of one year on August 31, 1996 and each anniversary
thereafter. Pursuant to the terms of Mr. Feldman's employment agreement, Mr.
Feldman is entitled to receive (i) an annual base salary of $284,000, or such
higher amount as the Compensation Committee may determine (the "Base Salary"),
(ii) an annual cash bonus based on the Company's achievement of specified levels
of net income as determined by the Compensation Committee and (iii) a deferred
annuity program of $15,000 per year and other benefits at least equivalent to
those provided to the Company's other executive officers. The Base Salary will
be reviewed by the Compensation Committee on not less than an annual basis.
Pursuant to the employment agreement, Mr. Feldman is also entitled to receive a
car allowance of at least $9,000 per year.
Mr. Feldman's employment agreement may be terminated by the Company
with or without cause, which is defined to include, among other things, the
material breach of the employment agreement by Mr. Feldman, gross negligence in
the performance of his duties, conviction of a felony or commission of a
material act of dishonesty or breach of trust with respect to the Company. The
employment
51
<PAGE>
agreement may also be terminated by Mr. Feldman for good reason, which includes,
among other things, the demotion or removal of Mr. Feldman, a material
diminishment of his responsibilities, a reduction in his Base Salary, failure to
be re-elected to the Board or upon a change in control of the Company. In the
event of termination for good reason (including the Company's failure to renew
the term of the employment agreement) by Mr. Feldman, or without cause by the
Company, Mr. Feldman will be entitled to receive, among other things, regular
payments of his Base Salary for three years and have any unvested stock options
and awards accelerate and become fully exercisable. In the event of termination
by the Company for cause or for any other reason, Mr. Feldman will be entitled
to receive any unpaid salary and benefits through the date of termination. Under
the employment agreement, Mr. Feldman is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr. Feldman
is prohibited from soliciting employees or customers of the Company or engaging
or participating in any business which competes with the Company within a 100-
mile radius of any of the Company's branch offices while he is employed by the
Company and for one year thereafter or, in the event of termination by Mr.
Feldman for good reason (including the Company's failure to renew the term of
the employment agreement) or by the Company without cause, for three years
thereafter.
David S. Geller. On July 20, 1998, the Company entered into an
employment agreement with David S. Geller, Chief Financial Officer, for an
initial term of three years, subject to automatic annual extensions of one year
on July 19, 1999 and each anniversary thereafter. Pursuant to the terms of Mr.
Geller's employment agreement, Mr. Geller is entitled (i) to receive a base
salary of at least $165,000 per year through January 19, 1999, which amount will
be increased to $175,000 per year on January 20, 1999, (ii) to participate in a
bonus program in the event the Company achieves targeted consolidated net
income, and (iii) to receive other benefits similar to those provided to the
Company's other officers. Mr. Geller was also granted an option to purchase
150,000 shares of the Company's Common Stock at a per share exercise price of
$2.25. These shares vest equally over the three-year period ended June 20, 2001.
Mr. Geller's employment agreement may be terminated by the Company with or
without cause, which is defined to include, among other things, the material
breach of the employment agreement by Mr. Geller, gross negligence in the
performance of his duties, conviction of a felony or commission of a material
act of dishonesty or breach of trust with respect to the Company. The employment
agreement may also be terminated by Mr. Geller for good reason, which includes,
among other things, the demotion or removal of Mr. Geller, a material
diminishment of his responsibilities, a reduction in his base salary, or upon a
change of control of the Company. In the event of termination for good reason
(including the Company's failure to renew the term of the employment agreement)
by Mr. Geller, or without cause by the Company, Mr. Geller will be entitled to,
among other things, receive regular payments of his base salary for 12 months
after termination, have any stock options and awards issued to Mr. Geller become
fully vested and have health insurance continue to be provided to Mr. Geller for
a period of 12 months from the date of his termination. If Mr. Geller terminates
the employment agreement for good reason as a result of a change of control he
will be entitled to receive regular payments of his base salary for the period
which is the greater of (i) 12 months after the termination or (ii) the number
of months remaining in the initial term of the employment agreement. In the
event of termination by the Company for cause, Mr. Geller will be entitled to
receive any unpaid salary and benefits through the date of termination. Under
the employment agreement, Mr. Geller is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr. Geller
is prohibited from soliciting employees or customers of the Company or engaging
or participating in any business which competes with the Company within a 100-
mile radius of any of the Company's offices while he is employed by the Company
or receiving severance payments from the Company and for one year thereafter.
Joseph J. Grilli. On May 1, 1998, the Company entered into an
employment agreement with Joseph J. Grilli, Area Vice President, Northeast, for
an initial term of three years, subject to automatic annual extensions of one
year on April 30, 1999 and each anniversary thereafter. Pursuant to the terms of
Mr. Grilli's employment agreement, Mr. Grilli is entitled (i) to receive a base
salary of at least $129,000
52
<PAGE>
per year, (ii) to participate in a bonus program in the event the Company
achieves targeted consolidated net income, and (iii) to receive other benefits
similar to those provided to the Company's other officers. Mr. Grilli's
employment agreement may be terminated by the Company with or without cause,
which is defined to include, among other things, the material breach of the
employment agreement by Mr. Grilli, gross negligence in the performance of his
duties, conviction of a felony or commission of a material act of dishonesty or
breach of trust with respect to the Company. The employment agreement may also
be terminated by Mr. Grilli for good reason, which includes, among other things,
the demotion or removal of Mr. Grilli, a material diminishment of his
responsibilities, a reduction in his base salary, or upon a change of control of
the Company. In the event of termination for good reason (including the
Company's failure to renew the term of the employment agreement) by Mr. Grilli,
or without cause by the Company, Mr. Grilli will be entitled to, among other
things, receive regular payments of his base salary for 12 months after
termination, have any stock options and awards issued to Mr. Grilli become fully
vested and have health insurance continue to be provided to Mr. Grilli for a
period of 12 months from the date of his termination. If Mr. Grilli terminates
the employment agreement for good reason as a result of a change of control he
will be entitled to receive regular payments of his base salary for the period
which is the greater of (i) 12 months after the termination or (ii) the number
of months remaining in the initial term of the employment agreement. In the
event of termination by the Company for cause, Mr. Grilli will be entitled to
receive any unpaid salary and benefits through the date of termination. Under
the employment agreement, Mr. Grilli is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr. Grilli
is prohibited from soliciting employees or customers of the Company or engaging
or participating in any business which competes with the Company within a 100-
mile radius of any of the Company's offices while he is employed by the Company
or receiving severance payments from the Company and for two years thereafter.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 30, 1998, certain
information with respect to the beneficial ownership of the Common Stock (i) by
each person who is known by the Company to be the beneficial owner of more than
5% of the Common Stock, (ii) by each director of the Company, (iii) by each
executive officer of the Company named in the Summary Compensation Table and
(iv) by all directors and executive officers of the Company as a group. Except
as otherwise indicated, all information is as of June 30, 1998 and the
beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares.
