<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 0-26938
HOME HEALTH CORPORATION OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Pennsylvania 23-2224800
- ----------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2200 Renaissance Boulevard
Suite 300
King of Prussia, PA 19406
- ----------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (610) 272-1717
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding at February 1, 1999
- ----------------------------- --------------------------------
Common stock, no par value 9,873,664
Exhibit index is located on page 29
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three and
six months ended December 31, 1997 and 1998 3
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 1997 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Part II: Other Information
Item 1. Legal Proceedings 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit index 29
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Home Health Corporation of America, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
-------------------------------------------
1997 1998 1997 1998
-------------------------------------------
<S> <C> <C> <C> <C>
Net revenues................................... $ 45,742 $ 28,732 $ 92,788 $ 62,577
Operating costs and expenses:
Patient care costs:
Professional care and product costs...... 20,808 16,457 42,020 33,052
Depreciation on equipment held for
rental................................ 851 887 1,567 1,744
-------------------------------------------
Total patient care costs........... 21,659 17,344 43,587 34,796
General and administrative.................. 18,875 16,970 36,284 32,725
Provision for doubtful accounts............. 1,404 7,444 2,876 26,635
Depreciation................................ 593 686 1,096 1,385
Amortization................................ 833 719 1,584 1,387
Interest expense, net....................... 1,795 2,332 3,634 4,494
Merger and other nonrecurring expenses...... 4,880 - 4,880 -
Writedown of goodwill....................... 23,516 28,176 23,516 28,176
-------------------------------------------
Total operating costs and expenses....... 73,555 73,671 117,457 129,598
-------------------------------------------
Loss before income tax benefit................. (27,813) (44,939) (24,669) (67,021)
Income tax benefit............................. (3,957) - (2,841) -
-------------------------------------------
Net loss.................................... $(23,856) $(44,939) $(21,828) $(67,021)
===========================================
Other data, including per share data:
Basic per share data:
Weighted average shares outstanding...... 9,158 9,777 9,153 9,771
===========================================
Loss per share........................... $(2.60) $(4.60) $(2.38) $(6.86)
===========================================
Diluted per share data:
Weighted average shares outstanding...... 9,158 9,777 9,153 9,771
===========================================
Loss per share........................... $(2.60) $(4.60) $(2.38) $(6.86)
===========================================
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
3
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1998
------ -------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................$ 1,639 $ 412
Accounts receivable, net of allowance for doubtful accounts
of $12,187 and $27,945, respectively......................... 58,908 39,052
Inventories.................................................... 2,257 1,266
Prepaid expenses and other current assets...................... 7,918 4,762
-------- --------
Total current assets........................................ 70,722 45,492
Property and equipment, net....................................... 16,736 14,187
Goodwill, net..................................................... 46,803 20,104
Other assets, net................................................. 2,578 3,965
-------- --------
Total assets.............................................$136,839 $ 83,748
======== ========
Liabilities and Stockholders' Equity (Deficiency)
-------------------------------------------------
Current liabilities:
Current maturities of long-term debt...........................$ 4,211 $ 88,612
Accounts payable............................................... 6,796 6,830
Accrued salaries and related employee benefits................. 4,396 4,082
Restructuring and other nonrecurring liabilities............... 3,667 2,494
Third-party payor accruals and settlements..................... - 8,599
Other current liabilities...................................... 3,270 7,562
-------- --------
Total current liabilities................................... 22,340 118,179
Long-term debt, net of current portion............................ 85,311 3,338
Other noncurrent liabilities...................................... 3,095 3,136
Commitments and contingencies..................................... - -
Stockholders' equity (deficiency):
Preferred stock (undesignated), no par value, 10,000 shares
authorized; no shares issued and outstanding................ - -
Common stock, no par value, 20,000 shares authorized; 9,856
and 9,874 shares issued, 9,764 and 9,781 outstanding,
respectively................................................ 44,296 44,319
Accumulated deficit............................................ (18,203) (85,224)
-------- --------
Total stockholders' equity (deficiency)..................... 26,093 (40,905)
-------- --------
Total liabilities and stockholders' equity (deficiency)...$136,839 $ 83,748
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended December 31,
------------------------------
1997 1998
------------------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss....................................................$(21,828) $(67,021)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 4,379 4,547
Third-party payor accruals and settlements................. - 4,126
Provision for doubtful accounts............................ 2,876 26,635
Writedown of goodwill...................................... 23,516 28,176
Writeoff of terminated merger costs........................ 1,202 -
Other...................................................... - 313
Net changes in certain assets and liabilities, net of
acquisitions:
Accounts receivable......................................... (7,726) (10,905)
Inventories................................................. 153 991
Prepaid expenses and other current assets................... (4,286) 3,076
Accounts payable, accrued expenses and other
current liabilities....................................... 1,619 701
Third-party payor accruals and settlements.................. - 8,599
Restructuring and other nonrecurring liabilities............ 2,843 (1,319)
-------- --------
Net cash flows provided by (used in) operating
activities............................................. 2,748 (2,081)
-------- --------
Cash flows used in investing activities:
Purchases of property and equipment......................... (1,345) (646)
Cash paid for acquisitions, net of cash acquired............ (372) -
Other, net.................................................. (273) (270)
-------- --------
Net cash flows used in investing activities.............. (1,990) (916)
-------- --------
Cash flows provided by financing activities:
Proceeds from long-term debt................................ 4,000 3,150
Repayments of long-term debt................................ (3,285) (844)
Payment of deferred financing fees.......................... - (538)
Proceeds from issuance of common stock...................... 192 2
-------- --------
Net cash flows provided by financing activities.......... 907 1,770
-------- --------
Net increase (decrease) in cash and cash equivalents........... 1,665 (1,227)
Cash and cash equivalents, beginning of period................. 464 1,639
-------- --------
Cash and cash equivalents, end of period.......................$ 2,129 $ 412
======== ========
</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
(continued)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Home Health Corporation of America, Inc. and subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Additionally, although the June
30, 1998 condensed consolidated balance sheet was derived from audited financial
statements, it does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended December 31, 1998
are not necessarily indicative of the results that may be expected for the full
fiscal year ending June 30, 1999. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
1998 included in the Company's Form 10-K/A filed with the Securities and
Exchange Commission.
2. Going Concern
The unaudited condensed consolidated financial statements of the Company
have been prepared under generally accepted accounting principles assuming that
the Company will continue as a going concern. The Company recorded net losses of
($24,848,000) and ($67,021,000) during fiscal 1998 and the six months ended
December 31, 1998, respectively, and had negative cash flows from operations
during the six months ended December 31, 1998. The Company is in default under
its senior credit facility (the "Credit Facility") as a result of violations of
certain financial covenant requirements and the Company suspending payment of
interest due on amounts outstanding under the Credit Facility. As a result of
the ongoing events of default under the Credit Facility, the Company classified
the $83,886,000 in outstanding indebtedness under the Credit Facility as a
current liability in the accompanying unaudited condensed consolidated balance
sheet at December 31, 1998. The Company does not have the ability to repay the
Credit Facility in its entirety if required by the Company's lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Credit Facility."
The Company is experiencing difficulties in meeting its obligations in
connection with its ongoing operations due to various factors including (i) the
implementation of the Medicare Interim Payment System effective July 1, 1998
which negatively impacted the Company's home nursing visit patterns and
significantly decreased the Company's per-visit Medicare reimbursement; (ii)
excess interim reimbursements and retroactive adjustments for prior period
Medicare cost reports, which amounts are being repaid to Medicare by the Company
over three to twelve month periods; (iii) certain managed care and other non-
governmental payors continuing to delay or deny payments to the Company for
products and services delivered pursuant to provider contracts with these
payors; and (iv) unreimbursed costs aggregating $6,500,000 from the Company's
Medicare cost-reimbursed nursing agencies
6
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
through the six months ended December 31, 1998. The Company does not expect
that cash on hand, cash flows from operations or cash flows from financing of
certain capital expenditures through leasing arrangements will be sufficient to
allow the Company to meet its debt service obligations, working capital, capital
expenditures or other cash flow requirements. As a result, on February 18, 1999
the Company and its operating subsidiaries filed voluntary petitions for
reorganization with the United States Bankruptcy Court for the District of
Delaware under Chapter 11 of title 11 of the United States Code.
