<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 0-26938
HOME HEALTH CORPORATION OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2224800
- --------------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2200 Renaissance Boulevard
Suite 300
King of Prussia, PA 19406
- --------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (610) 272-1717
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding at April 30, 1998
----- -----------------------------
Common stock, no par value 9,856,492
Exhibit index is located on page 26
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three
and nine months ended March 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets as of June 30, 1997
and March 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
2
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------------ ------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $42,267 $42,367 $102,352 $135,155
Operating costs and expenses:
Patient care costs 20,683 20,427 49,642 64,030
General and administrative 15,367 18,149 36,594 54,416
Provision for doubtful accounts 1,400 1,636 3,768 4,512
Depreciation 409 630 1,025 1,727
Amortization 678 626 1,498 2,210
Interest expense, net 903 1,878 2,073 5,512
Merger and other nonrecurring expenses 300 - 1,884 4,880
Writedown of goodwill - - - 23,516
------------- ------------- ------------- ------------
Total operating costs and expenses 39,740 43,346 96,484 160,803
------------- ------------- ------------- ------------
Income (loss) before income taxes 2,527 (979) 5,868 (25,648)
Provision (benefit) for income taxes 960 (335) 2,255 (3,177)
------------- ------------- ------------- ------------
Net income (loss) $1,567 $(644) $3,613 $(22,471)
============= ============= ============= ============
Other data, including per share data:
Basic per share data:
Net income (loss) available to common
stockholders $1,567 $(644) $3,607 $(22,471)
============= ============= ============= ============
Net income (loss) per common share $0.18 $(0.07) $0.43 $(2.45)
============= ============= ============= ============
Weighted average shares used in computing
net income (loss) per common share 8,678 9,193 8,378 9,167
============= ============= ============= ============
Diluted per share data:
Net income (loss) available to common
stockholders $1,567 $(644) $3,686 $(22,471)
============= ============= ============= ============
Net income (loss) per common share $0.18 $(0.07) $0.42 $(2.45)
============= ============= ============= ============
Weighted average shares used in computing
net income (loss) per common share 8,826 9,227 8,727 9,167
============= ============= ============= ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE>
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1997 1998
------ -------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 464 $ 563
Accounts receivable, net of allowance for doubtful accounts of $10,847
and $10,855, respectively 56,410 60,285
Inventories 3,262 2,939
Prepaid expenses and other 2,018 3,697
Income taxes 2,566 5,535
---------- ---------
Total current assets 64,720 73,019
Property and equipment, net 18,261 16,869
Goodwill, net 68,202 47,481
Other assets, net 2,080 2,305
---------- ---------
Total assets $ 153,263 $ 139,674
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 6,263 $ 3,863
Accounts payable 5,705 6,592
Accrued salaries and related employee benefits 4,788 4,750
Restructuring and other nonrecurring liabilities 764 3,796
Other current liabilities 3,996 4,346
---------- ---------
Total current liabilities 21,516 23,347
Long-term debt, net of current portion 78,793 83,370
Restructuring and other nonrecurring liabilities 386 1,851
Other liabilities 1,996 2,636
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 shares outstanding at June 30 and
March 31, respectively 43,927 44,297
Retained earnings (accumulated deficit) 6,645 (15,827)
---------- ---------
Total stockholders' equity 50,572 28,470
---------- ---------
Total liabilities and stockholders' equity $ 153,263 $ 139,674
========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended March 31,
---------------------------------------
1997 1998
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 3,613 $ (22,471)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,090 6,496
Provision for doubtful accounts 3,768 4,512
Deferred income taxes 52 -
Writedown of goodwill - 23,516
Write-off of terminated merger costs - 1,202
Write-off of deferred financing fees 300 -
Net changes in certain assets and liabilities, net of acquisitions:
Accounts receivable (14,694) (11,150)
Inventories (939) 323
Prepaid expenses and other (987) (1,678)
Income taxes (810) (2,970)
Restructuring and other nonrecurring liabilities - 2,298
Accounts payable, accrued expenses and other (5,418) 1,199
-------- ---------
Net cash flows provided by (used in) operating activities (11,025) 1,277
-------- ---------
Cash flows used in investing activities:
Purchases of property and equipment (2,768) (1,886)
Cash paid for acquisitions, net of cash acquired (32,382) (514)
Decrease (increase) in other (292) (160)
-------- ---------
Net cash flows used in investing activities (35,442) (2,560)
-------- ---------
Cash flows provided by financing activities:
Proceeds from long-term debt 47,890 6,000
Repayments of long-term debt (2,109) (4,860)
Payment of deferred financing fees (287) (127)
Proceeds from issuance of common stock 13 369
-------- ---------
Net cash flows provided by financing activities 45,507 1,382
-------- ---------
Net (decrease) increase in cash and cash equivalents (960) 99
Cash and cash equivalents, beginning of period 1,695 464
-------- ---------
Cash and cash equivalents, end of period $ 735 $ 563
======== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Home
Health Corporation of America, Inc. and Subsidiaries (the "Company" or "HHCA")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Additionally, although the June
30, 1997 condensed consolidated balance sheet was derived from audited financial
statements, it does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1998. The unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended June 30, 1997 included
in the Company's Form 10-K/A filed with the Securities and Exchange Commission.
2. Per Share Data
The Company adopted Statement of Financial Accounting Standard No. 128 ("SFAS
128"), "Earnings Per Share," during the quarter ended December 31, 1997. The
adoption of SFAS 128 did not have a material effect on the Company's earnings
per share. Earnings per share and common shares outstanding for the three and
nine months ended March 31, 1997 have been restated for comparative purposes.
Basic earnings per share. Basic earnings per share is calculated by
dividing income available to common stockholders (the basic numerator) by the
weighted-average number of common shares outstanding (the basic denominator)
during the period. Income available to common stockholders is computed by
deducting dividends declared in the period on preferred stock (whether or not
paid) and dividends accumulated for the period on cumulative preferred stock.
Diluted earnings per share. Diluted earnings per share is calculated by
adjusting the basic numerator to add back the after-tax amount of dividends and
interest recognized in the period associated with potentially issuable common
shares and for any other changes in income or loss that would result from the
assumed conversion or exercise of potentially issuable common shares.
Additionally, the basic denominator is increased to include the additional
number of common shares that would have been outstanding if the potentially
issuable common shares had been issued, if dilutive. The treasury stock method
is used to reflect the dilutive effect of outstanding options and warrants.
Under SFAS 128, the computation of diluted EPS does not assume the conversion or
exercise of securities that have an anti-dilutive effect on earnings per share
(i.e., increase the income-per-share amount or decrease the loss-per-share
amount).