<TABLE>
<CAPTION>
Shares Beneficially Owned (2)
----------------------------------------
Name and Address of Beneficial Owner(1) Number Percent
- ------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
Bruce J. Feldman (3)............................... 784,603 8.0%
Fred J. Nicholas(4)................................ 94,333 1.0%
David S. Geller.................................... - -
James Weinstein.................................... 2,200 (*)
Joseph J. Grilli(5)................................ 31,666 (*)
Colleen M. Lederer................................. 3,733 (*)
G. Michael Bellenghi(6)............................ 10,000 (*)
Harvey Machaver(7)................................. 37,591 (*)
Donald Gleklen..................................... 20,000 (*)
Wasatch Advisers, Inc. (8)......................... 781,481 8.0%
Wellington Management Co., L.L.P. (9).............. 758,500 7.8%
Joseph Falkson (10)................................ 579,901 5.9%
Susan Falkson (10)................................. 579,901 5.9%
Michael Falkson (10)............................... 579,901 5.9%
Peter Falkson (10)................................. 579,901 5.9%
All Directors and Executive
Officers as a group (11 persons)(11)............ 990,792 10.1%
</TABLE>
- -----------------------
(*) Denotes less than 1.0%
(1) Except as otherwise shown, the address of each person listed above is in
care of the Company, 2200 Renaissance Boulevard, Suite 300, King of
Prussia, PA 19406.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and includes
voting or investment power with respect to the shares. Shares of the
Company Common
54
<PAGE>
Stock subject to securities exercisable within 60 days following June 30,
1998, are deemed outstanding for computing the share ownership and
percentage ownership of the person holding such securities, but are not
deemed outstanding for computing the percentage of any other person.
(3) Includes 95,238 shares of the Company Common Stock held by the Company's
Profit Sharing Plan, of which Mr. Feldman is sole voting trustee, 175,000
shares of the Company Common Stock which may be acquired upon the exercise
of stock options, and 5,000 shares of the Company Common Stock which may be
acquired upon the exercise of warrants.
(4) Includes 93,333 shares of the Company Common Stock which may be acquired
upon the exercise of options.
(5) Includes 21,666 shares of the Company Common Stock which may be acquired
upon the exercise of options.
(6) Represents shares of the Company Common Stock which may be acquired upon
the exercise of options.
(7) Consists of 20,000 shares of the Company Common Stock which may be acquired
upon the exercise of warrants, 10,000 shares of the Company Common Stock
which may be acquired upon the exercise of options and 7,591 shares held
jointly with Mr. Machaver's spouse.
(8) The shares of the Company Common Stock are owned by a variety of investment
advisory clients of Wasatch Advisers, Inc. ("Wasatch"), which clients
receive dividends with respect to and proceeds from the sale of such
shares. No such client is known to beneficially own more than 5% of the
Company Common Stock. Wasatch has sole dispositive and voting power with
respect to all 781,481 of the shares of the Company Common Stock. The
information set forth herein with respect to the beneficial ownership of
the Company Common Stock is as of June 30, 1998 and is derived from
information supplied to the Company by Wasatch. The address of such
beneficial owner is 68 S. Main Street, Suite 400, Salt Lake City, UT 84101.
(9) The shares of the Company Common Stock are owned by a variety of investment
advisory clients of Wellington Management Company ("Wellington"), which
clients receive dividends with respect to and proceeds from the sale of
such shares. No such client is known to beneficially own more than 5% of
the Company Common Stock. Wellington has shared dispositive power with
respect to all 758,500 of the shares of the Company Common Stock and shared
voting power with respect to 306,000 of the shares of the Company Common
Stock. The information set forth herein with respect to the beneficial
ownership of the Company Common Stock is as of June 30, 1998 and is derived
information supplied to the Company by Wellington. The address of such
beneficial owner is 75 State Street, Boston, MA 02109.
(10) Each of Joseph Falkson, Susan Falkson, Michael Falkson and Peter Falkson
have shared voting and dispositive power with respect to these shares.
Their address is 132 Lakeside Drive West, Centerville, MA 02632.
(11) Includes 25,000 shares of the Company Common Stock which may be acquired
upon the exercise of warrants and 319,998 shares of the Company Common
Stock which may be acquired upon the exercise of options.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The statements made under this section include summaries of certain
provisions contained in the Company's Amended and Restated Articles of
Incorporation (the "Articles") and in its Amended and Restated Bylaws
("Bylaws"). The Articles and Bylaws have been filed as exhibits to the
Registration Statement of which this Prospectus is a part and are incorporated
herein by reference.
The Articles authorize the Company to issue 20,000,000 shares of
Company Common Stock and 10,000,000 shares of preferred stock, no par value,
issuable in series, the relative rights limitations and preferences of which may
be designated by the Board of Directors. As of June 30, 1998, an aggregate of
9,764,097 shares of Company Common Stock were issued and outstanding.
Common Stock
The Articles provide that the holders of Company Common Stock are
entitled to one vote per share on all matters to be voted upon by stockholders.
The holders of Company Common Stock are entitled, among other things, (i) to
share ratably in dividends if, when and as declared by the Board of Directors
out of funds legally available for the payment of dividends and (ii) in the
event of liquidation, dissolution or winding-up of the Company, to share ratably
in the distribution of assets legally available therefor, after payment of debts
and expenses. The holders of Company Common Stock do not have cumulative voting
rights in the election of directors and have no preemptive rights to subscribe
for additional shares of Company Common Stock. All currently outstanding shares
of the Company Common Stock are, and the shares offered hereby, when sold in the
manner contemplated by this Prospectus, will be, fully paid and nonassessable.