The petitions will enable the Company to conduct business under protection of
the Bankruptcy Code while it pursues a plan to reorganize its obligations
and strengthen its financial position. Due to the ongoing cash flow
constraints, the Company began to implement a restructuring plan
during February 1999 to reduce its operating expenses and focus the Company's
operations on more profitable business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Restructuring
Initiatives." In developing a long-term reorganization plan, the Company is
also reviewing its future capital requirements and attempting to identify its
financing alternatives. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
3. Loss Per Share
The following table indicates a reconciliation of the numerator and
denominator in calculating loss per share for the periods presented:
<TABLE>
<CAPTION>
For the three months For the six months
ended ended
December 31, December 31,
-----------------------------------------------------
1997 1998 1997 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
(amounts in thousands)
Net loss used for calculation of basic
and diluted loss per share............. $(23,856) $(44,939) $(21,828) $(67,021)
=====================================================
Weighted average number of common
shares outstanding used for
calculation of basic loss per share... 9,158 9,777 9,153 9,771
Stock options and warrants assumed
outstanding during the period............ - - - -
-----------------------------------------------------
Weighted average number of common
shares used for calculation of diluted
loss per share........................... 9,158 9,777 9,153 9,771
=====================================================
</TABLE>
7
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
4. Medicare Reimbursement
Medicare Payments
Certain of the Company's Medicare cost-reimbursed nursing agencies received
excess interim reimbursements and notices from Medicare regarding retroactive
adjustments to prior year Medicare cost reports. These excess reimbursements and
cost report adjustments aggregated $8,599,000 at December 31, 1998 and are
reflected as current liabilities in the accompanying unaudited condensed
consolidated balance sheet. The Company is repaying the excess reimbursements
and cost report adjustment amounts to Medicare over three to twelve month
periods as it recently received denials of its requests for extended repayment
terms for these amounts beyond twelve months. The inability to obtain extended
repayment terms has had a material adverse effect on the Company's cash flows.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Medicare Contractual Allowances
The Company recorded contractual allowances of $4,126,000 during the three
months ended December 31, 1998, which related to the above cost report
adjustment notices and to changes in estimated outcomes of prior year cost
report adjustments under appeal with Medicare. These amounts are reflected as
reductions in net revenues in the December 31, 1998 unaudited condensed
consolidated statement of operations.
5. Writedown of Goodwill
During the three months ended December 31, 1998, the Company recorded a
$28,176,000 writedown of goodwill previously recorded in connection with certain
acquisitions. The Company determined the writedown of goodwill was required
based upon the Company's review of its operations and cash flows in certain of
its locations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restructuring Initiatives" and "- Results of
Operations - Three Months Ended December 31, 1998 Compared to the Three Months
Ended December 31, 1997 -Writedown of goodwill."
6. Income Taxes
For the six months ended December 31, 1998, the Company recorded an income
tax benefit of $21,358,000 offset by a valuation allowance of the same amount as
the net income carryback amounts available for prior years were fully utilized
as of June 30, 1998.
8
<PAGE>
Home Health Corporation of America, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
7. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the periods presented:
<TABLE>
<CAPTION>
For the six months ended
December
31,
---------------------------------
1997 1998
---------------------------------
<S> <C> <C>
(amounts in thousands)
Non-cash investing and financing activities:
Accrual of earnout liabilities related to
acquisitions................................. $ - $2,709
---------------------------------
</TABLE>
8. Adoption of Recent Accounting Pronouncements
During the three months ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," which requires changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The Company had no items of comprehensive income to disclose for
the periods presented in these unaudited condensed consolidated financial
statements.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Outlook and Risks
The Company is subject to significant external factors which could
significantly impact its business, including changes in Medicare reimbursement,
government fraud and abuse initiatives and other such factors which are beyond
the control of the Company. Certain of these factors are discussed herein.
Refer to the Company's Annual Report on Form 10-K/A for the year ended June 30,
1998 for a discussion of these and additional factors which management believes
may impact the Company. These factors, as well as future changes in
reimbursement and changes in interpretations of regulations, could cause future
results to differ materially from historical trends and management's current
expectations.
Restructuring Initiatives
The Company is experiencing difficulties in meeting its obligations and is
experiencing operating losses during fiscal 1999. Additionally, the Company is
in default of its senior credit facility (the "Credit Facility"). Principally as
a result of these issues, on February 18, 1999 the Company and its operating
subsidiaries filed voluntary petitions for reorganization with the United States
Bankruptcy Court for the District of Delaware under Chapter 11 of title 11 of
the United States Code. See "Liquidity and Capital Resources - Liquidity Issues
and Bankruptcy Proceedings" and note 2 to the unaudited condensed consolidated
financial statements. In connection with pursuing a plan of reorganization
required to be filed with the Bankruptcy Court, the Company began implementing
restructuring initiatives during February 1999. These initiatives include (i)
ceasing all operations in Texas, (ii) ceasing to provide products and services
to the majority of the Company's managed care and certain other non-governmental
payors it currently services, and (iii) elimination of certain unprofitable
products and supplies from the Company's lines of business. Further initiatives
are expected to be developed and implemented in connection with finalizing the
plan of reorganization to be filed with the Bankruptcy Court.
The Company expects to record restructuring expenses during the three
months ended March 31, 1999 for severance and other restructuring costs, the
amount of which has not yet been determined.
The Company cannot predict the ultimate impact of the restructuring
initiatives on its
10
<PAGE>
operations. While overall reductions in net revenues and expenses are expected,
there can be no assurance that net revenues will exceed expenses. There can be
no assurance that the cost reductions being implemented will be sufficient to
offset the reductions in net revenues expected from the impact of these
initiatives.
Net Revenues by Product Line
The following table indicates the percentage of net revenues represented by
each of the Company's services for the periods indicated:
<TABLE>
<CAPTION>
Three months Six months
ended ended
December 31, December 31,
-------------------------------------
1997 1998 1997 1998
-------------------------------------
<S> <C> <C> <C> <C>
Nursing and related
patient services:
Medicare 43.5% 22.4% 43.3% 27.6%
Non-Medicare 23.3 38.8 22.9 35.9
-------------------------------------
66.8 61.2 66.2 63.5
Product services:
Respiratory therapy 13.5 19.2 15.4 17.5
Infusion therapy 7.4 5.6 7.1 6.3
Durable medical
equipment 12.3 14.0 11.3 12.7
-------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
=====================================
</TABLE>
The decreases in Medicare nursing and related patient services net revenues
for the three and six months ended December 31, 1998 from 1997 were principally
due to (i) unreimbursed costs from Medicare aggregating $6,500,000 through
December 31, 1998; and (ii) a reduction in net revenues of $4,126,000 for
notices received regarding retroactive adjustments to prior year Medicare cost
reports and to changes in estimated outcomes of prior year cost report
adjustments under appeal with Medicare. The decreases in Medicare net revenues
resulted in corresponding increases in the Company's non-Medicare nursing and
product net revenues as a percentage of total net revenues. See "Results of
Operations - Net revenues."
The Company's net revenues are expected to be significantly impacted by the
February 1999 restructuring initiatives as a result of (i) the plan to cease
operations of all lines of business in Texas, (ii) ceasing to provide products
and services to the majority of the Company's managed care and certain other
non-governmental payors it currently services, and (iii) elimination of certain
unprofitable products and supplies from the Company's lines of business. Net
revenues from the Texas operations were $3,578,000 for the three months ended
December 31, 1998. Net revenues from managed care and other non-governmental
payors represented 39.2% of net revenues at June 30, 1998. See "Restructuring
Initiatives."
