SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended June 30, 1998
Commission File No. 033-97034
HELP AT HOME, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 36-4033986
(State or other jurisdiction of incorporation (IRS Employer Identifi-
or organization) cation Number)
223 West Jackson Blvd.
Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
312-663-4244
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(g) of the Act:
Title of Each Class: Name of Exchange on which registered:
Common Stock, Par Value $0.02 NASDAQ National Market
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No[]
Indicate by checkmark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment in this Form 10-KSB [x]
Registrant's revenues for its most recent fiscal year: $23,137,194
The aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of October 13, 1998 was approximately
$747,534 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 1,869,375 shares of the registrant's Common Stock outstanding
as of September 30, 1998.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (Check One) Yes [ ] No [x]
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
Help at Home, Inc. ("Help at Home") and its subsidiaries (collectively,
the "Company") provide homemaker, custodial and personal home health
care services to elderly and disabled persons within their homes. Such
services consist of nutritional planning and assistance, household
management, personal care, skilled nursing interventions, rehabilitative
therapy, and medical social work services. The majority of the
Company's clients are obtained and served through 20 regional contracts
with the Illinois Department on Aging ("IDOA") and 31 contracts with
other state and municipal agencies. Help at Home also provides medically
necessary, skilled home health care services through its subsidiaries
that are certified as Medicare home health agencies. In light of recent
changes in Medicare's home health reimbursement methodology, the
Company's Board of Directors voted to exit the Medicare business and
discontinue, in fiscal 1999, all Medicare home health operations. The
Company operates 35 offices in Illinois, Indiana, Missouri, Alabama,
Mississippi, and Arkansas.
History of the Company.
The Company was incorporated on August 7, 1995 in the State of Delaware.
On December 5, 1995, Help at Home completed an initial public offering
through which 819,375 units were offered and sold to the general public.
Help at Home received gross proceeds of $5,162,063 from the initial
public offering. Each unit consisted of one share of Common Stock, $.02
par value, of help at Home, Inc. and two redeemable common stock
purchase Warrants. The Common Stock and Warrants were immediately
detached upon the effective date of the offering and are separately
transferable. The Warrants are immediately exercisable. Each Warrant
generally entitles the holder to purchase one share of Common Stock for
$6.00 commencing one year after the offering, or sooner if the Warrants
are called for redemption, until the close of business on December 5,
2000. The Warrants are redeemable, in whole or in part, at a price of
$.10 per Warrant, commencing one year after December 5, 1995 and prior
to the expiration date, provided that prior written notice of not less
than 30 days is given to the Warrant holders and the closing price of
the Common Stock is at least $9.00 for ten consecutive trading days.
Help at Home, Inc., an Illinois corporation, was incorporated on October
29, 1974 and, through a merger on June 17, 1982, merged with and into
Help at Home of Evanston, Inc., an Illinois corporation, which was
originally incorporated on February 27, 1975. Simultaneously with the
merger, the surviving entity changed its name to Help at Home, Inc.
Lakeside Home Health Agency, Inc. was incorporated in the State of
Missouri on April 20, 1993. Lakeside Home Health Agency, Inc., a
Medicare certified home health agency, was acquired by the Company on
July 20, 1995. Lakeside Home Health Agency, Inc., an Illinois
corporation, was incorporated on August 3, 1995.(See Overview of the
Home Care Industry ,paragraph 6, regarding the Company's discontinuation
of Medicare operations.)
<PAGE>
Rosewood Home Health, Inc. was incorporated in the State of Illinois on
March 4, 1994. A Medicare certified home health agency, Rosewood was
acquired by the Company on January 30, 1996.(See Overview of the Home
Care Industry, paragraph 6, regarding the Company's discontinuation of
Medicare operations.)