6
<PAGE>
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted income (loss) per share follows:
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended March ended March ended March ended March
31, 1998 31, 1997 31, 1998 31, 1997
------------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Net income (loss) $(644) $1,567 $(22,471) $3,613
Dividends on preferred stock - - - (6)
------------------ ------------------ ------------------ ---------------
Net income (loss) used for calculation
of basic income (loss) per share (644) 1,567 (22,471) 3,607
Interest and dividends on convertible
securities - - - 79
------------------ ------------------ ------------------ ---------------
Net income (loss) used for calculation
of diluted income (loss) per share $(644) $1,567 $(22,471) $3,686
================== ================== ================== ===============
Weighted average number of common
shares outstanding used for
calculation of basic income (loss)
per share 9,193 8,678 9,167 8,378
Stock options and warrants assumed
outstanding during the period 34 148 - 148
Convertible securities assumed
outstanding during the period - - - 201
================== ================== ================== ===============
Weighted average number of common
shares used for calculation of
diluted income (loss) per share 9,227 8,826 9,167 8,727
================== ================== ================== ===============
</TABLE>
3. Medicare Reimbursement Reductions and Related Restructuring
In 1997, Congress approved the Balanced Budget Act of 1997 (the "Budget Act").
The Budget Act established an interim payment system (the "IPS") that provided
for the lowering of reimbursement limits for home health nursing visits. For
cost reporting periods beginning on or after October 1, 1997,
Medicare-reimbursed home health agencies will have their cost limits determined
as the lesser of (i) their actual costs, (ii) cost limits based on 105% of
median costs of freestanding home health agencies, or (iii) agency-specific
per-patient cost limits, based on 98% of 1994 costs adjusted for inflation. The
new IPS cost limits will apply to the Company for the cost reporting period
beginning July 1, 1998, except for the Company's Medicare-certified nursing
agency located in Texas, for which the new cost limits applied for the cost
reporting period beginning January 1, 1998. During the second quarter of fiscal
1998, various regulations and interpretations of the Budget Act were published
which enabled the Company to calculate the potential impact on reimbursement of
the new IPS cost limits. Management's analysis, without giving effect to the
restructuring and cost reductions discussed below, estimated the aggregate
impact on reimbursement to exceed $5.0 million for certain of the Company's
Medicare-certified nursing agencies. After giving effect to the restructuring
and cost reductions, management estimates that the aggregate impact will be
between $1.8 to $2.5 million under the currently published Medicare
reimbursement regulations, assuming no additional cost reductions
7
<PAGE>
are made during the remainder of fiscal 1998 or during fiscal 1999 and there are
no further changes in reimbursement regulations.
The Budget Act also provided for a 25% reduction in home oxygen reimbursement
from the 1997 fee schedule, effective January 1, 1998, and a further reduction
of 5% effective January 1, 1999. Compounding these reductions was a freeze on
consumer price index increases in oxygen reimbursement rates until the year
2003. Approximately 5.8% of the Company's net revenues are derived from
reimbursement of oxygen services affected by the reduction in the fee schedule,
which is expected to result in a significant impact on the profitability of
these services.
During the second quarter of fiscal 1998, the Company developed a restructuring
plan to reduce annual operating costs by approximately $3.0 to $4.0 million,
thus proactively and aggressively responding to the above reductions in Medicare
reimbursement by fundamentally reshaping the Company for long-term growth in the
changing reimbursement environment. This plan, as well as management's
assessment of the continuing value of goodwill under the changing reimbursement
environment, resulted in pre-tax accounting charges aggregating $28.4 million
during the second quarter of fiscal 1998 which were comprised of a writedown of
goodwill of $23.5 million, restructuring costs of $3.7 million and the write-off
of deferred costs aggregating $1.2 million related to a terminated acquisition.
The writedown of goodwill was required under Statement of Financial Accounting
Standard No. 121 ("SFAS 121), "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed of," based upon management's
estimate of the impact of the announced reductions in Medicare oxygen
reimbursement and the expected 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 the second quarter of fiscal 1998. This 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. This writedown is reflected
in the accompanying condensed consolidated financial statements as of and for
the nine months ended March 31, 1998.
The restructuring costs of $3.7 million were 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 aggregating $1.6 million, (ii) estimated
employee severance costs in connection with the related termination of
employees, including certain former owners of businesses acquired, aggregating
$1.7 million and (iii) certain other costs aggregating $370,000 related to the
restructuring. The restructuring plan was substantially implemented by March
1998. The cash portion of the pre-tax accounting charge is estimated to be
approximately $3.7 million. Approximately $517,000 was charged against the
related accruals during the third quarter of fiscal 1998. The restructuring
costs were included in merger and other nonrecurring expenses in the
accompanying condensed consolidated statement of operations for the nine months
ended March 31, 1998.
Additionally, during the fourth quarter of fiscal 1998, the Company will be
implementing cost reduction and office consolidation initiatives which were
identified in addition to the initiatives implemented during the third quarter
of fiscal 1998. These additional initiatives are expected to result in between
$4.0 to $6.0 million in annual cost reductions. Approximately $3.0 to $4.0
million of these cost reductions are expected to result from the consolidation
of the Company's regional operating structure to two large regions
8
<PAGE>
from the five regions the Company currently operates. Approximately $1.0 to $2.0
million of these cost reductions are expected to result from reductions in
caregiver expenses. These additional cost reductions are expected to be
implemented during the fourth quarter of fiscal 1998 and first quarter of fiscal
1999. At least half of these cost reductions are expected to impact the
Company's Medicare cost-reimbursed nursing agencies and reduce the Company's
exposure to the IPS. The Company expects to record charges during the fourth
quarter of fiscal 1998 for employee severance and lease termination costs in
connection with these additional cost reduction and office consolidation
initiatives.
On February 11, 1998, the Company and U.S. HomeCare Corporation ("USHO") agreed
to the termination of the Company's proposed acquisition of USHO. Deferred
acquisition costs of $1.2 million associated with this proposed acquisition were
written-off during the second quarter of fiscal 1998 and included in merger and
other nonrecurring expenses in the accompanying condensed consolidated statement
of operations for the nine months ended March 31, 1998.
4. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the nine months ended
March 31:
<TABLE>
<CAPTION>
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Non-cash investing and financing activities:
Acquisitions:
Assets acquired and amounts paid to
former owners $ 53,759 $ 514
Less:
Liabilities assumed and acquisition costs 10,902 -
Issuance of subordinated seller notes 4,925 -
Issuance of common stock 5,550 -
---------------- ---------------
Cash paid, net of cash acquired $ 32,382 $ 514
================ ===============
Capital lease obligations incurred $ 2,256 $ 1,443
================ ===============
Conversion of HHSI convertible notes into the
Company's common stock:
Common stock, no par 2,042 -
Additional paid-in capital (104) -
---------------- ---------------
$ 1,938 -
================ ===============
Exchange of HHSI shares for the Company's Common
stock $ 1,250 -
================ ===============
Reclassification to common stock related to
expiration of redemption requirements $ 500 -
================ ===============
</TABLE>
5. Credit Facility
9
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The Company's senior credit facility (the "Credit Facility") was amended to
limit aggregate borrowings under the Credit Facility, increase the fees on such
borrowings, and waive and amend certain financial covenants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources."