Preferred Stock
Although the Company has no present plans to issue shares of Preferred
Stock, the Board of Directors is authorized under the Articles, without further
shareholder action, to provide for the issuance of preferred stock in one or
more classes or series in such numbers of shares, and with such voting rights,
designations, preferences, limitations, and special or relative rights (if any),
as determined by the Board of Directors.
It is not possible to state the actual effect of the authorization of
the Preferred Stock upon the rights of holders of the Company Common Stock until
the Board of Directors determines the specific rights of the holders of a series
of preferred stock. However, the issuance of shares of Preferred Stock could
adversely affect the rights of the holders of Company Common Stock. Such effects
might include (i) restrictions on dividends on the Company Common Stock if
dividends on Preferred Stock have not been paid; (ii) dilution of the voting
power of the Company Common Stock to the extent that the Preferred Stock has
voting rights; (iii) dilution of the equity interest of the Company Common Stock
to the extent that the Preferred Stock is converted into Company Common Stock;
or (iv) the Company Common Stock not being entitled to share in the Company's
assets upon liquidation until satisfaction of any liquidation preference granted
the holders of the Preferred Stock. Additionally, the issuance of Preferred
Stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, may be used to deter, discourage or
make more difficult the assumption of control of the Company by another
corporation or person through a tender offer, merger, proxy context or
56
<PAGE>
similar transaction or series of transactions. See "Risk Factors--Potential
Effects of Anti-Takeover Provisions; Issuance of Preferred Stock."
Anti-Takeover Provisions
Certain provisions of the Articles, Bylaws and state law may be deemed
to have anti-takeover effect and may delay, deter or prevent a merger, tender
offer, proxy context or other takeover attempt. In addition to providing for a
classified Board of Directors and the issuance of Preferred Stock having terms
established by the Board of Directors without stockholder approval, the Articles
provide that (i) at least 65% of the votes entitled to be cast by stockholders
is required to approve amendments to the Articles, unless at least a majority of
the incumbent directors on the Board of Directors has voted in favor of the
amendment, in which case only a majority of the votes cast by stockholders is
required to approve the amendment, (ii) directors can be removed only for cause
and only by a vote of at least 65% of the votes entitled to be cast by
stockholders and (iii) the stockholders of the Company are not entitled to call
special meetings of the stockholders. In addition, the Articles provide that
actions by stockholders without a meeting must receive the unanimous written
consent of all stockholders. The Bylaws establish procedures for the nomination
of directors by stockholders and the proposal by stockholders of matters to be
considered at meetings of the stockholders, including the submission of certain
information by the times prescribed in the Bylaws.
The BCL also provides that the directors of a corporation, in making
decisions concerning takeovers or any other matters, may consider, to the extent
that they deem appropriate, among other things, (i) the effects of any proposed
transaction upon any or all groups affected by such action, including, among
others, stockholders, employees, suppliers, customers and creditors, (ii) the
short-term and long-term interests of the corporation and (iii) the resources,
intent and conduct of the person seeking control.
57
<PAGE>
PLAN OF DISTRIBUTION
The Company is providing this Prospectus to you as a limited partner of
one of the Partnerships. The Partnerships acquired the 280,669 shares of the
Company's Common stock owned by them in connection with the Company's
acquisition of Home Health Systems, Inc. in November 1996 (the "HHSI
Acquisition"). In connection with the HHSI Acquisition, the general partners of
the Partnerships became indirect subsidiaries of the Company. The Partnerships
conduct no business and hold no assets other than the Company's Common Stock.
The general partners of the Partnership are soliciting your vote to
dissolve and liquidate the Partnership in which you are a Partner. The
partnership agreement of the Partnerships provide that the Partnerships may be
dissolved at any time by the vote of the Partners holding at least sixty-six and
two-thirds percent of the outstanding partnership interests. Each Partnership
that receives the required vote of its Partners will be dissolved and liquidated
and its assets will be distributed in accordance with the terms of the
partnership agreement of that Partnership. If the Partnership in which you are a
Partner is dissolved and liquidated you will receive a portion of the Company
Common Stock held by that Partnership.
The following table sets forth, opposite the name of each Partnership
the total number of Shares owned by that Partnership.
Total Number of
Name of Shares Owned by
Partnership the Partnership
----------- ---------------
Total Care Limited Partnership 44,398
Total Care Limited Partnership II 70,410
Total Care of Maryland Limited Partnership 32,261
Total Care of Northern Virginia Limited
Partnership 24,187
Total Care Company of Southcentral
Pennsylvania 38,660
Total Care Health Systems Company of Eastern
Pennsylvania 25,948
Total Care Company of Central New Jersey L.P. 19,672
Total Care Health Systems of Greater
Philadelphia Limited Partnership 18,073
Potomac Total Care, L.P. 7,060
The General Partners have determined that an in kind distribution of
the shares of Company Common stock owned by the Partnerships will be made to the
Partners upon dissolution of the Partnership in accordance with the terms of the
Partnership Agreements. The Partnership Agreements provide that upon dissolution
the assets of the Partnership are required to be applied and distributed in the
following order:
58
<PAGE>
(i) to the payment and discharge of all of the Partnership's debts and
liabilities to persons other than the Partners;
(ii) to the payment and discharge of all the Partnership's debts and
liabilities to the Partners (other than in respect of their Partnership
interests); and
(iii) to and among the Partners in accordance with their respective
positive balances in their capital accounts, after their capital accounts have
been adjusted to reflect the profit or loss of the Partnership upon the
dissolution.
In determining profit and loss from the dissolution of each Partnership,
profit of the dissolving Partnership will be allocated first to the Partners
having deficit balances in their capital accounts in proportion to and to the
extent of such deficits. Any remaining profit and all loss will be allocated
among the Partners so as to produce, as nearly as possible, positive capital
account balances for the Partners of the dissolving Partnership which will
result in net cash proceeds available from the dissolution in the following
amounts and sequences:
(i) first, 99% to the limited partners of the dissolving partnership, as a
class, and 1% to the general partner of the dissolving partnership, until the
limited partners of the dissolving partnership, as a class, would receive an
aggregate amount (taking into account prior distributions of capital, if any)
equal to their aggregate capital contributions to the dissolving Partnership;
and
(ii) second, the balance, if any, 70% to the limited partners of the
dissolving Partnership, as a class, and 30% to the general partner.