As of May 31, 1996, the Company acquired HASC Staffing Services, Inc.,
Homemakers of Montgomery, Inc. and Statewide Healthcare Services, Inc.,
all doing business as Oxford Health Care (the "Oxford companies"). HASC
Staffing Services, a Mississippi corporation, was incorporated on March
23, 1986. Homemakers of Montgomery, Inc., an Alabama corporation, was
incorporated on March 27, 1985.(See Overview of the Home Care Industry,
paragraph 6, regarding the Company's discontinuation of Medicare
operations.) Statewide Healthcare Services, Inc., a Mississippi
corporation, was incorporated on January 10, 1974.
As of October 1, 1996, the Company acquired Preferred Nursing Care,
Inc.,an Alabama corporation. Preferred Nursing Care, Inc. was
incorporated in the State of Alabama on April 28, 1994. Preferred
Nursing Care's operations were merged into those of Statewide Healthcare
Services, Inc. in October 1997.
Overview of the Home Care Industry.
The home care industry serves the elderly as well as persons of any age
with temporary or permanent disabilities. The primary purpose of
home care programs is to keep clients from becoming institutionalized.
The need for such services has escalated over the last decade due to the
general aging of the population and the desire of elderly or disabled
persons to maintain their quality of life by remaining independent and
living in their own homes.
The home care industry accounted for an estimated $42 Billion in
expenditures in 1997 with sustained annual growth rates of more than
20%. In addition to the general aging of the population, primary reasons
cited for industry growth include the substantial cost savings
achievable through at-home care as an alternative to more expensive
institutional care, medical and technological advances which enable a
growing number of treatments to be administered at home rather than in
a medical facility, and Medicare reimbursement policies which continue
to provide certain incentives to minimize the length of in-patient
hospital stays.
It has been predicted that long-term maintenance (custodial) home care
services will be the largest area of growth in the home care field.
Fully 20% of those over 65 can be considered frail elderly who
experience functional limitations secondary to chronic disease
processes; while 46% of those over the age of 85 fall into the frail
elderly grouping and are, therefore, candidates for continuous,
long-term home support services. The need for assistance with the
activities of daily living such as eating, dressing, bathing, walking
and household management is sometimes thought of as a social need rather
than a medical requirement. However, the provision of these basic
services, often by a paid home care worker, is crucial to the health and
well-being of the elderly patient and is being considered more and more
often as medically necessary, preventive care.
<PAGE>
The majority of home care recipients obtain services by participating in
federally or state-funded programs for which they are eligible.
Medically necessary, skilled home health care interventions, such as
those provided through the Company's Medicare certified home health
agencies, are reimbursed through Medicare payments. Similarly, non-
medical, custodial services to homebound clients are provided pursuant
to contracts with agencies such as the Illinois Department on Aging or
various Medicaid Waiver programs. The Company is a provider to
Medicare, Medicaid and other state and local program recipients through
various contract arrangements.
On August 5, 1997, the President signed into law the Balanced Budget Act
of 1997 which contained a number of significant changes to the
methodology used by the Federal government for calculating Medicare
reimbursement for home health services. For all cost reporting periods
beginning on or after October 1, 1997 home health agencies will be
reimbursed based on the lowest of 1) their actual costs of delivering
care, 2) a per visit limit (reduced from 112% to 105% of the national
median of labor-related and nonlabor costs per visit), or 3) a blended,
agency-specific per beneficiary limit predicated on the agency's 1994
costs. For certain providers without a 12-month, 1994 cost reporting
period, the per beneficiary limit is equal to the median of all home
health agencies. Additionally, for Medicare patients utilizing more
than one home health agency for care, the per beneficiary limit is
prorated among all agencies used. Further, as of February 1998,
Medicare benefits were qualified to exclude coverage for patients
requiring skilled nursing solely for venipuncture to obtain a blood
sample. And, finally, the Act mandates the development of a prospective
payment system for all home health services with an implementation
deadline for cost reporting periods beginning on or after October 1,
1999.