6. Commitments and Contingencies
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 intends to engage in a vigorous defense.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Outlook and Risks
The Company is subject to significant external factors which could significantly
impact its business, including changes in Medicare reimbursement, government
fraud and abuse initiatives and other such factors which are beyond the control
of the Company. Certain of these factors are discussed herein. Refer to the
Company's Form 10K/A for the year ended June 30, 1997 for a discussion of these
and additional factors which management believes may impact the Company. These
factors, as well as future changes in reimbursement and changes in
interpretations of regulations, could cause future results to differ materially
from historical trends and management's current expectations.
General
The financial condition and results of operations of the Company for the three
and nine months ended March 31, 1998 compared with the three and nine months
ended March 31, 1997 have been affected by both acquisitions and internal
growth.
Acquisitions
The results of operations of the companies acquired during fiscal 1997 are
included in the Company's consolidated results of operations from their
respective acquisition dates, which occurred at various times during fiscal
1997. Accordingly, the operating results for any fiscal quarter are not
necessarily comparable with the results for any past or future fiscal quarter.
During fiscal 1997, the Company entered the Texas and New England regions with
five acquisitions, expanding its operations into Texas, Massachusetts, New
Hampshire, Rhode Island and Maine. Additionally, during fiscal 1997, the Company
expanded its ongoing operations in Pennsylvania, New Jersey, Maryland and the
Tampa/St. Petersburg, Florida market with five acquisitions, and also expanded
into Illinois as a result of a merger transaction. There were no acquisitions
from July 1, 1997 through March 31, 1998. 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 the nine months
ended March 31, 1998, the Company paid $514,000 in additional consideration for
certain acquisitions completed in fiscal 1997. The Company also issued 579,901
shares of common stock on March 30, 1998 to the former owners of Nahatan Drug,
Inc. as additional consideration required under the acquisition agreement. As a
result of the changing reimbursement environment, management expects a slowing
of growth through acquisition. Additionally, the Company is currently restricted
by its senior credit facility from engaging in acquisitions. See "Liquidity and
Capital Resources."
On February 11, 1998, the Company and USHO agreed to the termination of the
Company's proposed acquisition of USHO. Deferred acquisition costs of $1.2
million associated with this proposed acquisition were written-off during the
second quarter of fiscal 1998 and are included in merger and other nonrecurring
expenses in the accompanying condensed consolidated statement of operations for
the nine months ended March 31, 1998.
11
<PAGE>
Internal Growth
Three months ended March 31, 1998 compared to the three months ended March 31,
1997. The Company experienced a decrease of 7.8% in internal growth during the
three months ended March 31, 1998, compared to an 11.5% increase for the
comparable period in fiscal 1997. Significant factors impacting internal growth
in net revenues included the unanticipated early implementation on January 1,
1998 of the IPS for the Company's Texas Medicare cost-reimbursed nursing agency
and the reductions in Medicare oxygen reimbursement which were also effective
January 1, 1998. The decrease in internal growth during the three months ended
March 31, 1998 was comprised of a reduction in same-branch Medicare cost-
reimbursed nursing and related patient service net revenues of 9.1%, or $1.7
million, and a decline in same-branch product net revenues (durable medical
equipment and respiratory and infusion therapy services) of 17.1%, or $2.1
million, offset by an increase in same-branch non-Medicare nursing net revenues
of 8.0%, or $698,000. The decrease in Medicare cost-reimbursed nursing and
related patient service net revenues was primarily a result of early
implementation of the IPS in the Texas Region. The decrease in product net
revenues was due principally to the reductions in Medicare oxygen reimbursement
as well as various other factors including the Company ceasing to provide
services and products to selected managed care companies due to their protracted
payment terms, a reduction in reimbursement rates by certain managed care
companies, and the Company choosing not to renew certain contracts with managed
care companies that were attempting to impose rate reductions. The increase in
non-Medicare nursing services resulted principally from effective cross-selling
of these nursing services to the Company's product patients as well as increased
patient referrals.
Nine months ended March 31, 1998 compared to the nine months ended March 31,
1997. The Company experienced an increase of 10.3% in internal growth during the
nine months ended March 31, 1998, compared to 12.5% for the comparable period in
fiscal 1997. The increase in internal growth for the nine months ended March 31,
1998 was comprised of an increase of 19.5%, or $6.1 million, in same-branch
Medicare cost-reimbursed nursing and related patient services net revenues and
an increase of 16.8%, or $3.6 million, in same-branch net revenues for non-
Medicare nursing services, offset by a decrease in same-branch product net
revenues of 5.0%, or $1.4 million. The increase in net revenues relating to
Medicare cost-reimbursed nursing and related patient services resulted from a 6%
increase in visits at same-branch Medicare cost-reimbursed nursing branches and
increased costs incurred by these branches resulting in additional cost
reimbursement. The increase in non-Medicare nursing services net revenue
resulted from 9% and 30% increases in hourly and visit volume, respectively,
from same-branch non-Medicare nursing branches, primarily a result of effective
cross-selling of these nursing services to the Company's product patients and
increased patient referrals. The decrease in product net revenues was due
principally to the reductions in Medicare oxygen reimbursement, which were
effective January 1, 1998, as well as various other factors such as the Company
ceasing to provide services and products to selected managed care companies due
to their protracted payment terms, a reduction in reimbursement rates by certain
managed care companies, the Company choosing not to renew certain contracts with
managed care companies that were attempting to impose rate reductions and a
decline in cross-selling of these products and services to the Company's nursing
patients during the transition to certain of the Company's regional coordinated
care centers during the second quarter of fiscal 1998.
The Company may continue to experience a decrease in its internal growth rate
related to respiratory therapy services as a result of the reduction on January
1, 1998 in Medicare
12
<PAGE>
reimbursement for oxygen services. Additionally, the Company may also continue
to experience a decrease in the internal growth rate for its Texas Medicare
cost-reimbursed nursing agency as well as the Company's other 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.
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.
Restructuring Initiatives
On February 10, 1998, the Company announced certain proactive steps it was
taking to reduce costs and better position the Company for success under the
changing reimbursement environment. Specifically, the Company closed certain
offices and reduced administrative personnel resulting in approximately $3.0 to
$4.0 million in annual reductions in operating costs. These initiatives were
substantially implemented by March 1998. See "Nine Months Ended March 31, 1998
Compared with the Nine Months Ended March 31, 1997 - Merger and other
nonrecurring expenses" and Note 3 to the accompanying unaudited condensed
consolidated financial statements.
Additionally, during the fourth quarter of fiscal 1998, the Company will be
implementing cost reduction and office consolidation initiatives which were
identified in addition to the initiatives implemented during the third quarter
of fiscal 1998. These additional initiatives are expected to result in between
$4.0 to $6.0 million in annual cost reductions. Approximately $3.0 to $4.0
million of these cost reductions are expected to result from the consolidation
of the Company's regional operating structure to two large regions from the five
regions the Company currently operates. Approximately $1.0 to $2.0 million of
these cost reductions are expected to result from reductions in caregiver
expenses. These additional cost reductions are expected to be implemented during
the fourth quarter of fiscal 1998 and first quarter of fiscal 1999. At least
half of these cost reductions are expected to impact the Company's Medicare
cost-reimbursed nursing agencies and reduce the Company's exposure to IPS. The
Company expects to record charges during the fourth quarter of fiscal 1998 for
employee severance and lease termination costs in connection with these
additional cost reduction and office consolidation initiatives.