All profit and loss and distributions which are allocable to the limited
partners of a dissolving Partnership as a class, will be allocated among the
limited partners in accordance with their respective interests in the dissolving
Partnership.
No fractional shares of Company Common Stock will be distributed to the
Partners upon dissolution of the Partnerships. In lieu of the issuance of
fractional shares, cash adjustments will be paid to each Partner in respect of
any fraction of a share of Company Common Stock which would otherwise be
distributed under the applicable partnership agreement.
59
<PAGE>
The following table illustrates the distribution of the shares of Company
Common Stock owned by the Partnerships to the Partners of each Partnership that
would have occurred if these shares had been distributed to the Partners on the
basis of each Partnership having the liabilities it had as of June 30, 1998 as
set forth in the table and the Company's Common Stock having a market value
equal to $1.19, which was the last reported sale price of a share of the
Company's Common Stock on October 7, 1998. All of the liabilities of the
Partnerships represent amounts owed to the general partners of the Partnerships
as reimbursement for costs and expenses advanced by the general partners on
behalf of the Partnerships. The actual distribution of shares to the Partners of
each Partnership could differ from the illustration set forth in the table if
the liabilities of the Partnerships and the closing sale price of Company Common
Stock as of the time of dissolution differs from the liabilities and closing
sale price reflected in the table.
<TABLE>
<CAPTION>
Aggregate
Number of
Shares of
Number of Company Common
Dollar Amount Shares to be Aggregate Stock to be
of Partnership Used to Number of Distributed per
Liabilities at Discharge the Shares to be each Outstanding
June 30, Partnership's Distributed to Unit of Limited
1998 Liabilities (1) Partners Partner Interest
--------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Total Care Limited
Partnership $16,767 14,119 25,708 864
Total Care Limited
Partnership II 24,516 20,645 42,516 1,009
Total Care of Maryland
Limited Partnership 13,465 11,338 17,601 633
Total Care of Northern
Virginia Limited
Partnership 11,018 9,278 12,418 640
Total Care Company of
Southcentral Pennsylvania 15,077 12,696 21,983 703
Total Care Health Systems
Company of Eastern
Pennsylvania 11,104 9,350 13,926 669
Total Care Company of
Central New Jersey 9,727 8,191 9,455 325
Total Care Health Systems
of Greater Philadelphia 10,304 8,677 7,535 290
Potomac Total Care, L.P. 3,758 3,164 3,168 384
</TABLE>
(1) Determined by dividing the dollar amount of partnership liabilities at
June 30, 1998 by $1.19, the last reported sale price of Company Common
Stock on October 7, 1998.
The general partners intend to effect the distribution of shares of
Company Common stock to the Partners as soon as practicable after the vote
approving the dissolution and liquidation of a Partnership is obtained.
60
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences
of the proposed liquidation of the Partnerships. This summary is for general
information purposes only. Each Partner should consult his, her or its tax
advisor for a complete analysis of the federal, state and local income tax
effect of the transaction on such Partner. This summary of federal income tax
consequences assumes that each of the Partnerships is taxable as a partnership
for federal income tax purposes, and not as an association taxable as a
corporation. References to the "Code" mean the Internal Revenue Code of 1986, as
amended. References to the fair market value of shares of Company Common Stock
below mean such fair market value as determined on the date of distribution of
such stock by a Partnership.
The transfer of shares of Company Common Stock to a general partner to
repay expenses advanced by the general partner as loans to a Partnership will be
treated as a taxable disposition of such shares of Company Common Stock by the
Partnership. The Partnership will recognize gain to the extent the fair market
value of the shares so transferred to the general partner exceeds the adjusted
basis of such shares. If the adjusted basis of the shares so transferred exceeds
the fair market value of such shares, the Partnership will recognize a loss on
the transfer. Any gain or loss recognized will be allocated among the Partners
of the Partnership in accordance with the Partnership's Partnership Agreement.
Since each Partnership has held the shares as a capital asset for more than one
year, but will not have held the shares for more than eighteen months at the
time of such disposition, any such gain or loss will be long-term capital gain
or loss, and the gain, if any, allocated to a Partner who is an individual will
be subject to a maximum federal income tax rate of 28%.
Some shares of Company Common Stock may be redeemed from all or some of
the Partnerships by the Company for cash, to avoid the distribution of
fractional shares to any Partner. Such redemption would constitute a sale of the
redeemed shares for federal income tax purposes only if the redemption was "not
essentially equivalent to a dividend" as determined under Section 302(b)(1) of
the Code. The Partnership and the Company believe there is not sufficient
authority to treat the redemption as a sale of the redeemed shares under Section
302(b)(1), and accordingly will report the amount of cash received in the
redemption as a dividend to the extent of the Company's earnings and profits,
then as a tax free recovery of capital to the extent of the adjusted basis of
the redeemed shares, and as gain from the sale of the shares to the extent of
any additional amount of cash. Any income recognized by the Partnership as a
result of the redemption will be allocated among the Partners in accordance with
the Partnership Agreement. Therefore, the income allocated to a Limited Partner
in connection with the redemption may be greater of less than the cash received
by a Limited Partner with respect to a fractional interest.
Under Section 731(b) of the Code, none of the Partnerships will
recognize any gain or loss on the distribution of shares of Company Common Stock
to the Partners in exchange for their interests in the Partnerships in
connection with the liquidation of the Partnerships.
Since the shares of Company Common Stock are "marketable securities" as
defined in Section 731(c)(2) of the Code, the determination of the federal
income tax consequences to a Partner of receipt of such shares in connection
with the liquidation of a Partnership will depend upon (a) the fair market value
of the shares of Company Common Stock at the time of the distribution to the
Partner, and (b) the Partner's adjusted basis in his, her or its interest in the
Partnership immediately before the distribution.
61
<PAGE>
If the Partner's adjusted basis in his, her or its interest in the
Partnership immediately before the distribution exceeds the sum of the cash and
the fair market value of the shares of Company Common Stock distributed to the
Partner, under Section 731(a)(2) of the Code the Partner will not be permitted
to recognize the loss on the liquidation unless the Partner receives only cash
(that is, a situation where the Partner was entitled to only a fractional share
of Company Common Stock, and receives cash in lieu of the fractional share).