These changes have inspired an ongoing debate as to the long-range
impact on availability of services to Medicare beneficiaries with
intensive or long-term care requirements and the financial viability of
home health agencies, generally, if levels of reimbursement are
significantly reduced, as planned. There are a number of proposals
pending which may alleviate, somewhat, the impact of the Balanced Budget
Act of 1997 on home health agencies; however, the Company is unable to
predict the final outcome of such efforts. Based on the Company's
assessment of the new payment methodology and its potential long-range
financial impact on the Company's Medicare agencies, the Company has
elected to exit the Medicare home health business (see Business
Strategy). Moreover, the Company believes that at least one
ramification of the Medicare reimbursement changes will be to increase
demand for custodial and personal care services available from other
sources such as state funded waiver programs.
The Company's principal executive offices are located at 223 West
Jackson Blvd., Chicago, IL 60606. The telephone number of the executive
office is (312)663-4244.
<PAGE>
Business Strategy.
The Company's business strategy is to provide a variety of custodial
services to a diversified mix of groups and individuals in the
geographic markets served by the Company. The Company expects to
continue its expansion of locations and markets it serves through
development of additional service contracts, introduction of
complementary services, and limited acquisition of existing home care
businesses. Key elements of the Company's strategy include:
1) New Market Development and Penetration. The Company has continued
its emphasis on development of new operating locations within the
states of Illinois, Mississippi, Missouri, and Arkansas. The
Company has established 10 new offices since July 1997 for the
purpose of responding to contract opportunities that enable the
Company to provide custodial services to clients in previously
under-served areas. The Company will continue to focus on business
development in neighboring areas throughout the Midwest, Southeast,
Mid-Atlantic and Southwestern regions of the United States.
2) Consolidation/Elimination of Certain Locations. The Company, in
1998, has undertaken an extensive review of certain
under-performing offices to determine if operating efficiencies can
be implemented in order to achieve profitability, or conversely, if
the location should be closed. As a result of this ongoing
process, the number of Alabama locations has been reduced by two.
In addition, four Mississippi offices were closed between July and
September 1998. In all cases, the contractual relationships and
clients have been preserved and reassigned to other geographically
proximate operating locations.
3) Achievement of Operating Improvements/Efficiencies. The Company
has initiated an office by office review of potential operating
efficiencies that has resulted in imposition of homemaker wage caps
in both Alabama and Mississippi as a means of controlling direct
costs of providing services. Similarly, the Company has imposed
limitations on mileage reimbursement for homemakers traveling
between clients in Alabama and Mississippi. The Company expects to
continue the practice of reviewing potential performance
improvement measures and implementing them as necessary.
4) Development of New Services. The Company has made a continuing
commitment to pursue temporary professional staffing services in
certain areas in order to take advantage of existing marketplace
opportunities. With the Company's extensive rosters of nurses and
home health aides, it is in an excellent position to offer
intermittent nurse/aide staffing services to acute care
institutions, physicians' clinics and other facilities.
5) Promotion of Private Services. Traditionally, the majority of
custodial services provided by the Company have been pursuant to
contractual arrangements with various payors including state and
municipal agencies. The Company believes that a significant demand
exists for private services paid for by clients themselves or
members of their immediate family. The Company is actively
developing a promotional strategy to increase this aspect of market
share in many of the areas it now serves.
<PAGE>
6) Acquiring Complementary Businesses. The Company will, within its
financial capacity to do so, pursue acquisition of businesses that
complement the Company's existing locations and/or service
offerings.
The Company maintains contracts with several state and municipal
agencies to provide custodial services to elderly and disabled clients.
Such custodial services generally entail homemaker services, household
management, and assistance with activities of daily living. The Company
provides in-depth training to its workers who provide such services to
ensure patient safety, consistency of approach and adequacy of care.
Case managers, engaged by state agencies, generally refer custodial care
clients to the Company after eligibility for service is determined.
Clients are generally assigned to home care companies on a rotating
basis unless a specific home care provider is identified by the client
to be served. In some rural communities, however, the Company enjoys
exclusive status as the only contracted provider of homemaker and
personal care services. Approximately 95% of the Company's revenues
from continuing operations in fiscal 1998 were derived from the delivery
of homemaker services.
Customers.