There can be no assurance the Company will be able to achieve the expected cost
savings or synergies from the closing or consolidation of offices and other
restructuring efforts described above or will be able to reduce costs without
negatively impacting operations.
13
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Percentage of net Percentage of net
revenue for the three revenue for the nine
months ended March 31, months ended March 31,
---------------------------- ---------------------------
1997 1998 1997 1998
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses:
Patient care costs 48.9 48.2 48.5 47.4
General and administrative 36.4 42.8 35.8 40.3
Provision for doubtful accounts 3.3 3.9 3.7 3.3
Depreciation 1.0 1.5 1.0 1.3
Amortization 1.6 1.5 1.5 1.6
Interest expense, net 2.1 4.4 2.0 4.1
Merger and other nonrecurring
expenses 0.7 - 1.8 3.6
Writedown of goodwill - - - 17.4
---------- ------------- ---------- -----------
Income (loss) before income taxes 6.0 (2.3) 5.7 (19.0)
Provision (benefit) for income taxes 2.3 (0.8) 2.2 (2.4)
---------- ------------- ---------- ------------
Net income (loss) 3.7 % (1.5) % 3.5 % (16.6) %
========== ============= ========== ============
</TABLE>
Three Months Ended March 31, 1998 Compared with the Three Months Ended December
31, 1997
Net revenues. For the three months ended March 31, 1998, net revenues increased
to $42.4 million from $42.3 million for the comparable prior year period. The
increase in net revenues was consistent with management's expectations. The
factors impacting the growth in net revenues included the unanticipated early
implementation on January 1, 1998 of the IPS for the Company's Texas Medicare
cost-reimbursed nursing agency and reductions in Medicare oxygen reimbursement
which were also effective January 1, 1998. Principally as a result of these two
factors, internal growth declined by $3.2 million, or 7.8%, during the three
months ended March 31, 1998 from the comparable prior year period. See "Internal
Growth." Net revenues for the three months ended March 31, 1998 attributable to
operations from acquisitions completed during the prior fiscal year increased
$3.3 million, or 164.8%, compared to the prior year period. Net revenues from
nursing and related patient services increased from $27.9 million for the three
months ended March 31, 1997 to $28.1 million for the three months ended March
31, 1998, a 1% increase. Total Medicare nursing visits decreased 23% to 224,000
visits for the three months ended March 31, 1998. This reduction is principally
a result of the early implementation of the IPS for the Texas Medicare cost-
reimbursed nursing agency. Total non-Medicare nursing hourly and visit volume
increased 2% and 37%, respectively, to 284,000 hours and 61,000 visits,
respectively, for the three months ended March 31, 1998. Acquisitions, effective
cross-selling of these nursing services to the Company's product patients and
increased referrals contributed to these volume increases. Product net revenues
decreased $113,000, or 1%, to $14.3 million for the three months ended March 31,
1998, from $14.4 million for the three months ended March 31, 1997. This
decrease was comprised of an increase of $2.0 million in net revenues for the
three months ended March 31, 1998 attributable to operations from acquisitions
completed during the
14
<PAGE>
prior fiscal year, offset by a decrease of $2.1 million in net revenues for
same-branch operations due to the various factors discussed under "Internal
Growth."
Patient care costs. For the three months ended March 31, 1998, patient care
costs were $20.4 million, a decrease of $256,000, or
1.2%, over the three months ended March 31, 1997. This decrease principally
related to decreases in net revenues. These costs decreased slightly
as a percentage of net revenues from 48.9% to 48.2%. 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 expects that patient care costs
as a percentage of net revenues may continue to decrease as a result of the cost
reduction initiatives implemented by the Company 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 will be impacted by the reduction in
Medicare oxygen reimbursement which took effect on January 1, 1998, 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 "Net revenues."
General and administrative expenses. For the three months ended March 31, 1998,
general and administrative expenses increased to $18.1 million. This represented
an increase of $2.8 million, or 18.1%, over the three months ended March 31,
1997. These costs increased as a percentage of net revenues from 36.4% to 42.8%.
Of these increases, costs of $1.1 million were related to acquisitions completed
during the third and fourth quarters of fiscal 1997 and costs of $1.7 million
were related to 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 relating to implementing
the Company's regional coordinated care centers and increased costs for
insurance, telecommunications and other operating expenses. The Company expects
that a decrease in general and administrative expenses as a percentage of net
revenues will result from the cost reduction and office consolidation
initiatives implemented during the third quarter of fiscal 1998 and those
initiatives being implemented beginning the fourth quarter of fiscal 1998. As a
result of the initiatives implemented during the third quarter of fiscal 1998,
general and administrative expenses decreased to $18.1 million for the three
months ended March 31, 1998 from $18.9 million for the three months ended
December 31, 1997.
Provision for doubtful accounts. For the three months ended March 31, 1998,
provision for doubtful accounts increased to $1.6 million. This represented an
increase of $236,000, or 16.9%, over the three months ended March 31, 1997.
Provision for doubtful accounts increased slightly as a percentage of net
revenues from 3.3% to 3.9%. This was due principally to the decrease in Medicare
nursing and related patient services net revenues as a percentage of total net
revenues to 41.0% for the three months ended March 31, 1998 from 45.2% for the
three months ended March 31, 1997, which do not require a provision for doubtful
accounts.
Depreciation. For the three months ended March 31, 1998, depreciation expense
increased to $630,000. This represented an increase of $221,000, or 54.0%, over
the three months ended March 31, 1997. This increase was attributable to fixed
assets acquired in connection with acquisitions and capital expenditures related
to vehicles, management information systems and equipment to support the
Company's growth.
15
<PAGE>
Amortization. For the three months ended March 31, 1998, amortization was
$626,000, a decrease of $52,000, or 8.3%, over the three months ended March 31,
1997. This decrease was attributable principally to the reduction in goodwill as
a result of the writedown recorded during the second quarter of fiscal 1998. See
"Nine Months Ended March 31, 1998 Compared with the Nine Months Ended March 31,
1997 - Writedown of goodwill."
Interest expense, net. Interest expense, net, increased $975,000, or 108.0 %, to
$1.9 million during the three months ended March 31, 1998 compared with the
three months ended March 31, 1997. This increase resulted from increased
borrowings for acquisitions completed during fiscal 1997 and increased
borrowings to finance working capital requirements. The Company may experience
increases in interest expense as a result of increased interest rates imposed
under the Credit Facility and its related amendments. See "Liquidity and Capital
Resources."
Loss before income taxes. The three months ended March 31, 1998 included a pre-
tax operating loss from the Texas Medicare cost-reimbursed nursing agency of
approximately $839,000 as a result of early implementation of the IPS. The
Company expects this loss to continue during the fourth quarter of fiscal 1998
but at a reduced amount as a result of the cost reduction and office
consolidation initiatives currently being implemented. The Company expects this
loss to be significantly reduced during fiscal 1999 after all the cost
reductions are implemented. However, 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 34%
of pretax loss for the three months ended March 31, 1998.