Under Section 732(b) of the Code, the Partner's adjusted basis in the shares of
Company Common Stock received will be the same as the adjusted basis of the
Partner's interest in the Partnership immediately before the liquidation,
reduced by any cash received by the Partner. Under Section 732(c) of the Code,
such adjusted basis will be allocated pro rata among each share of Company
Common Stock received by such Partner.
If the sum of (a) cash and (b) the fair market value of the shares of
Company Common Stock distributed to a Partner reduced by the amount of gain that
would have been allocated to the Partner if the Partnership had sold all of its
Company Common Stock immediately before the liquidation, exceeds the Partner's
adjusted basis in his, her or its interest in the Partnership, under Section
731(a)(1) of the Code the Partner will recognize gain on the distribution equal
to the amount of such excess. Section 731(a) provides that gain is recognized by
a partner on a distribution only if cash distributed exceeds the adjusted basis
of the partner's interest in the partnership. However, for this purpose (but not
for purposes of determining whether a partner is allowed to recognize a loss),
Section 731(c)(1) of the Code, as modified by Section 731(c)(3)(B) of the Code,
treats marketable securities as cash to the extent of the fair market value of
such securities, reduced by (a) the amount of the net gain that would have been
allocated to the partner if the partnership had sold all of its marketable
securities immediately before the distribution, minus (b) such partner's share
of the net gain of marketable securities held by the partnership immediately
after the distribution. Since none of the Partnerships will hold any marketable
securities after the liquidation, the effect of this formula is that, for
purposes of determining the gain recognized by a Partner on the distribution,
the shares of Company Common Stock distributed to a Partner will be treated as
cash to the extent the fair market value of such shares exceeds the net gain
that would have been allocated to the Partner if the Partnership had sold all of
its shares immediately prior to the distribution. If a Partner recognizes gain
under these provisions, under Section 731(c)(4) of the Code the adjusted basis
of the shares of Company Common Stock received by the Partner will be equal to
the adjusted basis of such Partner's interest in the Partnership immediately
before the distribution, increased by the gain recognized by the Partner as a
result of the distribution. Such adjusted basis would be allocated pro rata
among all of the shares received by the Partner.
For purposes of computing a Partner's holding period for any shares of
Company Common Stock received from a Partnership, Section 735(b) of the Code
provides that the holding period shall include the period during which the
Partnership held such shares. Therefore, even if a Partner acquired his, her or
its interest in the Partnership before or after the date on which the
Partnerships acquired the shares of Company Common Stock, the Partner's holding
period for the shares of Company Common Stock will begin on November 13, 1996
(the day after the date on which the Partnerships acquired the Company Common
Stock). The Partner's holding period for the Company Common Stock may be
relevant to the Partner for such purposes as determining whether, on a
subsequent disposition of such shares, the Partner is entitled to the reduced
capital gains rate applicable to capital assets held by individuals for more
than eighteen months.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 9,765,764 shares of Common Stock outstanding. Except
for approximately 1,000,000 shares of Common Stock which were issued and sold by
the Company in private transactions and are "restricted" stock within the
meaning of Rule 144, all of the Company's outstanding shares, including the
shares of Company Common Stock included in this Offering, will be freely
tradeable without restriction or further registration under the Securities Act.
The shares of Common Stock which are "restricted" may not be resold unless they
are registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, such as Rule 144 or Rule 144A under the Securities
Act.
In general, under Rule 144 as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned
"restricted" shares (as defined under Rule 144) for at least one year, and any
affiliate who owns shares that are not "restricted" shares, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock reported through the
Nasdaq Stock Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. In addition, a shareholder who is not deemed an
affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned his shares for at least two years, is entitled to sell
such shares under Rule 144(k) without regard to volume limitations, manner of
sale provisions, notice requirements or the availability of current public
information concerning the Company. Rule 144A under the Securities Act permits
the immediate sale by the current holders of "restricted" shares of all or a
portion of their shares to certain qualified institutional buyers, as defined in
Rule 144A.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market prices for the Common Stock and make it more
difficult for the Company to sell equity securities in the future at a time and
price which it deems appropriate.
63
<PAGE>
EXPERTS
The consolidated balance sheets as of June 30, 1998 and 1997 and the
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998, included in this
prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Under the rules and regulations of the Securities and Exchange
Commission (the "Commission"), the distribution of the Shares to the Partners on
the dissolution of the Partnerships constitutes an offering of the Company
Common Stock. Accordingly, the Company has filed with the Commission a
Registration Statement on Form S-1 under the Securities Act of 1933, as amended
(the "Securities Act") with respect to such offering. This Prospectus
constitutes a prospectus of the Company filed as part of the Registration
Statement. This Prospectus does not contain all of the information set forth in
such Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For such information,
reference is made to the Registration Statement and the exhibits filed as a part
thereof. Such additional information may be obtained from the Commission's
principal office in Washington, D.C. Statements contained in this Prospectus or
in any document incorporated in this Prospectus by reference as to the contents
of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
to such other document, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commissioner's regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621 and
75 Park Place, 14 Floor, New York, New York 10007. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a World Wide Web site that contains registration statements, reports,
proxy and information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web
site can be accessed at http://www.sec.gov.
In addition, the Company's common stock is listed on the Nasdaq
National Market System. The Company's reports, proxy statements and other
information filed under the Exchange Act may also be inspected and copied at the
office of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. 20006.
No person is authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Prospectus
to or from any person, in any jurisdiction where it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any
64
<PAGE>
distribution of the securities made under this Prospectus shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus.
This Prospectus does not constitute a prospectus for the public
reoffering of the Company Common Stock.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Home Health Corporation of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-1
Fiscal Year End Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1998 F-2
Consolidated Statements of Operations for the fiscal years ended June 30, 1996,
1997 and 1998 F-3
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1996,
1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended
June 30, 1996, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
66
<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.
/s/ 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
F-1
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS June 30, June 30,
------ 1997 1998
--------------- ---------------
<S> <C> <C>
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.
</TABLE>
F-2
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
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.