The Company's customers include, but are not necessarily limited to,
case management units, third party administrators, physicians, hospital
discharge planners, social workers, third party payers and other types
of health care or social service organizations. Approximately 59% of
the Company's revenues during fiscal 1998 were derived from the Illinois
Department on Aging with another 35% attributable to other homemaker
service contracts. Commercial insurance companies, other government
funded programs and individuals provided the remaining 6% of the
Company's revenue from services. The state and federally funded programs
through which the Company derives its revenues require that certain
standards for eligibility and participation are continually met.
Billing and payment arrangements with the Company's customers are
specified in payor contracts that are non-exclusive and which do not
obligate the payor to utilize a certain volume of services over a
specified period of time. The Company's customers often use a variety
of providers in addition to the Company, thus necessitating competition
among several providers on the basis of pricing, array of service
offerings, availability of caregivers and/or quality of services.
With regard to the Company's contractual arrangements with the Illinois
Department on Aging (IDOA), the Company must ensure that the direct
costs associated with providing service to IDOA clients (as such costs
are contractually defined) constitute at least 73% of charges. The
Company is required to submit an annual audited cost report
demonstrating its compliance with this requirement. Management believes
that the Company is in compliance with the IDOA cost requirements.
Regulation.
Custodial services are generally unregulated. The Company must,
however, maintain certain state and/or federal licenses or
certifications in order to offer specific health services. The Company
must also perform criminal background checks on its employees in certain
states to ensure the integrity of its work force.
<PAGE>
With respect to licensure of skilled home health care services, each
state specifies the manner in which home health agencies will operate.
Approximately half of the states, including Alabama and Mississippi,
require that home health agencies possess one or more valid Certificates
of Need (CON) in order to qualify as a provider of Medicare home health
services. Absent a valid CON, a home health agency may be precluded
from providing certain services or expanding its operations into new
geographic areas. The Company possesses three Certificates of Need
through Homemakers of Montgomery, Inc.
All Medicare home health agencies must also successfully demonstrate, on
an annual basis, compliance with Medicare Conditions of Participation in
order to continue to provide services to Medicare beneficiaries. Such
conditions generally embody established standards for home health agency
management of personnel, adherence to patients' rights, supervision of
care, financial management and the presence of an independent,
professional advisory group. All of the Company's Medicare provider
units have successfully passed their annual Medicare surveys.
As well, the Montgomery, AL branch of the Oxford companies has been
accredited by the Joint Commission on the Accreditation of Healthcare
Organizations (JCAHO).
Competition.
The Company competes with other providers of custodial services for
various state and municipal contracts pursuant to a competitive bidding
process. Each company competing for a bid is required to provide
specific information regarding its history, duration and qualifications
as a provider of services.
In the State of Illinois, depending on each bidder's responses to
requested information and the fulfillment of specific evaluative
criteria, points are awarded to each provider with contracts going to
the bidders with the greatest number of accumulated points. They key
competitive factors are the length of time in business and the
geographic areas served by the provider. Pricing of services is
established by the state in advance of the bidding process. As a result
of the Company's long operating history, market penetration and
presence, the Company has been highly successful in obtaining Illinois
contracts for provision of custodial services.
In the States of Alabama and Mississippi, contracts are periodically
awarded by state, county or regional area agencies on aging based on
competitive pricing of services, provider qualifications, market
presence and financial stability. Arkansas and Missouri Medicaid Waiver
contracts are available to qualified Medicaid providers.
Competition among home health agencies for Medicare and Medicaid
patients is based, in part, on availability of qualified personnel who
can be dispatched to care for a patient in a timely manner. Likewise,
a home health agency's array of service offerings, geographic coverage
and relationships with major referral sources significantly influences
competitive position. In states with applicable CON regulations,
competition may be somewhat restricted due to the smaller number of
providers in any one market. There is limited, if any, price
competition with regard to services provided to Medicare and/or Medicaid
covered recipients.
<PAGE>
Employees.
Exclusive of field personnel who work on a per diem basis the Company
has 173 administrative employees.