Nine Months Ended March 31, 1998 Compared with the Nine Months Ended March 31,
1997
Net revenues. For the nine months ended March 31, 1998, net revenues increased
to $135.2 million. This represented an increase of $32.8 million, or 32.0%, over
the nine months ended March 31, 1997. Of this increase, $24.5 million, or 74.6%,
was attributable to acquisitions completed during fiscal 1997. The balance of
the increase was due to internal growth of 10.3%, or $8.3 million. See "Internal
Growth." Net revenues from nursing and related patient services increased from
$64.9 million for the nine months ended March 31, 1997 to $89.5 million for the
nine months ended March 31, 1998, a 37.9% increase. The increase in Medicare
nursing and related patient services net revenues resulted from increased visits
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. Total Medicare nursing visits increased 29% to 762,000 visits for the
nine months ended March 31, 1998. Total non-Medicare nursing hourly and visit
volume increased 37% and 30%, respectively, to 910,000 hours and 167,000 visits,
respectively, for the nine months ended March 31, 1997. Acquisitions, 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 $8.2 million, or 22.0%, to $45.7 million for the nine months ended
March 31, 1998, from $37.4 million for the nine months ended March 31, 1997 as a
result of acquisitions, increased referrals and effective cross-selling of
infusion therapy services to the Company's nursing patients. This increase was
comprised of an increase of $9.6 million in net revenues for the nine months
ended March 31, 1998 attributable to operations from
16
<PAGE>
acquisitions completed during the prior fiscal year, offset by a decrease of
$1.4 million in net revenues for same-branch operations due to the various
factors discussed under "Internal Growth."
Patient care costs. For the nine months ended March 31, 1998, patient care costs
increased to $64.0 million. This represented an increase of $14.4 million, or
29.0%, over the nine months ended March 31, 1997. This increase principally
related to increases in net revenues. These costs decreased slightly as a
percentage of net revenues from 48.5% 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 expects that patient care costs
as a percentage of net revenues may continue to decrease as a result of the cost
reduction initiatives implemented by the Company 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 will be impacted by the reduction in
Medicare oxygen reimbursement which took effect on January 1, 1998, 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 "Net revenues."
General and administrative expenses. For the nine months ended March 31, 1998,
general and administrative expenses increased to $54.4 million. This represented
an increase of $17.8 million, or 48.7%, over the nine months ended March 31,
1997. These costs increased as a percentage of net revenues from 35.8% to 40.3%.
Of these increases, costs of $8.8 million were related to acquisitions completed
during the third and fourth quarters of fiscal 1997 and costs of $9.0 million
were related to 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 relating to implementing
the Company's regional coordinated care centers and increased costs for
insurance, telecommunications and other operating expenses. The Company expects
that a decrease in general and administrative expenses as a percentage of net
revenues will result from the cost reduction and office consolidation
initiatives identified during the second quarter of fiscal 1998 and implemented
during the third quarter of fiscal 1998, as well as those initiatives being
implemented beginning the fourth quarter of fiscal 1998. See "Restructuring
Initiatives" and Note 3 to the unaudited condensed consolidated financial
statements. During the second quarter of fiscal 1998, the Company recorded a
restructuring charge in connection with the initiatives identified during the
second quarter. See "Merger and other nonrecurring expenses."
Provision for doubtful accounts. For the nine months ended March 31, 1998,
provision for doubtful accounts increased to $4.5 million. This represented an
increase of $744,000, or 19.7%, over the nine months ended March 31, 1997. This
increase was due to increases in net revenues for the nine months ended March
31, 1998. Provision for doubtful accounts decreased slightly as a percentage of
net revenues from 3.7% to 3.3%. This was due principally to the increase in
Medicare cost-reimbursed nursing and related patient services net revenues as a
percentage of total net revenues to 42.6% for the nine months ended March 31,
1998 from 40.5% for the nine months ended March 31, 1997, which do not require a
provision for doubtful accounts.
Depreciation. For the nine months ended March 31, 1998, depreciation expense
increased to $1.7 million. This represented an increase of $702,000, or 68.5%,
over the nine months ended
17
<PAGE>
March 31, 1997. This increase was attributable to fixed assets acquired in
connection with acquisitions and capital expenditures related to vehicles,
management information systems and equipment to support the Company's growth.
Amortization. For the nine months ended March 31, 1998, amortization increased
to $2.2 million. This represented an increase of $712,000, or 47.5%, over the
nine months ended March 31, 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 year 1998. See "Writedown of goodwill."
Interest expense, net. Interest expense, net, increased $3.4 million, or 165.9%,
to $5.5 million during the nine months ended March 31, 1998 compared with the
nine months ended March 31, 1997. This increase resulted from increased
borrowings for acquisitions completed during fiscal 1997 and increased
borrowings to finance working capital requirements. The Company may experience
increases in interest expense as a result of increased interest rates imposed
under the Credit Facility and its related amendments. See "Liquidity and Capital
Resources."
Merger and other nonrecurring expenses. During the second quarter of fiscal
1998, the Company recorded a charge in connection with a restructuring of the
Company's operations. The Company evaluated the impact of reductions in
reimbursement for Medicare oxygen services and the IPS and, where appropriate,
closed certain offices and reduced administrative personnel resulting in an
expected annual reduction in operating costs aggregating approximately $3.0 to
$4.0 million. As a result of these restructuring activities, the Company
recorded a pre-tax charge of $3.7 million in connection with (i) the closure and
consolidation of certain branch locations, including the accrual of estimated
facility exit costs and future lease costs, the write-off of leasehold
improvements, and other exit costs aggregating $1.6 million, (ii) estimated
employee severance costs in connection with the related termination of
employees, including certain former owners of businesses acquired, aggregating
$1.7 million, (iii) and certain other costs aggregating $370,000 related to the
restructuring. Management believes that the restructuring plan, which was
substantially implemented by the end of March 1998, will position the Company as
a lower cost provider under the Medicare prospective payment system that is
scheduled to be implemented October 1, 1999, as well as reduce the impact on the
Company of the reduction in Medicare reimbursement for oxygen services and the
IPS limits. During the fourth quarter of fiscal 1998, the Company will be
implementing cost reduction and office consolidation initiatives which were
identified in addition to the initiatives identified during the second quarter
of fiscal 1998. See "Restructuring Initiatives" and Note 3 to the accompanying
unaudited condensed consolidated financial statements.
Additionally, deferred acquisition costs aggregating $1.2 million associated
with the termination of the Company's proposed acquisition of USHO were written
off during the second quarter of fiscal 1998.
The Company recorded certain nonrecurring expenses of $1.6 million during the
second quarter of fiscal 1997 as a result of a merger which occurred in November
1996. Such costs were comprised of transaction fees, legal and accounting costs
and other nonrecurring expenses associated with the merger. Additionally, during
the third quarter of fiscal 1997, the Company wrote-off deferred costs
aggregating $300,000 relating to an offering to sell shares of the Company's
common stock through a Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on November 1, 1996 and withdrawn on December
30,
18
<PAGE>
1996. The write-off was recorded based upon management's judgment that a similar
offering would not likely occur prior to June 30, 1997 due to market conditions.