11
<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>
Three months Six months
ended ended
December 31, December 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 47.4 60.4 47.0 55.6
General and 41.3 59.1 39.1 52.3
administrative
Provision for doubtful 3.1 25.9 3.1 42.6
accounts
Depreciation 1.3 2.4 1.2 2.2
Amortization 1.8 2.5 1.7 2.2
Interest expense, net 3.9 8.1 3.9 7.2
Merger and other
nonrecurring 10.7 - 5.3 -
expenses
Writedown of goodwill 51.4 98.2 25.3 45.0
----- ------ ----- ------
Loss from operations (60.9) (156.6) (26.6) (107.1)
Income tax benefit (8.7) - (3.1) -
----- ------ ----- ------
Net loss (52.2)% (156.6)% (23.5)% (107.1)%
===== ====== ===== ======
</TABLE>
Three Months Ended December 31, 1998 Compared to the Three Months Ended
December 31, 1997
Net revenues. Net revenues decreased to $28,732,000 for the three months ended
December 31, 1998. This represented a decrease of ($17,010,000), or (37.2%),
over the comparable prior fiscal period. The decrease in net revenues was
comprised of a reduction in Medicare cost-reimbursed nursing and related patient
service net revenues of ($13,451,000), or (67.6%), and a decline in net product
revenues (durable medical equipment and respiratory and infusion therapy
services) of ($4,021,000), or (26.5%), offset by an increase in non-Medicare
nursing net revenues of $462,000, or 4.3%.
The 67.6% decrease in Medicare cost-reimbursed nursing and related patient
service net revenues during the three months ended December 31, 1998 was
primarily a result of (i) a reduction in net revenues of $4,126,000 for notices
received regarding retroactive adjustments to prior year Medicare cost reports
and changes in estimated outcomes of prior year cost report adjustments under
appeal with Medicare; (ii) implementation of reduced reimbursement rates and
per-visit and per-beneficiary limitations on reimbursements for the Company's
eleven Medicare cost-reimbursed nursing agencies under the Interim Payment
System (the "IPS") effective July 1, 1998; and (iii) decreased Medicare nursing
visits of (44.9%) compared to the three months ended December 31, 1997. The
primary reasons for the decrease in Medicare nursing visits were (i) the
negative impact of IPS on the Company's visit patterns; (ii) the impact of a
reduction in hospital coordinator staff in connection with the Company's fiscal
1998 restructuring initiatives and (iii) a general decline in Medicare nursing
referrals from physicians
12
<PAGE>
due to initiatives by the Health Care Financing Administration ("HCFA") which
establish more rigid guidelines for physicians to prescribe homecare and stress
penalties regarding Medicare referrals, which management believes have
discouraged physicians from referring patients for homecare nursing and product
services.
Although the Company reduced Medicare nursing costs in connection with its
fiscal 1998 restructuring initiatives, the decrease in Medicare nursing visits
resulted in increased per-visit costs in excess of the IPS cost limits for
certain of the Company's Medicare cost-reimbursed nursing agencies. This
resulted in the Company's Medicare cost-reimbursed nursing agencies recording an
approximate ($3,500,000) loss for these unreimbursed costs during the three
months ended December 31, 1998.
The 26.5% decrease in net product revenues in the three months ended December
31, 1998 resulted principally from (i) the 25% reduction in Medicare oxygen
reimbursement in January 1998; (ii) reductions in cross-selling opportunities as
a result of the decrease in Medicare nursing visits during the three months
ended December 31, 1998; (iii) reductions in sales staff in connection with the
Company's fiscal 1998 restructuring initiatives; (iv) a general decline in
physician referrals due to continuing initiatives by HCFA; and (v) reductions in
managed care and other non-governmental payor net revenues. In connection with
its February 1999 restructuring initiatives, the Company plans to cease
providing products and services to the majority of its managed care and certain
other non-governmental payors. This will have a negative impact on the Company's
net revenues but is expected to eliminate payors who delay or deny payments for
products and services provided by the Company under contractual arrangements,
which makes providing these services cost prohibitive. See "Restructuring
Initiatives" and "Net Revenues by Product Line."
The 4.3% increase in non-Medicare nursing services in the three months ended
December 31, 1998 resulted principally from increased patient referrals for
skilled nursing and other patient related services, principally related to
pediatric services, offset by a decrease in unskilled nursing and other patient
related services referrals. Total non-Medicare skilled and unskilled nursing
visit volume increased 4.2% to 55,000 visits and hourly volume remained constant
at 305,000 hours. Non-Medicare skilled nursing visit and hourly volume during
this period increased 5.5% and 10.8% to 47,000 visits and 182,000 hours,
respectively. Total non-Medicare unskilled visit and hourly volume during this
period decreased (2.9%) and (12.6%) to 8,000 visits and 123,000 hours,
respectively. In general, the Company receives higher reimbursement for its
skilled nursing and other patient related services compared to unskilled nursing
services.
The Company expects non-Medicare nursing visits and hours to decrease
beginning during the third quarter of fiscal 1999 in connection with the Company
withdrawing its bid on a contract renewal to provide services to Humana, Inc. in
Southeast Florida. This decision was made as a result of contract rates being
demanded by Humana, Inc. being below the Company's cost of providing services.
During January 1999, the Company began discharging the approximately 300
patients it
13
<PAGE>
was providing services to under the expiring Humana, Inc. contract. Net revenues
resulting from nursing services provided to Humana, Inc. patients aggregated
approximately $3,000,000 annually. Additionally, the Company's net revenues from
non-Medicare nursing services will decrease in connection with its February 1999
restructuring initiatives. See "Restructuring Initiatives" and "Net Revenues by
Product Line."
In addition to the impact on net revenues of the February 1999 restructuring
initiatives (see "Restructuring Initiatives" and "Net Revenues by Product
Line"), the Company expects to experience decreases in its Medicare cost-
reimbursed nursing net revenues over the comparable fiscal 1998 periods during
the remainder of fiscal 1999 as a result of decreased visits and reduced
reimbursement under IPS. The Company may continue to experience decreases in its
respiratory therapy services net revenues as a result of the 25% and 5%
reductions on January 1, 1998 and 1999, respectively, in Medicare reimbursement
for oxygen services. The Company may also continue to experience decreases in
its net product revenues as a result of decreased cross-selling opportunities
due to decreased Medicare cost-reimbursed nursing visits.
Patient care costs. Patient care costs decreased to $17,344,000 for the three
months ended December 31, 1998. This represented a decrease of ($4,315,000), or
(19.9%), over the comparable prior fiscal period. The majority of this decrease
was due to the decrease in Medicare cost-reimbursed nursing visits resulting in
decreased patient care costs during the three months ended December 31, 1998,
with the remainder resulting from decreases in product net revenues during the
period as compared to the prior fiscal period. Patient care costs increased as a
percentage of net revenues from 47.4% to 60.4% principally as a result of the
$4,126,000 reduction in Medicare cost-reimbursed nursing net revenues recorded
during the three months ended December 31, 1998. See "Net revenues."
General and administrative. General and administrative expenses decreased to
$16,970,000 for the three months ended December 31, 1998. This represented a
decrease of ($1,905,000), or (10.1%), over the comparable prior fiscal period.
This decrease principally resulted from the Company's restructuring initiatives
during the last half of fiscal 1998, offset by increases during the three months
ended December 31, 1998 for additions to sales and hospital coordinator staff,
regional management staff and support staff necessary to service certain new
provider contracts, as well as increases in consulting costs associated with
improvements in the Company's information systems, without a corresponding
increase in net revenues. Although general and administrative expenses
decreased in the aggregate they increased as a percentage of net revenues from
41.3% to 59.1%. This was principally a result of the (i) $4,126,000 reduction in
Medicare cost-reimbursed nursing net revenues recorded during the three months
ended December 31, 1998 (see "Net revenues"), (ii) increases in these expenses
for increased staffing and consulting costs, and (iii) net revenues for this
period decreasing at a faster rate than the decreases in these expenses. A
certain portion of general and administrative expenses generally do not vary
directly with increases or decreases in net revenues. General and administrative
costs will be impacted by the Company's February 1999 restructuring initiatives.
See "Restructuring Initiatives."
Provision for doubtful accounts. The provision for doubtful accounts was
$7,444,000 for the three months ended December 31, 1998 compared to $1,404,000
in the comparable prior
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fiscal period. This $6,040,000 increase resulted principally from increases
implemented during the first quarter of fiscal 1999 in the historical reserve
percentages which were applied to the December 31, 1998 accounts receivable
aging categories.
Like many other health care providers, the Company's ability to collect its
accounts receivable from managed care and other non-governmental payors
continues to be increasingly difficult. See "Six Months Ended December 31, 1998
Compared to the Six Months Ended December 31, 1997."