The number of caregivers providing services to clients varies from day
to day. These personnel do not, necessarily, work full time shifts; nor
do they exclusively work for the Company. Certain of the Company's
part-time field employees in Chicago are represented by a union.
Relations with the union are considered to be good.
The Company has in place a screening process for all of its caregivers
to ensure compliance with laws, generally, and the absence of criminal
convictions and/or disciplinary actions that limit professional
activity.
Description of Property.
The Company's principal executive offices are located at 223 West
Jackson Blvd., Chicago, IL and consist of approximately 6,000 square
feet of rented space. Similarly, the Company leases office space in
each of its 35 operating locations. Office leases are generally for
terms of one to five years. The Company has no ownership interest in
any property in which it occupies space and is of the opinion that its
existing space is adequate for its present purposes.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings which it believes
may have a materially adverse effect on the Company's financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of the Company's security
holders during the month of June.
1) Election of the Company's Board of Directors (See Part III,
Item 9) for the ensuing year.
2) Ratification of the appointment of the Company's independent
certified public accountants, PricewaterhouseCoopers, LLP.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock and Warrants are traded on the NASDAQ
National Market under the symbols HAHI and HAHIW, respectively. The
following table shows the high and low bid price information, as quoted
by NASDAQ. Such quotations reflect inter-dealer prices, without retail
mark-ups, markdowns or commissions, and may not necessarily represent
actual transactions.
<PAGE>
<TABLE>
Common Stock Bid Prices by Fiscal Year
1997 High 1997 Low 1998 High 1998 Low
<S> <C> <C> <C> <C>
HAHI:
First Quarter $8.50 $6.50 $4.00 $3.25
Second Quarter 7.25 4.75 3.25 1.38
Third Quarter 6.63 4.88 2.13 1.06
Fourth Quarter 5.38 3.50 2.00 1.31
HAHIW:
First Quarter $2.88 $1.88 $ .88 $ .38
Second Quarter 2.13 1.13 .56 .22
Third Quarter 1.50 1.00 .50 .31
Fourth Quarter 1.81 .30 .38 .25
</TABLE>
There were approximately ten holders of record of the Common Stock as of
September 30, 1998 and four holders of record of the Warrants as of the
same date. This number includes shareholders of record who may hold
stock for the benefit of others.
The Company does not expect to pay dividends on its Common Stock in the
foreseeable future. Management intends to retain all available funds
for the development of new business and for use as working capital.
Item 6. Management's Plan of Operation and Discussion and Analysis
of Financial Condition.
Overview.
The Company provides home care services in Illinois, Indiana, Missouri,
Alabama, Mississippi and Arkansas. The Company's fiscal year ends June
30. Unless otherwise noted, references to 1997 and 1998 relate to the
fiscal years ended June 30, 1997 and 1998, respectively.
The Company's revenues are derived mainly from custodial services. The
Company believes that the unskilled segment of the overall home care
market will continue to experience significant growth due to the aging
of the population, continued emphasis on preventive health and long-term
independence, early patient discharges from acute care institutions and
constraints imposed on Medicare beneficiaries' access to care. The
Company is generally well positioned to take advantage of the expected
growth in both the custodial home care and home health care segments of
the market, provided that working capital necessary to sustain such
growth can be secured.
The statements which are not historical facts contained in this form-
10-KSB are forward looking statements that involve risks and
uncertainties, including, but not limited to, the integration of new
acquisitions into the operations of the Company, the ability of the
Company to realize profit in its start-up operations, the success of the
Company in locating attractive acquisition candidates, the effect of
economic conditions and interest rates, general labor costs, the impact
and pricing of competitive services, regulatory changes and conditions,
the results of financing efforts, the actual closing of contemplated
transactions and agreements, the effect of the Company's accounting
policies, and other risks detailed in the Company's Securities and
Exchange Commission filings. No assurance can be given that the actual
results of operations and financial condition will conform to the
forward looking statements contained herein.