Such costs were comprised principally of legal, accounting and printing costs.
Writedown of goodwill. During the second quarter of 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
under SFAS 121 based upon management's estimate of the impact of the announced
reductions in Medicare reimbursement for oxygen services and the expected impact
of the IPS on the Company's continuing operations. 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 the three months
ended December 31, 1997. 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 in
accordance with SFAS 121. There can be no assurance that the remaining balance
of goodwill of $47.5 million at March 31, 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 March 31, 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 the nine months ended March 31, 1998 included a pre-tax
operating loss from the Texas Medicare cost-reimbursed nursing agency of
approximately $839,000 as a result of early implementation of the IPS in the
Texas Region effective January 1, 1998 and pretax charges aggregating $28.4
million related to the nonrecurring writedown of goodwill and merger and other
nonrecurring costs recorded during the second quarter of fiscal 1998. The
Company expects the Texas Medicare IPS related loss to continue during the
fourth quarter of fiscal 1998 but at a reduced amount as a result of the cost
reduction and office consolidation initiatives currently being implemented. The
Company expects this loss to be significantly reduced during fiscal 1999 after
all the cost reductions are implemented. However, 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 12%
of pretax loss for the nine months ended March 31, 1998, principally as a
result of the merger and restructuring charges and the writedown of goodwill
recorded during the second quarter of fiscal 1998. The writedown of goodwill
included approximately $15.6 million of nondeductible goodwill recorded in
connection with certain acquisitions, for which the Company receives no income
tax benefit.
Liquidity and Capital Resources
19
<PAGE>
Working capital increased to $49.7 million at March 31, 1998 from $43.2 million
at June 30, 1997, an increase of $6.5 million. The increase primarily resulted
from an increase in current assets of $8.3 million offset by an increase in
current liabilities of $1.8 million. The increase in current assets was
comprised principally of an increase in accounts receivable of $3.9 million and
an increase in income taxes receivable of $2.6 million. The increase in current
liabilities was comprised principally of the change in the current portion of
restructuring and other nonrecurring liabilities of $3.0 million at March 31,
1998, offset by a decrease of $2.4 million in the current portion of long-term
debt. The increase in accounts receivable was principally due to internal growth
and certain managed care payors continuing to subject the Company to protracted
payment terms and increasing attempts by these and other third-party payors to
deny payments for appropriate products and services furnished to their
subscribers. The increase in accounts receivable resulted in an increase in days
net revenues outstanding from 92 to 118 for this period. The increase in days
net revenues outstanding resulted from a decrease in net revenues of $5.5
million from the three months ended June 30, 1997 to the three months ended
March 31, 1998, as well as the increase of $3.9 million in net accounts
receivable from June 30, 1997 to March 31, 1998. Cash flow provided by
operations was $1.3 million for the nine months ended March 31, 1998 compared
with $11.0 million used in operations in the nine months ended March 31, 1997.
Cash expenditures for acquisitions were $32.4 million for the nine months ended
March 31, 1997. There were no acquisitions consummated during the nine months
ended March 31, 1998. During the nine months ended March 31, 1998, the Company
paid $514,000 in additional consideration for acquisitions completed during
fiscal 1997. The Company also issued 579,901 shares of common stock on March 30,
1998 to the former owners of Nahatan Drug, Inc. as additional consideration
required under the acquisition agreement. Additionally, the Company is currently
restricted by its senior credit facility from engaging in acquisitions. As a
result of the changing reimbursement environment, management expects a slowing
of growth through acquisition.
Goodwill was $47.5 million at March 31, 1998, after a $23.5 million writedown
recorded during the second quarter of fiscal 1998. The Company will continue to
evaluate the continuing value of goodwill in accordance with SFAS 121. There can
be no assurance that the remaining balance of goodwill at March 31, 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 March 31, 1998.
Mobile diagnostic services represent less than 3% of the Company's current net
revenues.
Expenditures for purchases of capital equipment were $1.9 million and $2.8
million for the nine months ended March 31, 1998 and 1997, respectively,
including $1.4 million of purchases in fiscal 1998 funded through a master lease
agreement. The Company expects to spend approximately $1.0 million for capital
expenditures for the remainder of fiscal 1998. The Company typically funds a
significant portion of its capital expenditures through a master lease
arrangement which is collateralized by the value of the underlying equipment.
20
<PAGE>
The Company's Medicare cost-reimbursed nursing agencies are subject to the
Medicare surety bond requirements imposed by the Budget Act, which require the
Company to obtain surety bonds for each agency in the amount of the greater of
$50,000 or 15% of the Medicare net revenues for the previous year. The Company
was required to have surety bonds in place no later than February 27, 1998 for
these agencies, and complied with these requirements. Since complying with these
requirements, the Health Care Financing Administration ("HCFA") has extended the
deadline for compliance to 60 days after the publication of the final
regulations. To date the final regulations have not been issued. The aggregate
cost of the surety bonds to the Company was less than $100,000 for coverage from
January 1, 1998 to June 30, 1998. A date has not been established for surety
bond coverage for durable medical equipment providers as the proposed rules for
such providers have not yet been finalized. Due to the nature of the surety
bonds serving as a Medicare fraud and abuse deterrent and the potential for
insurers to have significant risk under the bonds, many insurers are unwilling
to provide surety bond coverage that complies with all the specifications of the
regulation. As a result, although the Company was able to obtain surety bond
coverage that complies with the regulations, there can be no assurance that such
coverage will be adequate or available to the Company in the future on
satisfactory terms, if at all. Additionally, there can be no assurance that any
judgments, settlements or costs relating to future claims under these surety
bonds will not have a material adverse effect on the Company's results of
operations or financial condition.
The Company had a $100 million senior credit facility (the "Credit Facility")
available for acquisitions, working capital and other general corporate
purposes. On February 17, 1998, the Credit Facility was amended to waive and
amend certain covenants under the Credit Facility, limit aggregate borrowings
for working capital purposes to $48.0 million and no longer permit the Company
to borrow for acquisition purposes until it meets certain criteria as defined by
the Credit Facility. Additionally, the interest rates available to the Company
on borrowings under the Credit Facility were increased by 0.5% per annum. On May
15, 1998, the Company and its lenders entered into an amendment to the Credit
Facility (the "Amendment") which, among other things, waived the failure by the
Company to be in compliance on March 31, 1998 with certain covenants set forth
in the Credit Facility, limited the aggregate amount that the Company could
borrow under the Credit Facility through July 31, 1998 to $84.8 million and
required the Company to grant to the lenders under the Credit Facility, subject
to certain permitted liens and exceptions, a collateral interest in all of the
assets of the Company. The Amendment also requires the Company to pay certain
additional monthly fees based upon amounts outstanding under the Credit
Facility. These fees are expected to result in an increase in the effective
interest rate on borrowings under the Credit Facility of between 0.5% to 1% per
annum. On April 30, 1998, the Company had $82.1 million outstanding under the
Credit Facility bearing interest at a weighted average interest rate of 8.3% and
$2.7 million of unused commitment available for working capital purposes through
July 31, 1998.