</TABLE>
F-3
<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
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Class A and B Common Stock, Paid-in (Accumulated
Common Stock no par Capital Deficit)
--------------------- ---------------------- ------------- ----------------
Shares Amount Shares Amount
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 2,634 $264 185 $ - $2,394 $2,607
Exercise of options and
warrants 194 19 231 190 22
Issuance of warrants - - - - 1,192 -
Recapitalization (2,828) (283) 3,465 4,713 (3,504) -
Issuance of common stock - - 3,794 25,822 - -
Conversion of subordinated
note - - 400 3,000 - -
Write-off of Series C
preferred stock discount - - - - - (786)
Preferred stock
dividends - - - - - (117)
Forgiveness of
shareholder loan - - - - - -
Net income - - - - - 2,133
--------- ---------- ---------- ---------- -------------- ----------------
Balance at June 30, 1996 - - 8,075 33,725 104 3,837
Preferred stock dividends - - - - - (6)
Exercise of stock options - - 23 31 - -
Issuance of common stock - - 661 6,379 - -
Forgiveness of shareholder
loan - - - - - -
Exchange of preferred shares - - 81 1,250 - -
Conversion of notes to common
stock - - 189 2,042 (104) -
Expiration of redemption
requirement - - 100 500 - -
Net income - - - - - 2,814
--------- ---------- ---------- ---------- -------------- ----------------
Balance at June 30, 1997 - - 9,129 43,927 - 6,645
Exercise of stock options - - 50 349 - -
Issuance of common stock - - 585 20 - -
Net loss - - - - - (24,848)
--------- ---------- ---------- ---------- -------------- ----------------
Balance at June 30, 1998 - $ - 9,764 $44,296 $ - $(18,203)
========= ========== ========== ========== ============== ================
<CAPTION>
Stock
Treasury Subscriptions
Stock Receivable Total
----------- ---------------- -----------
<S> <C> <C> <C>
Balance at June 30, 1995 $(291) $(36) $4,938
Exercise of options and
warrants 231
Issuance of warrants - - 1,192
Recapitalization 291 - 1,217
Issuance of common stock - - 25,822
Conversion of subordinated
note - - 3,000
Write-off of Series C
preferred stock discount - - (786)
Preferred stock
dividends - - (117)
Forgiveness of
shareholder loan - 18 18
Net income - - 2,133
---------- --------------- -----------
Balance at June 30, 1996 - (18) 37,648
Preferred stock dividends - - (6)
Exercise of stock options - - 31
Issuance of common stock - - 6,379
Forgiveness of shareholder
loan - 18 18
Exchange of preferred shares - - 1,250
Conversion of notes to common
stock - - 1,938
Expiration of redemption
requirement - - 500
Net income - - 2,814
---------- --------------- -----------
Balance at June 30, 1997 - - 50,572
Exercise of stock options - - 349
Issuance of common stock - - 20
Net loss - - (24,848)
---------- --------------- -----------
Balance at June 30, 1998 $ - $ - $26,093
========== =============== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<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.
F-6
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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:
F-7
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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
=========== =========== =========== =============
(1) Net income reduced to reflect extraordinary loss of $1.2 million on early
extinguishment of indebtedness.
</TABLE>
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.
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
F-8
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-9
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-10
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
=============== ===============
5. Long-term Debt
At June 30, 1997 and 1998, long-term debt consisted of:
1997 1998
--------------- ---------------
(amounts in thousands)
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>
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 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
F-11
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
subordinated 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.
Maturities of long-term debt, including capitalized lease obligations,
for the next five fiscal years are as follows:
<TABLE>
<CAPTION>
Fiscal year ended
June 30
---------------------
(amounts in thousands)
<S> <C>
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
F-12
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest expense of approximately $60,000 annually, assuming the LIBOR rate at
June 30, 1998 does not fluctuate during fiscal 1999.
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.
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.
F-13
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-14
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Expected
average risk free Expected life of
Fiscal Year Issued interest 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>
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> Noncancelable
Capital Operating
Leases 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 capital
lease payments $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
F-15
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-16
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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)
=============== ============== ==============
A reconciliation of the U.S. Federal income tax rate to the effective
tax rate is as follows:
1996 1997 1998
------------- ------------- ------------
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%)
============= ============= ============
Deferred tax assets (liabilities) were comprised of the following:
1997 1998
---------------- -----------------
(amounts in thousands)
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>
F-17
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
F-18
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
-------------------------------------------
Filing Fees $ 64
Attorney Fees 10,000
Accounting Fees 6,000
Printing Fees 5,000
-----------
$ 21,064
Item 14. Indemnification of Directors and Officers
-----------------------------------------
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law of 1988, as amended, (the "BCL"), contain
provisions for mandatory and discretionary indemnification of a corporation's
directors, officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has
the power to indemnify directors and officers under certain prescribed
circumstances against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
an action or proceeding, whether civil, criminal, administrative or
investigative, to which any of them is a part by reason of his being a
representative, director or officer of the corporation or serving at the request
of the corporation as a representative of another corporation, partnership,
joint venture, trust or other enterprise, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. Under Section 1743, indemnification
is mandatory to the extent that the officer or director has been successful on
the merits or otherwise in defense of any action or proceeding if the
appropriate standards of conduct are met.
Section 1742 provides for indemnification in derivative actions except
in respect of any claim, issue or matter as to which the person has been
adjudged to be liable to the corporation unless and only to the extent that the
proper court determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court deems
proper.
Section 1744 provides that, unless ordered by a court, any
indemnification under Section 1741 or 1742 shall be made by the corporation only
as authorized in the specific case upon a determination that the representative
met the applicable standard of conduct, and such determination will be made by
the board of directors (i) by a majority vote of a quorum of directors not
parties to
II-1
<PAGE>
the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable
and a majority of disinterested directors so directs, by independent legal
counsel; or (iii) by the shareholders.
Section 1745 provides that expenses incurred by an officer, director,
employee or agent in defending a civil or criminal action or proceeding may be
paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation.
Section 1746 provides generally that, except in any case where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17D of the
BCL shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding that office.
Section 1747 grants to a corporation the power to purchase and maintain
insurance on behalf of any director or officer against any liability incurred by
him or her in his or her capacity as officer or director, whether or not the
corporation would have the power to indemnify him or her against the liability
under Subchapter 17D of the BCL.