<PAGE>
1999 Operating Plan.
The Company's overall strategy emphasizes the offering of an array of
homemaker, personal care and respite services to elderly and disabled
clients in their homes, concentrating on geographic areas with favorable
demographics and reimbursement trends. The Company intends to continue
its implementation of this strategy through growth in existing locations
and development of new locations.
The Company committed significant capital resources to the development
of new offices in Mississippi during 1998, four of which have
subsequently been closed or targeted for consolidation into other
remaining locations. The Company also established four new offices in
Illinois, two in Missouri and one in Arkansas during 1998. In order to
take advantage of opportunities for expansion of its business, the
Company must have continued access to working capital. Negotiations
with lenders for the purpose of securing long-term financing required to
realize operating goals are continuing. In the absence of a long-term
commitment, however, the Company may not be able to continue some or all
of its current operations (See Liquidity and Capital Resources).
Factors that May Affect 1999 Operating Results.
The Company is currently engaged in negotiations that may result in rate
increases for certain of the contracts pursuant to which it provides
homemaker services in Alabama. Other Alabama contract rates have
already been adjusted, on the average, by 11%. There can be no
assurance, however, that such rate increases will be realized.
Additionally, new Medicaid Waiver Program regulations regarding the
provision of personal care services require increased supervision of
such services by a full-time RN supervisor. Absent a rate increase
sufficient to offset the expense that will result from additional
supervision requirements, the Company may not continue its emphasis on
personal care services in Alabama.
The Company received a 9.4% rate increase on its IDOA contracts
effectiveas of July 1, 1998. Most of the homemakers providing services
in Illinois are compensated at the minimum wage and many of those who
reside in Chicago are union members. The collective bargaining
agreement in force between Help at Home and the union provides for
reopening of wage rate negotiations on behalf of this group of employees
in the event contract rates are increased.
The Company elected to exit the Medicare business in June 1998 due to
diminishing returns from operations and the uncertainty of future
reimbursement for services. This decision affects the Company's
following subsidiaries:
1) Homemakers of Montgomery, Inc.
2) Lakeside Home Health Agency, Inc. (MO)
3) Lakeside Home Health Agency, Inc. (IL)
4) Rosewood Home Health, Inc.
<PAGE>
In connection with its discontinuation of this segment of its business,
the Company has estimated, as of June 30,1998, a loss on disposal of the
Medicare business based on 1998 operating results and known financial
obligations (See 1998 Financial Statements, Notes 16 and 17). While the
Company believes that its estimates for discontinuation of operations
are sufficient, there can be no guarantee that there will be no
additional expense associated with the Company's elimination of this
line of business.
Results of Operations:
The following table sets forth, for fiscal year 1998 and 1997, certain
items from the Company's Consolidated Statement of Operations expressed
as a percentage of net sales.
<TABLE>
Fiscal Years Ended June 30
1998 1997
<S> <C> <C>
Net sales 100% 100%
Direct cost of services 70% 68%
Gross margin 30% 32%
Operating expenses 45% 33%
Non-operating income 2%
(Loss) from continuing operations
before income taxes (13%) (1%)
Income Tax (Benefit) Expense ( 3%) 1%
(Loss) from continuing operations (10%) (2%)
(Loss) from Discontinued Operations (6%) (1%)
Net (Loss) (16%) (3%)
</TABLE>
Fiscal 1998 Compared to Fiscal 1997:
Sales.
Client service revenue from continuing operations grew from $19.2
Million in 1997 to $23.1 Million in 1998, for an overall increase of
$3.9 Million or 21%. Approximately $2.7 Million of the revenue increase
originated with Help at Home, Inc. (IL) with the remaining $1.2 Million
attributable to the Company's locations in Alabama and Mississippi
(Statewide Healthcare Services, Inc.).
Homemaker services delivered to clients of the Illinois Department on
Aging ("IDOA") provided revenues of $13.7 Million, representing 59% of
total revenues for the year as compared with $11.5 Million or 60% for
1997. The contractual arrangement with IDOA requires that, at a
minimum, 73% of receipts from IDOA client services be spent for direct
costs of providing care (as defined by IDOA regulations). The Company's
report of its direct costs incurred in the provision of care to IDOA
clients is subject to an annual independent audit. Management believes
the Company is in compliance with the direct cost requirements imposed
by IDOA. Accounts receivable from IDOA represented 29% of total
receivables as of June 30, 1998 compared to 32% for the prior year.