Depreciation. Depreciation expense increased to $686,000 for the three months
ended December 31, 1998. This represented an increase of $93,000, or 15.7%,
over the comparable prior fiscal period. This increase was related to
depreciation on equipment purchased during the last half of fiscal 1998 and the
first half of fiscal 1999 principally for management information systems and
improvements in networking capabilities.
Amortization. Amortization decreased to $719,000 for the three months ended
December 31, 1998. This represented a decrease of ($114,000), or (13.7%), over
the comparable prior fiscal period. This decrease was attributable principally
to the writedown of goodwill recorded during the three months ended December 31,
1997. The Company expects amortization of goodwill to continue to decrease as a
result of the writedown of goodwill recorded during the three months ended
December 31, 1998. See "Writedown of goodwill."
Interest expense, net. Interest expense, net, increased to $2,332,000 for the
three months ended December 31, 1998. This represented an increase of $537,000,
or 29.9%, over the comparable prior fiscal period. This increase principally
resulted from the increase in indebtedness of $5,811,000 from December 31, 1997
as compared to December 31, 1998 and an increase in the weighted average
interest rate during the three months ended December 31, 1998 from the
comparable prior fiscal period. During November 1998 the Company notified its
lenders that it was suspending payment of interest due on amounts outstanding
under the Credit Facility. Accrued and unpaid interest aggregated $1,470,000 and
$2,140,000 at December 31, 1998 and January 31, 1999, respectively. See
"Liquidity and Capital Resources - Credit Facility."
Merger and other nonrecurring expenses. There were no merger or other
nonrecurring expenses recorded during the three months ended December 31, 1998.
However, the Company expects to record restructuring expenses during the three
months ended March 31, 1999 in connection with the February 1999 restructuring
initiatives. See "Restructuring Initiatives."
The Company recorded certain merger and other nonrecurring expenses during the
three months ended December 31, 1997 which included: (i) an aggregate pre-tax
charge of $3.7 million recorded in connection with the Company's restructuring
initiatives which was comprised of (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
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write-off of deferred acquisition costs aggregating $1.2 million associated with
a terminated acquisition.
Writedown of goodwill. The Company recorded a writedown of goodwill
previously recorded in connection with certain acquisitions of $28,176,000
during the three months ended December 31, 1998. The Company determined the
writedown of goodwill was required based upon the Company's review of ongoing
operations of certain of its locations and the planned closure of the Company's
Texas locations in connection with the February 1999 restructuring initiatives.
The Texas portion of the goodwill writedown aggregated $9,844,000. The
remainder of the writedown resulting from the Company's ongoing operations was
comprised of $10,119,000 related to certain durable medical equipment and
respiratory and infusion therapy companies, $3,086,000 related to certain non-
Medicare nursing companies and $5,127,000 related to certain Medicare cost-
reimbursed nursing agencies.
The Company also recorded a writedown of goodwill in fiscal 1998 of
$23,516,000. 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.
The Company will continue to evaluate the continuing value of goodwill.
There can be no assurance that the remaining balance of goodwill of $20,104,000
at December 31, 1998 will not be reduced for possible impairments which may
occur in the future as a result of the February 1999 restructuring initiatives,
the bankruptcy proceedings, sales or writeoffs of certain assets of the Company,
office closures, changes in reimbursement or other issues which may negatively
impact the Company. See "Restructuring Initiatives" and "Liquidity and Capital
Resources - Liquidity Issues and Bankruptcy Proceedings").
Income tax benefit. For the three months ended December 31, 1998 the
Company recorded an income tax benefit of $13,851,000 offset by a valuation
allowance of the same amount as the net income carryback amounts available for
prior years were fully utilized as of June 30, 1998.
The Company recorded a tax benefit of 14.2% of pretax income for the three
months ended December 31, 1997, principally as a result of the merger and
restructuring charges and the writedown of goodwill recorded during the three
months ended December 31, 1997. The writedown of goodwill included approximately
$15,600,000 of nondeductible goodwill recorded in connection with certain
acquisitions, for which the Company receives no income tax benefit.
Six Months Ended December 31, 1998 Compared to the Six Months Ended
December 31, 1997
Net revenues. Net revenues decreased to $62,577,000 for the six months ended
December 31, 1998. This represented a decrease of ($30,211,000), or (32.6%),
over the comparable prior fiscal period. The decrease in net revenues was
comprised of a reduction in same-branch Medicare cost-reimbursed nursing and
related patient service net revenues of ($22,897,000), or (57.0%), and a decline
in same-branch net product revenues (durable medical equipment and
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<PAGE>
respiratory and infusion therapy services) of ($8,521,000), or (27.1%), offset
by an increase in same-branch non-Medicare nursing net revenues of $1,207,000,
or 5.7%.
The 57.0% decrease in Medicare cost-reimbursed nursing and related patient
service net revenues during the six months ended December 31, 1998 was primarily
a result of (i) a reduction in net revenues of $4,126,000 for notices received
regarding retroactive adjustments to prior year Medicare cost reports and
changes in estimated outcomes of prior year cost report adjustments under appeal
with Medicare; (ii) implementation of reduced reimbursement rates and per-visit
and per-beneficiary limitations on reimbursements for the Company's eleven
Medicare cost-reimbursed nursing agencies under IPS effective July 1, 1998; and
(iii) decreased Medicare nursing visits of (45.8%) compared to the six months
ended December 31, 1997. The primary reasons for the decrease in Medicare
nursing visits were (i) the negative impact of IPS on the Company's visit
patterns; (ii) the impact of a reduction in hospital coordinator staff in
connection with the Company's fiscal 1998 restructuring initiatives; and (iii) a
general decline in Medicare nursing referrals from physicians due to initiatives
by HCFA which establish more rigid guidelines for physicians to prescribe
homecare and stress penalties regarding Medicare referrals, which management
believes have discouraged physicians from referring patients for homecare
nursing and product services.
Although the Company reduced Medicare nursing costs in connection with its
fiscal 1998 restructuring initiatives, the decrease in Medicare nursing visits
resulted in increased per-visit costs in excess of the IPS cost limits for
certain of the Company's Medicare cost-reimbursed nursing agencies. This
resulted in the Company's Medicare cost-reimbursed nursing agencies recording an
approximate ($6,500,000) loss for these unreimbursed costs during the six months
ended December 31, 1998.
The 27.1% decrease in net product revenues in the six months ended December
31, 1998 resulted principally from (i) the 25% reduction in Medicare oxygen
reimbursement in January 1998; (ii) reductions in cross-selling opportunities as
a result of the decrease in Medicare nursing visits during the six months ended
December 31, 1998; (iii) reductions in sales staff in connection with the
Company's fiscal 1998 restructuring initiatives; iv) a general decline in
physician referrals due to continuing initiatives by HCFA; and (v) reductions in
managed care and other non-governmental payor net revenues. In connection with
its February 1999 restructuring initiatives, the Company plans to cease
providing products and services to the majority of its managed care and certain
other non-governmental payors. This will have a negative impact on the Company's
net revenues but is expected to eliminate payors who delay or deny payments for
products and services provided by the Company under contractual arrangements,
which makes providing these services cost prohibitive. See "Restructuring
Initiatives" and "Net Revenues by Product Line."
The 5.7% increase in non-Medicare nursing services in the six months ended
December 31, 1998 resulted principally from increased patient referrals for
skilled nursing and other patient
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related services, principally related to pediatric services, offset by a
decrease in unskilled nursing and other patient related services referrals.
Total non-Medicare skilled and unskilled nursing visit and hourly volume
increased 3.6% and decreased (3.0%) to 109,000 visits and 608,000 hours,
respectively. Non-Medicare skilled nursing visit and hourly volume during this
period increased 5.1% and 10.6% to 92,000 visits and 354,000 hours,
respectively. Total non-Medicare unskilled visit and hourly volume during this
period decreased (3.7%) and (17.1%) to 17,000 visits and 254,000 hours,
respectively.
The Company expects non-Medicare nursing visits and hours to decrease
beginning during the third quarter of fiscal 1999 in connection with the Company
withdrawing its bid on a contract renewal to provide services to Humana, Inc. in
Southeast Florida. This decision was made as a result of contract rates being
demanded by Humana, Inc. being below the Company's cost of providing services.