The Company has provided to its lenders under the Credit Facility information
which reflects that the Company expects not to be in compliance as of September
30, 1998 and thereafter with certain covenants set forth in the Credit Facility.
In the Amendment, the lenders and the Company have agreed to negotiate in good
faith by August 15, 1998 an additional amendment to the Credit Facility,
including amendments to the financial covenants of the Credit Facility as
applicable after June 30, 1998 and thereafter and such other amendments that the
lenders require.
If the Company fails to be in compliance with the covenants set forth in the
Amendment and the Company and the lenders fail to enter into the additional
amendment to the Credit Facility which
21
<PAGE>
amends the covenants in a manner satisfactory to the Company and the lenders, or
if the lenders otherwise fail to waive the Company's noncompliance with the
covenants, the Company will be in default under the Credit Facility. If an event
of default should occur under the Credit Facility, the lenders could elect to
declare all amounts of principal outstanding under the Credit Facility, together
with all accrued interest, to be immediately due and payable.
If the Company and lenders enter into an additional amendment to the Credit
Facility on terms satisfactory to the Company, the Company anticipates that the
available lines of credit as of that time and cash flow generated from
operations should be adequate to enable the Company to fund its operations,
capital expenditures and anticipated internal growth for at least the next
twelve months.
22
<PAGE>
PART II: OTHER INFORMATION
Item 1. 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 intends to engage in a vigorous defense.
Item 2. Changes in Securities and Use of Proceeds
On March 30, 1998, the Company issued 579,901 shares of common stock to the
former owners of Nahatan Drug, Inc., a company acquired in March 1997, as
additional consideration required under the acquisition agreement. These shares
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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on February 16, 1998. At the
meeting, shareholders elected directors and approved an amendment to the
Company's 1995 Employee and Consultant Equity Plan (the "1995 Plan").
The following nominees for director, who was elected as a Class B director to
serve for a three year term and until his successors is duly elected and
qualified, received the following votes at the meeting.
For Withhold Authority
------------------ ------------------------
G. Michael Bellenghi 6,851,759 154,960
The term of office of each of the following directors continued after the
meeting: Bruce J. Feldman, Harvey Machaver and Joseph F. Trustey.
The following sets forth the number of votes cast for or against the amendment
to the 1995 Plan, as well as the number of abstentions and broker non-votes:
For Against Abstentions Broker Non-votes
----------- ------------- --------------- --------------------
4,805,650 1,166,046 13,182 1,021,841
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed with this report are listed in the index on page 26.
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K on March 3, 1998 to disclose
under Item 5 therein information with respect to certain litigation
filed against the Company on February 19, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME HEALTH CORPORATION OF AMERICA, INC.
Date: May 15, 1998 /s/ Bruce J. Feldman
----------------------------------------
President and Chief Executive Officer
(Duly Authorized Officer and Principal
Financial Officer)
25
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(a) 3.1 Amended and Restated Articles of Incorporation of the Company.
(a) 3.2 Amended and Restated Bylaws of the Company.
(b) 10.1 Stock Purchase Agreement among HHCA, Home Health Corporation of
New Hampshire, Randy DiSalvo, R.S.D. Management Services, Inc.,
Nursing Services Home Care, Inc. and Nursing Services Home
Care, Ltd.
(c) 10.2 Asset Acquisition Agreement Among Home Health Corporation of
America, Inc. and its Nominees, LHS Holdings, Inc., Liberty
Health Services, Inc., Nurses Today M/C, Inc. and Mark H.
O'Brien.
(c) 10.3 Asset Acquisition Agreement Among Home Health Corporation of
America, Inc. and its Nominees, PDN, Inc., Medical I.V., Inc.
and Mark H. O'Brien.
(c) 10.4 Indemnification Agreement Among Home Health Corporation of
America, Inc. and its Nominees, LHS Holdings, Inc., Liberty
Health Services, Inc., Nurses Today M/C, Inc., PDN, Inc.,
Medical I.V., Inc. and Mark H. O'Brien.
(a) 10.5 Asset Acquisition Agreement among Home Care Medical Supply and
Equipment, Inc., Alpha Home Care Services, Inc., Joel
Schreiber, and Joseph J. D'Alessandro, including schedules and
exhibits thereto.
(a) 10.6 Subordination Agreement among CoreStates Bank, N.A., Summit
Ventures II, L.P., Summit Investors II, L.P., CoreStates
Enterprise Fund, and Alpha Home Care Services, Inc.
(a) 10.7 Stock Purchase Agreement by and between Home Health Corporation
of Delaware, Inc., William Moses, Milton Altshuler, Steven R.
Altshuler, and Jane Altshuler, relating to Delaware
Acquisition.
(a) 10.8 Asset Acquisition Agreement between HHCDME, Inc., and Master
Medical Supply Co., Inc., relating to Delaware Acquisition.
(a) 10.9 Asset Acquisition Agreement between HHCD, Inc., and Professional
Home Health Care Agency, Inc., relating to Delaware
Acquisition.
(a) 10.10 Indemnification Agreement relating to Delaware Acquisition.
(a) 10.11 Agreement among Home Health Care Corporation of Delaware, Inc.,
HHCD, Inc., HHCDME, Inc., Master Medical Supply Co., Inc.,
Professional Home Health Services, Inc., Professional Home
Health Care Agency, Inc., William Moses, Andra H. Moses, Steven
R. Altshuler, and Jane Altshuler, relating to Delaware
Acquisition.
(a) 10.12 Full Payment Guaranty of the Company relating to Delaware
Acquisition.
(a) 10.13 Subordination Agreement among CoreStates Bank, N.A., Summit
Ventures II, L.P., Summit Investors II, L.P., CoreStates
Enterprise Fund, and parties to Delaware Acquisition
transaction documents.
(a) 10.14 Separation Agreement among Home Health Corporation of America,
Inc., Home Health Corporation of Delaware, Inc., HHCD, Inc.,
HHCDME, Inc., Steven R. Altshuler, Jane E. Altshuler, William
W. Moses and Andra H. Moses
(a) 10.15 Asset Purchase Agreement between Pennsylvania Home Care, Inc. and
Healthcare Professionals, Inc.
(d) 10.16 Third Amended and Restated Credit Agreement.
(e) 10.17 Amendment No. 1 to the Third Amended and Restated Credit
Agreement.
(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.*
26
<PAGE>
(a) 10.20 Employment Agreement between the Company and Fred J. Nicholas.*
(a) 10.21 Employment Agreement between the Company and Joseph Grilli.*
(a) 10.22 1995 Employee and Consultant Equity Plan. *
(a) 10.23 1984 Employee Stock Option Plan (Qualified and Non-Qualified),
as amended and restated.*
(a) 10.24 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) 10.25 Subordination Agreement, dated September 29, 1995, among
CoreStates Bank, N.A., Summit Ventures II, L.P., Summit
Investors II, L.P., Summit Subordinated Debt Fund, L.P.,
CoreStates Enterprise Fund and Preferred Diagnostic Services,
Inc.