Section 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Subchapter 17D of the BCL to successor
corporations in fundamental changes and to representatives serving as
fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs and personal representative of such person.
HHCA's Amended and Restated Bylaws provide in general that HHCA shall
indemnify its officers and directors to the fullest extent authorized by law.
HHCA currently has directors' and officers' liability insurance which
covers certain liabilities, including liabilities to HHCA and its shareholders,
in the amount of $1.0 million.
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
Issuance of Unregistered Securities
Between fiscal 1996 and 1997 HHCA completed eleven acquisitions for
which it issued shares of its common stock as certain of the consideration for
the securities or assets acquired in each
II-2
<PAGE>
of the acquisitions. There were no acquisitions during fiscal 1998, however,
HHCA was required to issue shares during fiscal 1998 as additional consideration
in connection with an acquisition in fiscal 1997. The shares issued in
connection with these acquisitions were not registered under the Securities Act
of 1933 (the "Act"), as amended, in reliance upon the exemption from such
registration provided by Section 4(2) of the Act. The transactions in which the
shares were issued and the aggregate number of shares issued in each transaction
are set forth in the following table:
<TABLE>
<CAPTION>
Aggregate
Issuance Date Acquisition Shares Issued
- ---------------------------- ------------------------------------- ---------------------
<S> <C> <C>
November 8, 1995 Preferred Diagnostics and Medical
Services, Inc. 400,000
May 1, 1996 Progressive Home Health 46,939
May 1, 1996 Dependable Nurses, Inc. 38,462
May 1, 1996 Mobilsonix, Inc. 16,000
August 5, 1996 Dailey Resources, Ltd. 22,779
August 14, 1996 National Home Infusion, Inc. 38,483
October 1, 1996 Medical Express, Inc. 38,540
November 12, 1996 Home Health Systems, Inc. 455,238
December 1, 1996 R.S.D. Management, Inc. 94,118
March 27, 1997 Nahatan Drug, Inc. 380,048
April 9, 1997 PDN, Inc./Medical I.V., Inc. 84,243
March 30, 1998 Nahatan Drug, Inc. 579,901
</TABLE>
Item 16. Exhibits and Financial Statement Schedules
------------------------------------------
(a) Exhibits
Exhibit No. Description
- -----------
(a) 3.1 Amended and Restated Articles of Incorporation of the Company.
(a) 3.2 Amended and Restated Bylaws of the Company.
5.1 Opinion of Blank Rome Comisky & McCauley LLP**
(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 .
II-3
<PAGE>
(c) 10.4 Indemnification Agreement Among Home Health Corporation of America,
Inc. and its Nominees, LHS Holdings, Inc., Liberty Health
Services, Inc., Nurses Today M/C, Inc., PDN, Inc., Medical I.V.,
Inc. and Mark H. O'Brien.
(a) 10.5 Asset Acquisition Agreement among Home Care Medical Supply and
Equipment, Inc., Alpha Home Care Services, Inc., Joel Schreiber,
and Joseph J. D'Alessandro, including schedules and exhibits
thereto.
(a) 10.6 Subordination Agreement among CoreStates Bank, N.A., Summit
Ventures II, L.P., Summit Investors II, L.P., CoreStates
Enterprise Fund, and Alpha Home Care Services, Inc .
(a) 10.7 Stock Purchase Agreement by and between Home Health Corporation of
Delaware, Inc., William Moses, Milton Altshuler, Steven R.
Altshuler, and Jane Altshuler, relating to Delaware Acquisition.
(a) 10.8 Asset Acquisition Agreement between HHCDME, Inc., and Master
Medical Supply Co., Inc., relating to Delaware Acquisition.
(a) 10.9 Asset Acquisition Agreement between HHCD, Inc., and Professional
Home Health Care Agency, Inc., relating to Delaware Acquisition.
(a) 10.10 Indemnification Agreement relating to Delaware Acquisition.
(a) 10.11 Agreement among Home Health Care Corporation of Delaware, Inc.,
HHCD, Inc., HHCDME, Inc., Master Medical Supply Co., Inc.,
Professional Home Health Services, Inc., Professional Home Health
Care Agency, Inc., William Moses, Andra H. Moses, Steven R.
Altshuler, and Jane Altshuler, relating to Delaware Acquisition
(a) 10.12 Full Payment Guaranty of the Company relating to Delaware
Acquisition.
(a) 10.13 Subordination Agreement among CoreStates Bank, N.A., Summit
Ventures II, L.P., Summit Investors II, L.P., CoreStates
Enterprise Fund, and parties to Delaware Acquisition transaction
documents.
(a) 10.14 Separation Agreement among Home Health Corporation of America,
Inc., Home Health Corporation of Delaware, Inc., HHCD, Inc.,
HHCDME, Inc., Steven R. Altshuler, Jane E. Altshuler, William W.
Moses and Andra H. Moses
(a) 10.15 Asset Purchase Agreement between Pennsylvania Home Care, Inc. and
Healthcare Professionals, Inc .
(d) 10.16 Third Amended and Restated Credit Agreement.
(e) 10.17 Amendment No. 1 to the Third Amended and Restated Credit Agreement.
(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. *
(j) 10.20 Employment Agreement between the Company and David S. Geller. *
(j) 10.21 Employment Agreement between the Company and James J. Swiniuch. *
(j) 10.22 Employment Agreement between the Company and Joseph Grilli. *
II-4
<PAGE>
(g) 10.23 Amended and Restated 1995 Employee and Consultant Equity Plan. *
(a) 10.24 1984 Employee Stock Option Plan (Qualified and Non-Qualified), as
amended and restated.*
(a) 10.25 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.
(h) 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.
(h) 10.31 Amendment No. 3 to Third Amended and Restated Credit Agreement.
(i) 10.32 Amendment No. 4 to Third Amended and Restated Credit Agreement.
(j) 10.33 Amendment No. 5 to Third Amended and Restated Credit Agreement.
(j) 11.1 Computation of basic earnings (loss) per share for each of the
three years in the period ended June 30, 1998.
(j) 11.2 Computation of diluted earnings (loss) per share for each of the
three years in the period ended June 30, 1998.
(j) 21 Subsidiaries of the Company as of June 30, 1998.