During January 1999, the Company began discharging the approximately 300
patients it was providing services to under the expiring Humana, Inc. contract.
Net revenues resulting from nursing services provided to Humana, Inc. patients
aggregated approximately $3,000,000 annually. Additionally, the Company's net
revenues from non-Medicare nursing services will decrease in connection with its
February 1999 restructuring initiatives. See "Restructuring Initiatives" And
"Net Revenues by Product Line."
In addition to the impact on net revenues of the February 1999 restructuring
initiatives (see "Restructuring Initiatives" and "Net Revenues by Product
Line"), the Company may continue to experience decreases in its Medicare cost-
reimbursed nursing net revenues over the comparable fiscal 1998 periods during
the remainder of fiscal 1999 as a result of decreased visits and reduced
reimbursement under IPS. The Company may continue to experience decreases in its
respiratory therapy services net revenues as a result of the 25% and 5%
reductions on January 1, 1998 and 1999, respectively, in Medicare reimbursement
for oxygen services. The Company may also continue to experience decreases in
its net product revenues as a result of decreased cross-selling opportunities
due to decreased Medicare cost-reimbursed nursing visits.
Patient care costs. Patient care costs decreased to $34,796,000 for the six
months ended December 31, 1998. This represented a decrease of ($8,791,000), or
(20.2%), over the comparable prior fiscal period. The majority of this decrease
was due to the decrease in Medicare cost-reimbursed nursing visits resulting in
decreased patient care costs during the six months ended December 31, 1998, with
the remainder resulting from decreases in product net revenues during the period
as compared to the prior fiscal period. Patient care costs increased as a
percentage of net revenues from 47.0% to 55.6% principally as a result of the
$4,126,000 reduction in Medicare cost-reimbursed nursing net revenues recorded
during the three months ended December 31, 1998. See "Net revenues."
General and administrative. General and administrative expenses decreased to
$32,725,000 for the six months ended December 31, 1998. This represented a
decrease of ($3,559,000), or (9.8%), over the comparable prior fiscal period.
This decrease principally resulted from the Company's restructuring initiatives
during the last half of fiscal 1998. This decrease was net of increases during
the six months ended December 31, 1998 for additions to sales and hospital
coordinator staff, regional management staff and support staff necessary to
service certain new provider contracts, as well as increases in consulting costs
associated with
18
<PAGE>
improvements in the Company's information systems, without a corresponding
increase in net revenues. Although general and administrative expenses decreased
in the aggregate they increased as a percentage of net revenues from 39.1% to
52.3%. This was principally a result of the (i) $4,126,000 reduction in Medicare
cost-reimbursed nursing net revenues recorded during the three months ended
December 31, 1998 (see "Net revenues"), (ii) increases in these expenses for
increased staffing and consulting costs, and (iii) net revenues for this period
decreasing at a faster rate than the decreases in these expenses. A certain
portion of general and administrative expenses generally do not vary directly
with increases or decreases in net revenues. General and administrative costs
will be impacted by the Company's February 1999 restructuring initiatives. See
"Restructuring Initiatives."
Provision for doubtful accounts. The provision for doubtful accounts was
$26,635,000 for the six months ended December 31, 1998, which included: (i)
$3,288,000 of additional provision for doubtful accounts recorded during the
three months ended September 30, 1998 to comply with the Company's accounts
receivable reserve policy prior to a change in calculation methodology during
the quarter; and (ii) a $14,442,000 nonrecurring provision recorded during the
three months ended September 30, 1998 in connection with changes in the
Company's accounts receivable collection strategy and accounts receivable
reserve calculation methodology during the quarter. Additionally, the
$6,040,000 increase during the three months ended December 31, 1998 principally
resulted from increases implemented during the first quarter of fiscal 1999 in
the historical reserve percentages which were applied to the December 31, 1998
accounts receivable aging categories.
Like many other health care providers, the Company's ability to collect its
accounts receivable from managed care and other non-governmental payors
continues to be increasingly difficult. The Company had been following a
strategy of meeting with certain of its larger managed care payors in attempting
to collect its receivables for products and services supplied to their
subscribers. During the three months ended September 30, 1998, in light of an
unfavorable shift in the accounts receivable aging, management determined that
further changes to its collection strategy were necessary due to the continuing
industry-wide difficulties in collecting from managed care and other non-
governmental payors and the Company's need to liquidate its receivables to
generate cash for operations. These changes involved more vigorous
negotiations with these payors in an attempt to collect the related receivables,
which ultimately may involve the Company recording discounts on these
receivables. Additionally, due to the unfavorable shift in the accounts
receivable aging during the three months ended September 30, 1998, the Company
reviewed its methodology for determining its provision for doubtful accounts and
determined it was necessary to increase the historical reserve percentages
applied to the older accounts receivable aging categories.
There can be no assurance that the provision for doubtful accounts will not
have to be increased in the future as a result of further adverse market or
payor conditions, unfavorable shifts in the accounts receivable aging, the
impact of the February 1999 restructuring initiatives, or any impact resulting
from the bankruptcy proceedings. See "Liquidity and Capital Resources."
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<PAGE>
Depreciation. Depreciation expense increased to $1,385,000 for the six months
ended December 31, 1998. This represented an increase of $289,000, or 26.4%,
over the comparable prior fiscal period. This increase was related to
depreciation on equipment purchased during the last half of fiscal 1998 and the
first half of fiscal 1999 principally for management information systems and
improvements in networking capabilities.
Amortization. Amortization decreased to $1,387,000 for the six months ended
December 31, 1998. This represented a decrease of ($197,000), or (12.4%), over
the comparable prior fiscal period. This decrease was attributable principally
to the writedown of goodwill recorded during the three months ended December 31,
1997. The Company expects amortization of goodwill to continue to decrease as a
result of the writedown of goodwill recorded during the three months ended
December 31, 1998. See "Three Months Ended December 31, 1998 Compared to the
Three Months Ended December 31, 1997 - Writedown of goodwill."
Interest expense, net. Interest expense, net, increased to $4,494,000 for the
six months ended December 31, 1998. This represented an increase of $860,000, or
23.7%, over the comparable prior fiscal period. This increase principally
resulted from the increase in indebtedness of $5,811,000 from December 31, 1997
as compared to December 31, 1998 and an increase in the weighted average
interest rate during the three months ended December 31, 1998 from the
comparable prior fiscal period. During November 1998 the Company notified its
lenders that it was suspending payment of interest due on amounts outstanding
under the Credit Facility. Accrued and unpaid interest aggregated $1,470,000 and
$2,140,000 at December 31, 1998 and January 31, 1999, respectively. See
"Liquidity and Capital Resources - Credit Facility."
Merger and other nonrecurring expenses. See "Three Months Ended December
31, 1998 Compared to the Three Months Ended December 31, 1997 - Merger and other
nonrecurring expenses."
Writedown of goodwill. See "Three Months Ended December 31, 1998 Compared
to the Three Months Ended December 31, 1997 - Writedown of goodwill."
Income tax benefit. For the six months ended December 31, 1998 the Company
recorded an income tax benefit of $21,358,000 offset by a valuation allowance of
the same amount as the net income carryback amounts available for prior years
were fully utilized as of June 30, 1998.
The Company recorded an income tax benefit of 11.5% of pretax income for
the six months ended December 31, 1997, principally as a result of the merger
and restructuring charges and the writedown of goodwill recorded during the
three months ended December 31, 1997. The writedown of goodwill included
approximately $15,600,000 of nondeductible goodwill recorded in connection with
certain acquisitions, for which the Company receives no income tax benefit.
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Liquidity and Capital Resources
Cash used in operating activities was ($2,081,000) for the six months ended
December 31, 1998 compared to cash provided by operations of $2,748,000 for the
comparable prior fiscal period. This decrease in cash flows provided by
operating activities during the six months ended December 31, 1998 as compared
to the six months ended December 31, 1997 was primarily a result of payment of
restructuring and other current liabilities and decreased collections on
accounts receivable in fiscal 1999. Cash provided by operating activities for
the six months ended December 31, 1997 was principally a result of increases in
accounts payable and restructuring costs.