(a) 10.26 Asset Acquisition Agreement among the Company, Home Health
Corporation of America, Inc. - Tampa, Preferred Diagnostic &
Medical Services, Inc., Preferred Diagnostic Services, Inc.,
G&S Industries, Inc., and Joel M. Grossman, Jeffrey Grossman,
Joseph Sterensis, Barbara Sterensis and Richard Levitt.
(a) 10.27 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) 10.28 Amended and Restated Agreement and Plan of Merger among Home
Health Corporation of America, Inc., HHCA Acquisition
Corporation, Inc. and U.S. HomeCare Corporation.
(g) 10.29 Termination of Amended and Restated Agreement and Plan of Merger
among Home Health Corporation of America, Inc., HHCA
Acquisition Corporation, Inc. and U.S. HomeCare Corporation.
(g) 10.30 Amendment No. 3 to Third Amended and Restated Credit Agreement.
11.1 Computation of basic and diluted loss per share for the three
and nine months ended March 31, 1998.
11.2 Computation of basic and diluted earnings per share for the
three and nine months ended March 31, 1997.
27.1 Financial data schedule for the nine month period ended
March 31, 1998.
27.2 Financial data schedule for the nine month period ended
March 31, 1997.
27.3 Financial data schedule for the six month period ended
December 31, 1996.
- -----------------
(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 Form 10-Q dated December 31,
1997 and filed February 17, 1998.
* Represents management contract or compensatory plan
27
<PAGE>
Exhibit 11.1
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
Computation of Basic and Diluted Loss Per Share
for the three and nine months ended March 31, 1998
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, 1998 March 31, 1998
-------------------------------------- -----------------------------------
Basic Diluted Basic Diluted
--------------- ------------------- --------------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss available to common
stockholders $(644) $(644) $(22,471) $(22,471)
=============== =================== =============== ================
Weighted average number of
common shares outstanding
during period 9,193 9,193 9,167 9,167
Weighted average number of
common shares subject to
exercise under outstanding
stock options and warrants,
net of treasury shares
assumed repurchased (a) - 34 - -
--------------- ------------------- --------------- ----------------
Weighted average number of
common shares outstanding 9,193 9,227 9,167 9,167
=============== =================== =============== ================
Net loss per share $(0.07) $(0.07) $(2.45) $(2.45)
=============== =================== =============== ================
</TABLE>
(a) No shares were assumed outstanding for the diluted calculation for the nine
months ended March 31, 1998 as such shares were anti-dilutive and decreased the
loss per share to $2.43.
<PAGE>
Exhibit 11.2
HOME HEALTH CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
Computation of Basic and Diluted Earnings Per Share
for the three and nine months ended March 31, 1997
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, 1997 March 31, 1997
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
------------- ------------------ ------------- ------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $1,567 $1,567 $3,613 $3,613
Dividends on preferred stock - - (6) (6)
Interest and dividends on
convertible securities,
net of tax - - - 79
------------- ------------------ ------------- ------------------
Net income available to common
stockholders $1,567 $1,567 $3,607 $3.686
============= ================== ============= ==================
Weighted average number of
common shares outstanding
during period 8,678 8,678 8,378 8,378
Weighted average number of
common shares subject to
exercise under outstanding
stock options and warrants,
net of treasury shares assumed
repurchased - 148 - 148
Shares assumed issued in connection
with conversion of convertible
securities, as of the beginning
of the period - - - 201
------------- ------------------ ------------- ------------------
Weighted average number of common
shares outstanding 8,678 8,826 8,378 8,727
============= ================== ============= ==================
Net income per share $ 0.18 $ 0.18 $ 0.43 $ 0.42
============= ================== ============= ==================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1998 AND THE RELATED STATEMENTS OF OPERATIONS FOR THE NINE
MONTH PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 563
<SECURITIES> 0
<RECEIVABLES> 71,140
<ALLOWANCES> 10,855
<INVENTORY> 2,939
<CURRENT-ASSETS> 73,019
<PP&E> 31,412
<DEPRECIATION> 14,543
<TOTAL-ASSETS> 139,674
<CURRENT-LIABILITIES> 23,347
<BONDS> 0
0
0
<COMMON> 44,297
<OTHER-SE> (15,827)
<TOTAL-LIABILITY-AND-EQUITY> 139,674
<SALES> 135,155
<TOTAL-REVENUES> 135,155
<CGS> 64,030
<TOTAL-COSTS> 126,895
<OTHER-EXPENSES> 28,396<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,512
<INCOME-PRETAX> (25,648)
<INCOME-TAX> (3,177)
<INCOME-CONTINUING> (22,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,471)
<EPS-PRIMARY> $(2.45)
<EPS-DILUTED> $(2.45)
<FN>
<F1>Other expenses includes pretax accounting charges during the three months
ended December 31, 1997 of $28.4 million which was comprised of a writedown of
goodwill of $23.5 million, restructuring costs of $3.7 million and the writeoff
of deferred costs aggregating $1.2 million related to a terminated acquisition.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 735
<SECURITIES> 0
<RECEIVABLES> 57,543
<ALLOWANCES> 9,326
<INVENTORY> 3,607
<CURRENT-ASSETS> 56,460
<PP&E> 65,032
<DEPRECIATION> 2,526
<TOTAL-ASSETS> 136,534
<CURRENT-LIABILITIES> 17,224
<BONDS> 0
0
0
<COMMON> 43,098
<OTHER-SE> 7,436
<TOTAL-LIABILITY-AND-EQUITY> 136,534
<SALES> 102,352
<TOTAL-REVENUES> 102,352
<CGS> 49,642
<TOTAL-COSTS> 92,527
<OTHER-EXPENSES> 1,884<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,073
<INCOME-PRETAX> 5,868
<INCOME-TAX> 2,255
<INCOME-CONTINUING> 3,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,613
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
<FN>
<F1>OTHER EXPENSES ARE COMPRISED OF $1,584 RELATED TO MERGER COSTS INCURRED IN
CONNECTION WITH A POOLING TRANSACTION IN NOVEMBER 1996 AND $300 RELATED TO THE
WRITE-OFF OF DEFERRED OFFERING COSTS AS A RESULT OF THE CANCELLATION ON
DECEMBER 30, 1996 OF A REGISTRATION OF SHARES OF THE COMPANY'S STOCK.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1996 AND THE RELATED STATEMENTS OF OPERATIONS FOR THE
SIX MONTH PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,979
<SECURITIES> 0
<RECEIVABLES> 49,875
<ALLOWANCES> 9,512
<INVENTORY> 2,444
<CURRENT-ASSETS> 47,588
<PP&E> 18,640
<DEPRECIATION> 7,191
<TOTAL-ASSETS> 105,582
<CURRENT-LIABILITIES> 15,712
<BONDS> 0
500
0
<COMMON> 38,985
<OTHER-SE> 5,867
<TOTAL-LIABILITY-AND-EQUITY> 105,582
<SALES> 60,085
<TOTAL-REVENUES> 60,085
<CGS> 28,959
<TOTAL-COSTS> 55,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,170
<INCOME-PRETAX> 3,339
<INCOME-TAX> 1,295
<INCOME-CONTINUING> 2,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,044
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