23.1 Consent of Independent Accountants
23.2 Consent of Blank Rome Comisky & McCauley (included in Exhibit 5)
- -------------
(a) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-96888) dated November 8, 1995, as
amended.
(b) Incorporated by reference to the Company's Form 10-Q dated September 30,
1996 and filed November 14, 1996.
(c) Incorporated by reference to the Company's Form 8-K dated January 10, 1997
and filed January 24, 1997.
(d) Incorporated by reference to the Company's Form 10-Q dated March 31, 1997
and filed May 14, 1997.
II-5
<PAGE>
(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 Fiscal 1997 Notice of Annual
Meeting of Shareholders dated and filed January 14, 1998.
(h) Incorporated by reference to the Company's Form 10-Q dated December 31,
1997 and filed February 17, 1998.
(i) Incorporated by reference to the Company's Form 10-Q/A dated March 31, 1998
and filed June 3, 1998 .
(j) Incorporated by reference to the Company's Form 10-K dated June 30, 1998
and filed September 24, 1998.
* Represents management contract or compensatory plan
** To be filed by amendment.
(b) Financial Statement Schedules
Included in the Prospectus
Included in the Registration Statement but not
in the Prospectus
Page Number
-----------
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
II-6
<PAGE>
Item 17. Undertakings
------------
1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
II-7
<PAGE>
EXHIBIT INDEX
-------------
(a) Exhibits
Exhibit No. Description
- ----------- -----------
(a) 3.1 Amended and Restated Articles of Incorporation of the Company.
(a) 3.2 Amended and Restated Bylaws of the Company.
5.1 Opinion of Blank Rome Comisky & McCauley LLP**
(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.
II-8
<PAGE>
(a) 10.12 Full Payment Guaranty of the Company relating to Delaware
Acquisition.
(a) 10.13 Subordination Agreement among CoreStates Bank, N.A., Summit Ventures
II, L.P., Summit Investors II, L.P., CoreStates Enterprise Fund,
and parties to Delaware Acquisition transaction documents.
(a) 10.14 Separation Agreement among Home Health Corporation of America, Inc.,
Home Health Corporation of Delaware, Inc., HHCD, Inc., HHCDME,
Inc., Steven R. Altshuler, Jane E. Altshuler, William W. Moses and
Andra H. Moses
(a) 10.15 Asset Purchase Agreement between Pennsylvania Home Care, Inc. and
Healthcare Professionals, Inc.
(d) 10.16 Third Amended and Restated Credit Agreement.
(e) 10.17 Amendment No. 1 to the Third Amended and Restated Credit Agreement.
(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. *
(j) 10.20 Employment Agreement between the Company and David S. Geller. *
(j) 10.21 Employment Agreement between the Company and James J. Swiniuch. *
(j) 10.22 Employment Agreement between the Company and Joseph Grilli. *
(g) 10.23 Amended and Restated 1995 Employee and Consultant Equity Plan. *
(a) 10.24 1984 Employee Stock Option Plan (Qualified and Non-Qualified), as
amended and restated. *
(a) 10.25 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.
(h) 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.
II-9
<PAGE>
(h) 10.31 Amendment No. 3 to Third Amended and Restated Credit Agreement.
(i) 10.32 Amendment No. 4 to Third Amended and Restated Credit Agreement.
(j) 10.33 Amendment No. 5 to Third Amended and Restated Credit Agreement.
(j) 11.1 Computation of basic earnings (loss) per share for each of the three
years in the period ended June 30, 1998 .
(j) 11.2 Computation of diluted earnings (loss) per share for each of the
three years in the period ended June 30, 1998.
(j) 21 Subsidiaries of the Company as of June 30, 1998.
23.1 Consent of Independent Accountants
23.2 Consent of Blank Rome Comisky & McCauley (included in Exhibit 5)
- ----------
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-96888) dated November 8, 1995, as amended.
(b) Incorporated by reference to the Company's Form 10-Q dated September 30,
1996 and filed November 14, 1996.
(c) Incorporated by reference to the Company's Form 8-K dated January 10, 1997
and filed January 24, 1997 .
(d) Incorporated by reference to the Company's Form 10-Q dated March 31, 1997
and filed May 14, 1997.
(e) Incorporated by reference to the Company's Form 10-K/A dated June 30, 1997
and filed October 28, 1997.
(f) Incorporated by reference to the Company's Form 8-K dated September 26, 1997
and filed October 7, 1997.
(g) Incorporated by reference to the Company's Fiscal 1997 Notice of Annual
Meeting of Shareholders dated and filed January 14, 1998.
(h) Incorporated by reference to the Company's Form 10-Q dated December 31, 1997
and filed February 17, 1998.
(i) Incorporated by reference to the Company's Form 10-Q/A dated March 31, 1998
and filed June 3, 1998.
(j) Incorporated by reference to the Company's Form 10-K dated June 30, 1998 and
filed September 24, 1998.
* Represents management contract or compensatory plan
** To be filed by amendment.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in King of Prussia,
Pennsylvania on October 8, 1998.
HOME HEALTH CORPORATION OF AMERICA, INC.
By: /s/ Bruce J. Feldman
_____________________________________
Bruce J. Feldman
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Bruce J.
Feldman to sign on his behalf individually and in each capacity stated below,
and to file with the Securities and Exchange Commission any amendments,
including post-effective amendments, to this Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons, in the
capacities indicated, on October 8, 1998.
SIGNATURES CAPACITY
- ---------- --------
/s/ Bruce J. Feldman Chairman of the Board, President
- ------------------------------ and Chief Executive Officer
Bruce J. Feldman (Principal Executive Officer)
/s/ David S. Geller Chief Financial Officer
- ------------------------------ (Principal Accounting Officer)
David S. Geller
/s/ G. Michael Bellenghi Director
- ------------------------------
G. Michael Bellenghi
/s/ Harvey Machaver Director
- ------------------------------
Harvey Machaver
/s/ Donald M. Gleklen Director
- ------------------------------
Donald M. Gleklen
II-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Home Health Corporation of America, Inc.
King of Prussia, Pennsylvania
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 F-1 of this Form S-1, also included an
audit of the financial statement schedule listed in Item 16(b) of this Form S-1.
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.
/s/ 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 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 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 Home Health Corporation of
America, Inc. We also consent to the reference to our firm under the caption
"Experts."
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 8, 1998