Principally as a result of the Company's classification of amounts outstanding
under its Credit Facility aggregating $83,886,000 at December 31, 1998 as a
current liability, the Company had a working capital deficiency of ($72,687,000)
at December 31, 1998. See "Credit Facility" below. Excluding amounts
outstanding under the Credit Facility at December 31, 1998, working capital
decreased by ($37,183,000) to $11,199,000 at December 31, 1998 from $48,382,000
at June 30, 1998. The decrease principally resulted from a decrease in net
accounts receivable of ($19,856,000) (see "- Provision for doubtful accounts")
and an increase in current liabilities of $11,953,000 as a result of delays in
paying the Company's obligations and increases in third-party payor accruals and
settlements. See "Liquidity Issues and Bankruptcy Proceedings." The decrease
in accounts receivable at December 31, 1998 as compared to June 30, 1998
resulted in a decrease in "days net revenue outstanding" from 132 at June 30,
1998 to 126 for December 31, 1998.
Accounts receivable from managed care and other non-governmental payors
represented 63.9% of the Company's gross accounts receivable balance of
$66,997,000 at December 31, 1998. Approximately 26.3% of gross accounts
receivable at December 31, 1998 have been outstanding greater than 360 days,
which includes approximately $13,109,000 of gross accounts receivable from
managed care and other non-governmental payors. At December 31, 1998 the
allowance for doubtful accounts was $27,945,000. Determining a provision for
doubtful accounts requires management to make estimates and assumptions as of a
point in time. Actual results could differ from these estimates. There can be no
assurance that the provision for doubtful accounts will not have to be increased
in the future as a result of further adverse market or payor conditions,
unfavorable shifts in the accounts receivable aging, the impact of the February
1999 restructuring initiatives, or any impact resulting from the bankruptcy
proceedings.
The Company continues to be subject to difficulties in collecting its
accounts receivable from managed care and other non-governmental payors. See
"Six Months Ended December 31, 1998 Compared to the Six Months Ended December
31, 1997- Provision for doubtful accounts." There can be no assurance that the
Company's change in collection strategy during the first quarter of fiscal 1999
will result in significant collections of old accounts receivable or that
further changes in strategy will not be necessary in the future. Additionally,
a continuation of the lengthening of the amount of time required to collect
accounts receivable from managed care organizations or other payors or the
Company's inability to decrease days net revenues outstanding will have a
material adverse effect on the Company's financial condition or results of
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<PAGE>
operations. There can be no assurance that the Company's days net revenues
outstanding will not increase if these payors continue to delay or deny payments
to the Company for its services.
Certain of the Company's Medicare cost-reimbursed nursing agencies receive
periodic interim payments ("PIPs") from Medicare for nursing visits. PIP
amounts represent an estimate of each agency's expected reimburseable costs for
a specific fiscal period that are paid to the agency in 26 bi-weekly payments.
Each agency submits quarterly reports to its Medicare Fiscal Intermediary (the
"Intermediary") which are used to adjust the agency's PIP amounts to reflect
revisions in the previously submitted number of visits and reimburseable costs.
Generally, adjustments to PIP amounts occur on a retrospective basis after
review of the quarterly reports filed with the Intermediaries. Due to this time
lag, fluctuations in costs or visit trends during a quarterly period could
result in an agency receiving reimbursement in excess of or less than its actual
costs until the PIP amounts are adjusted to reflect the current cost and visit
statistics.
Certain of the Company's Medicare cost-reimbursed nursing agencies received
excess interim reimbursement from Medicare through December 31, 1998 due to (i)
the Company's fiscal 1998 cost reduction initiatives (refer to the Company's
Annual Report on Form 10-K/A for the year ended June 30, 1998); (ii) decreases
in Medicare nursing visits (see "Results of operations - Net revenues"); and
(iii) IPS cost limit reductions effective July 1, 1998 with no corresponding
reduction in the PIP amounts. Excess reimbursements also resulted from certain
Intermediaries' failure to reduce the PIP amounts after the Company's agencies
timely filed their quarterly PIP reports. Additionally, during the three months
ended December 31, 1998, the Company received notices regarding retroactive
adjustments to prior year Medicare cost reports. These excess reimbursements and
cost report adjustments aggregated $8,599,000 at December 31, 1998 and are
reflected as current liabilities in the accompanying unaudited condensed
consolidated balance sheet. Generally the Intermediary requires excess
reimbursements and retroactive cost report adjustments be offset against the
PIPs within thirty days. An extended repayment period of twelve months may be
granted by the Intermediary if requested by the Medicare cost-reimbursed nursing
agency. Any repayment period in excess of twelve months must be approved by
HCFA. The Company is repaying the excess reimbursement and cost report
adjustment amounts to Medicare over three to twelve month periods as it recently
received denials of its requests for extended repayment terms for these amounts
beyond twelve months. The inability to obtain extended repayment terms has had a
material adverse effect on the Company's cash flows. The Bankruptcy Court
entered an order which provides that to the extent the automatic stay provisions
of Section 362 of the Bankruptcy Code applies to the repayment of the excess
interim reimbursements and cost report adjustments, the Intermediaries may be
prohibited from offsetting these amounts against the Company's PIP amounts.
Cash flows used in investing activities for the six months ended December
31, 1998 was ($916,000) as compared to ($1,990,000) for the comparable prior
fiscal period. Investing activities principally included expenditures for
capital expenditures and acquisitions. Expenditures for purchases of capital
equipment were $646,000 and $1,345,000 for the six months ended December 31,
1998 and 1997, respectively.
There were no acquisitions during the six months ended December 31, 1998
and 1997. During the six months ended December 31, 1997, the Company paid
$372,000 in earnout consideration for certain acquisitions completed in prior
periods. Amounts required to be paid in cash during fiscal 1999 as earnout
consideration for non-Medicare nursing and related patient services and infusion
therapy services companies acquired during prior periods approximates
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$2,100,000. The Company may also be required to pay up to $2,100,000 in the form
of the Company's common stock to certain former owners through fiscal 2000 if
earnout targets are achieved. Pursuant to the terms of the Credit Facility, the
Company is prohibited from making payments for notes payable and earnout
consideration to the former owners of businesses described above. As of December
31, 1998 amounts owed to these former owners in cash aggregated $4,994,000.
Certain of the former owners have commenced or threatened legal proceedings
against the Company for non-payment of these amounts. See Part II - Item 3 of
this Form 10-Q.
Cash flows provided by financing activities during the six months ended
December 31, 1998 were $1,770,000, comprised principally of borrowings of
$3,150,000 offset by $844,000 used to repay indebtedness and $538,000 used to
pay financing fees. Cash flows provided by financing activities during the six
months ended December 31, 1997 were $907,000, comprised principally of
borrowings under the Credit Facility of $4,000,000 offset by $3,285,000 used to
repay indebtedness, with the remainder used to fund investing activities.
Credit Facility
Amounts outstanding under the Credit Facility aggregated $83,886,000 at
December 31, 1998, which is the maximum amount of borrowings permitted under the
Credit Facility. The Company was notified on November 5, 1998 by its senior
lenders that an event of default had occurred under the Credit Facility
primarily as a result of the Company failing to meet certain financial covenant
requirements set forth in the Credit Facility as of September 30, 1998. The
Company was also in default of these covenants at December 31, 1998.
Additionally, during November 1998 the Company notified its lenders that it was
suspending payment of interest due on amounts outstanding under the Credit
Facility. Accrued and unpaid interest on amounts outstanding under the Credit
Facility aggregated $1,470,000 and $2,140,000 at December 31, 1998 and January
31, 1999, respectively. As a result of the ongoing events of default under the
Credit Facility, the Company classified the $83,886,000 outstanding at December
31, 1998 under the Credit Facility as a current liability in the accompanying
unaudited condensed consolidated balance sheet.
Pursuant to the terms of the Credit Facility, upon the occurrence of an
event of default and upon notice to the Company, the lenders may terminate the
Credit Facility and declare the entire unpaid balance of principal, interest,
fees and all other amounts of indebtedness of the Company to the lenders to be
immediately due and payable. In connection with the default notice, the Company
was notified by its lenders that due to the existence of the event of default
the $1.4 million Supplemental Temporary Loan Facility (the "Temporary
Facility"), which was available through December 31, 1998 for payroll and
related costs, was immediately cancelled and interest on the indebtedness
outstanding under the Credit Facility was increased to the Base Rate plus the
Applicable Margin (as defined by the Credit Facility). The weighted average
interest rate was 9.5% at December 31, 1998. The filing of the Company's
bankruptcy petitions stays the lenders from taking any action against the
Company's assets to enforce their claim.
The Company does not have the ability to repay the entire unpaid balance of
principal, interest, fees and all other amounts of indebtedness due under the
Credit Facility if required by
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the Company's lenders. See "Liquidity Issues and Bankruptcy Proceedings."
Liquidity Issues and Bankruptcy Proceedings
The Company is experiencing difficulties in meeting its obligations in
connection with its ongoing operations due to various factors including (i) the
implementation effective July 1, 1998 of the IPS which negatively impacted the
Company's home nursing visit patterns and significantly decreased the Company's
per-visit Medicare reimbursement; (ii) excess reimbursements and retroactive
adjustments for prior period Medicare cost reports, which amounts are currently
being repaid by the Company over three to twelve month periods; (iii) certain
managed care and other non-governmental payors continuing to delay or deny
payments to the Company for products and services delivered pursuant to provider
contracts with these payors; and (iv) unreimbursed costs aggregating $6,500,000
from its Medicare cost-reimbursed nursing agencies through the six months ended
December 31, 1998. The Company does not expect cash on hand, cash flows from
operations or cash flows from financing of certain capital expenditures through
leasing arrangements will be sufficient to allow the Company to meet its debt
service obligations, working capital, capital expenditures or other cash flow
requirements. As a result, on February 18, 1999 the Company and its operating
subsidiaries filed voluntary petitions for reorganization with the United States
Bankruptcy Court for the District of Delaware under Chapter 11 of title 11 of
the United States Code.
The petitions will enable the Company to conduct business under protection
of the Bankruptcy Code while it pursues a plan to reorganize its obligations
and strengthen its financial position. However, there can be no assurance the
Company will be able to successfully reorganize and continue to operate. The
Company's ability to make post-petition payments with respect to priority claims
and post-petition obligations will depend on its future operating performance,
which will be affected by governmental regulations, prevailing economic
conditions, and other factors beyond the Company's control, including
unwillingness of certain vendors or other third-parties to continue to do
business with the Company due to its reorganization under the Bankruptcy Code or
loss of key employees during this period of reorganization. Due to the ongoing
cash flow constraints, the Company began to implement a restructuring plan
during February 1999 to reduce its operating expenses and focus the Company's
operations on more profitable business. See "Restructuring Initiatives." In
developing a long-term reorganization plan, the Company is reviewing its future
capital requirements and attempting to identify its financing alternatives. As a
result of the current industry environment and the Company filing for
reorganization, the Company believes that financing alternatives available to it
are limited. There can be no assurance
24
<PAGE>
that the Company's internally generated funds and funds from any financings will
prove to be sufficient to fund the Company's operations. In order to obtain
required funds the Company may engage in a public or private offering of debt or
equity securities or a sale or merger of the Company. Such transactions would
require approval of the Bankruptcy Court. There can be no assurance that
the Company will undertake any such transaction, what the timing thereof would
be or that the Company will be able to obtain any additional funds or complete
such a transaction on terms acceptable to the Company. These or other adverse
events could impact the Company's ability to continue as a going concern.
Impact of Year 2000
The impact of Year 2000 computer problems on the Medicare and Medicaid
programs, other federal or state health care programs and other third party
payors could affect prompt reimbursement to the Company in the future unless and
until such potential problems are corrected. The Company's major management
information system software programs are vendor-supplied and are scheduled by
the vendors to be Year 2000 compliant by December 31, 1999. Additionally, the
Company has reviewed its management information system hardware and its rental
equipment and determined that they are Year 2000 compliant. As a result, the
Company expects to be Year 2000 compliant by December 31, 1999 and does not
expect to incur significant costs in attaining compliance. However, there can be
no assurance the Company has adequately assessed or identified all aspects of
its business which may be impacted by Year 2000 issues which may arise after
December 31, 1999. Additionally, there can be no assurance that vendors who
supply the Company's major management information system software will
adequately address and correct any and all Year 2000 issues that may arise prior
to January 1, 2000. The Company has not developed a contingency plan to address
how to handle Year 2000 issues which may arise if the vendors who supply the
Company's major management information systems software do not meet the Year
2000 compliance deadline. 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. Additionally, there can be no assurance that
the Company will have the resources to correct any Year 2000 issues that may
arise due to the impact of the Company's restructuring initiatives and
bankruptcy proceedings. See "Restructuring Initiatives" and "Liquidity Issues
and Bankruptcy Proceedings."
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 131 ("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 131 during the last quarter of
fiscal 1999. The impact of this new standard on the Company's future financial
statements and disclosures has not yet been determined.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new policies and
procedures for accounting for derivatives and hedging activities. The Company
will be required to adopt SFAS 133 during fiscal 2000. The impact of this new
standard on the Company's future financial statements and disclosures has not
been determined.
25
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Sensitive Instruments
The Company uses derivative financial instruments to reduce certain types
of financial risk. Interest rate swaps are used to hedge interest rate risk.
Interest rate swaps involve a risk of additional interest expense in the event
that the prevailing LIBOR rate decreases from the Company's fixed interest rate
on the swap. Hedging strategies have been reviewed and approved by management
before being implemented.
The status of the Company's derivative financial instruments as of June 30,
1998 is discussed in paragraph 4 of Note 5 to the Company's Annual Report on
Form 10-K/A for the year ended June 30, 1998. A decrease of 5% to 10% in the
three-month prevailing LIBOR rate in connection with the Company's interest rate
swap agreement would not have a material adverse effect on the Company's results
of operations, cash flows or financial position. There have been no significant
decreases in the three-month prevailing LIBOR rate through December 31, 1998 nor
any changes in the nature of the derivative instrument.
Part II - Other Information
Item 1. Legal Proceedings
As disclosed in the Company's Annual Report on Form 10-K/A for the year
ended June 30, 1998, the Company and certain named officers of the Company are
party to a class action lawsuit against the Company entitled Koenig v. Feldman,
------------------
et al., which was filed on February 19, 1998 in the United States District
- ------
Court for the Eastern District of Pennsylvania. On January 24, 1999, the court
granted, in part, a motion filed by the Company to dismiss the lawsuit; but also
concluded that valid claims were stated concerning disclosure regarding possible
managed care organization terminations and that a substantial writedown in the
value of the Company's oxygen business would be necessary. The court also
granted the plaintiffs leave to file a second amended complaint within 30 days.
In connection with the bankruptcy proceedings, any further actions on pre-
petition claims, including continuation of legal proceedings, like the
aforementioned action, or entry of or execution of any judgements in any legal
proceedings against the Company, generally violate the automatic stay provisions
of Section 362 of the Bankruptcy Code. As a result, the ultimate disposition of
these legal proceedings cannot be determined at this time.
Item 3. Defaults Upon Senior Securities
The Company is in default under the terms of the Credit Facility as a
result of the violation of certain financial covenant requirements and interest
payment defaults under the Credit Facility. Principal amounts outstanding under
the Credit Facility aggregated $83,886,000 at December 31, 1998, which is the
maximum amount of borrowings permitted under the Credit
26
<PAGE>
Facility. Accrued and unpaid interest on amounts outstanding under the Credit
facility was $2,140,000 at January 31, 1999.
Pursuant to the terms of the Credit Facility, upon the occurrence of an
event of default and notice to the Company, the lenders may terminate the Credit
Facility and declare the entire unpaid balance of principal, interest, fees and
all other amounts of indebtedness of the Company to the lenders to be
immediately due and payable. The Company was notified by its lenders that due to
the existence of the event of default the $1.4 million Temporary Facility
available to the Company through December 31, 1998 was cancelled and interest on
the indebtedness outstanding under the Credit Facility was increased to the Base
Rate plus the Applicable Margin (as defined by the Credit Facility). The filing
of the Company's bankruptcy petitions stays the lenders from taking any action
against the Company's assets to enforce their claim. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Credit Facility" and "-Liquidity Issues and
Bankruptcy Proceedings."
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on November 19, 1998.
At the meeting, shareholders elected directors. The following nominees for
Class C directors, each to serve for a three year term and until his successor
is duly elected and qualified, received the following votes at the meeting:
For Withhold Authority
---------------------------------
Bruce J. Feldman 8,176,827 437,211
Harvey Machaver 8,230,290 383,748
The term of office of each of the following directors continued after the
meeting: G. Michael Bellenghi and Donald M. Gleklen.
Item 5. Other Information
On February 18, 1999, the Company and its operating subsidiaries filed
voluntary petitions for reorganization with the United States Bankruptcy Court
for the District of Delaware under Chapter 11 of title 11 of the United States
Code. The Company filed the petitions to pursue a reorganization and to ensure
that the Company continues its business operations without interruption as it
pursues its reorganization efforts. At present, the Company is managing its
businesses as debtors-in-possession under the supervision of the Bankruptcy
Court.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed with this report are listed in the exhibit index on
page 29.
(b) Reports on Form 8-K
The registrant did not file a report on Form 8-K during the quarter ended
December 31, 1998.
27
<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: February 22, 1998
/s/ David S. Geller
---------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
28
<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.
29
<PAGE>
(a) 10.18 Lease between the Company and Swedeland Road Corporation,
relating to the Company's principal executive offices.
(a) 10.19 Employment Agreement between the Company and Bruce J. Feldman. *
(i) 10.20 Employment Agreement between the Company and David S. Geller. *
10.21 Employment Agreement between the Company and James J. Swiniuch. *
(i) 10.22 Employment Agreement between the Company and Joseph Grilli. *
(f) 10.23 Amended and Restated 1995 Employee and Consultant Equity Plan. *
(a) 10.24 1984 Employee Stock Option Plan (Qualified and Non-Qualified), as
amended and restated. *
(a) 10.25 Subordination Agreement, dated September 29, 1995, among CoreStates
Bank, N.A., Summit Ventures II, L.P., Summit Investors II, L.P.,
Summit Subordinated Debt Fund, L.P., CoreStates Enterprise Fund and
Preferred Diagnostic Services, Inc.
(a) 10.26 Asset Acquisition Agreement among the Company, Home Health
Corporation of America, Inc. - Tampa, Preferred Diagnostic & Medical
Services, Inc., Preferred Diagnostic Services, Inc., G&S Industries,
Inc., and Joel M. Grossman, Jeffrey Grossman, Joseph Sterensis,
Barbara Sterensis and Richard Levitt.
(g) 10.27 Amendment No. 3 to Third Amended and Restated Credit Agreement.
(h) 10.28 Amendment No. 4 to Third Amended and Restated Credit Agreement.
(i) 10.29 Amendment No. 5 to Third Amended and Restated Credit Agreement.
11.1 Computation of basic and diluted loss per share for the three months
ended December 31, 1997 and 1998.
11.2 Computation of basic and diluted loss per share for the six months
ended December 31, 1997 and 1998.
27.1 Financial data schedule for the three months ended
December 31, 1998.
(a) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-96888) dated November 8, 1995, as amended.
(b) Incorporated by reference to the Company's Form 10-Q dated September 30,
1996 and filed November 14, 1996.
(c) Incorporated by reference to the Company's Form 8-K dated January 10, 1997
and filed January 24, 1997.
(d) Incorporated by reference to the Company's Form 10-Q dated March 31, 1997
and filed May 14, 1997.
(e) Incorporated by reference to the Company's Form 10-K/A dated June 30, 1997
and filed October 28, 1997.
(f) Incorporated by reference to the Company's Proxy Statement filed January
14, 1998.
(g) Incorporated by reference to the Company's Form 10-Q dated December 31,
1997 and filed February 17, 1998.
(h) Incorporated by reference to the Company's Form 10-Q/A dated March 31, 1998
and filed June 3, 1998.
(i) Incorporated by reference to the Company's Form 10-K dated June 30, 1998
and filed September 24, 1998.
* Represents management contract or compensatory plan
30
<PAGE>
EXHIBIT 11.1
Home Health Corporation of America, Inc. and Subsidiaries
Computation of Basic and Diluted Loss Per Share
for the three months ended December 31, 1997 and 1998
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Three months ended Three months ended
December 31, 1997 December 31, 1998
--------------------------------------------
Basic Diluted Basic Diluted
--------------------------------------------
<S> <C> <C> <C> <C>
(amounts in thousands, except per share data)
Net loss available to common
stockholders...................... $(23,856) $(23,856) $(44,939) $(44,939)
============================================
Weighted average number of
maximum shares outstanding
during period..................... 9,158 9,158 9,777 9,777
Weighted average number of
maximum shares subject to
exercise under outstanding stock
options and warrants, net of
treasury shares assumed
repurchased....................... - - - -
--------------------------------------------
Weighted average number of common
shares outstanding................ 9,158 9,158 9,777 9,777
============================================
Net loss per share................. $ (2.60) $ (2.60) $ (4.60) $ (4.60)
============================================
</TABLE>
<PAGE>
EXHIBIT 11.2
Home Health Corporation of America, Inc. and Subsidiaries
Computation of Basic and Diluted Loss Per Share
for the six months ended December 31, 1997 and 1998
The following calculation is submitted in accordance with the Securities Act of
1934:
<TABLE>
<CAPTION>
Six months ended Six months ended
December 31, 1997 December 31, 1998
---------------------------------------------
Basic Diluted Basic Diluted
---------------------------------------------
<S> <C> <C> <C> <C>
(amounts in thousands, except per share data)
Net loss available to common
stockholders...................... $(21,828) ($21,828) $(67,021) $(67,021)
=============================================
Weighted average number of
maximum shares outstanding
during period..................... 9,153 9,153 9,771 9,771
Weighted average number of
maximum shares subject to
exercise under outstanding stock
options and warrants, net of
treasury shares assumed
repurchased....................... - - - -
---------------------------------------------
Weighted average number of common
shares outstanding................ 9,153 9,153 9,771 9,771
=============================================
Net loss per share................. $ (2.38) $ (2.38) $ (6.86) $ (6.86)
=============================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1998 AND THE RELATED STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED DECEMBER 31, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 412
<SECURITIES> 0
<RECEIVABLES> 66,997
<ALLOWANCES> 27,945
<INVENTORY> 1,266
<CURRENT-ASSETS> 45,492
<PP&E> 33,115
<DEPRECIATION> (18,928)
<TOTAL-ASSETS> 83,748
<CURRENT-LIABILITIES> 118,179<F1>
<BONDS> 0
0
0
<COMMON> 44,319
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 83,748
<SALES> 62,577
<TOTAL-REVENUES> 62,577
<CGS> 34,796
<TOTAL-COSTS> 34,796
<OTHER-EXPENSES> 63,673<F2>
<LOSS-PROVISION> 26,635<F3>
<INTEREST-EXPENSE> 4,494
<INCOME-PRETAX> (67,021)
<INCOME-TAX> 0
<INCOME-CONTINUING> (67,021)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,021)
<EPS-PRIMARY> (6.86)
<EPS-DILUTED> (6.86)
<FN>
<F1>INCLUDES $83.9 MILLION OF INDEBTEDNESS UNDER THE COMPANY'S SENIOR CREDIT
FACILITY WHICH WAS CLASSIFIED AS A CURRENT LIABILITY DURING THE THREE MONTHS
ENDED DECEMBER 31, 1998 DUE TO EVENTS OF DEFAULT UNDER THE SENIOR CREDIT
FACILITY.
<F2>INCLUDES $28.2 MILLION WRITEDOWN OF GOODWILL RECORDED DURING THE THREE MONTHS
ENDED DECEMBER 31, 1998.
<F3>INCLUDES $14.4 MILLION NONRECURRING PROVISION IN CONNECTION WITH CHANGES IN THE
COMPANY'S ACCOUNTS RECEIVABLE COLLECTION STRATEGY AND ACCOUNTS RECEIVABLE
RESERVE CALCULATION METHODOLOGY DURING THE THREE MONTHS ENDED SEPTEMBER 30,
1998.
</FN>
</TABLE>