The Company also operates pursuant to numerous other contracts with
various state and local agencies on aging in Illinois, Indiana,
Missouri, Arkansas, Mississippi and Alabama. Revenue derived from such
contracts totaled approximately $8.0 Million (35%) versus $4.5 Million
(23%) in 1997. Revenue from private, commercial and staffing services
yielded $1.4 Million (6%) versus $3.1 Million (17%) in 1997.
<PAGE>
Direct Costs of Services.
Direct costs of providing services reached $16.2 Million (70% of
revenues) versus $13.1 Million (68% of revenues) in 1997. The growth of
$3.1 Million relates to increased volume and an increase in the minimum
wage from $4.75 to $5.15 in late 1997.
Selling, General and Administrative Expense.
Operating expenses grew by $4.0 Million from $6.3 Million in 1997 to
$10.3 Million in 1998 and comprised, respectively 33% and 45% of the
Company's revenues. Virtually all expense categories incurred increases
that generally correspond to the growth in revenues and expenses
associated with the start up of 17 new offices throughout Mississippi,
Arkansas, Illinois and Missouri.
The Company recognized unusual expense during the fourth quarter in the
amount of $2.1 Million including a $300,000 loss on the disposal of the
Company's Medicare operations, $1.4 Million attributable to the write-
off of goodwill, and approximately $400,000 of additional reserves for
bad debt. The loss on disposal of Medicare operations relates to the
Company's decision to either sell or close its Medicare entities on or
before the close of its 1999 fiscal year due to unfavorable changes in
Medicare reimbursement methodology for home health care.
Administrative salaries grew from $3.3 Million in 1997 to $4.2 Million
in 1998 for an overall increase of 33%. Virtually all of the increase
relates to Illinois operations. Administrative salaries were 19% of
revenues in 1998 versus 16% in 1997. Professional fees and insurance
expenses remained essentially flat at approximately $600,000 for both
1998 and 1997. Occupancy costs also remained essentially flat at $1.6
Million from year to year. Travel expenses grew by 14% during 1998 to
$335,000 from $292,000 the year before with all of the increase
attributable to corporate support of branch offices.
Bad debt expense increased by $472,000 in 1998, moving from $328,000 in
1997 to $800,000 in 1998. While the bulk of the increase is due to the
proportionate growth in revenues (necessitating more routine bad debt
expense), approximately 26% of the growth in bad debt expense is
attributable to the Company's stated intention of systematically
maintaining its reserves for doubtful accounts in keeping with
applicable industry averages. As of June 30, 1998, reserves for
doubtful accounts were approximately $560,000 representing 8% of total
accounts receivable.
Depreciation and amortization expense moved from approximately $214,000
in 1997 to $1.6 Million in 1998. The increase is due entirely to the
write-off of goodwill associated with the Oxford companies.
Advertising and promotional expense doubled, moving from $343,000 to
$613,000 from 1997 to 1998. Approximately $170,000 of the $270,000
increase (63%) is attributable to the Oxford companies while the
remainder ($100,000) is due to increased emphasis on marketing and
promotional efforts in Illinois, Arkansas and Missouri.
<PAGE>
Interest.
Interest expense grew by $224,000 from $109,000 in 1997 to $333,000 in
1998 due to increased reliance on existing credit facilities as a means
of funding newly established operating locations. Indebtedness related
to the Company's revolving credit facility increased by $1.9 Million to
$2.9 Million as of June 30, 1998.
Earnings.
The net loss in 1998 of $3.6 Million compares to a net loss of 479,000
in 1997 representing an increase of $3.1 Million. The loss per share of
common stock was $1.93 versus a loss per share of $.26 in 1997. The
loss is based on 1,869,375 shares of Common Stock issued and
outstanding.
Segment Operations.
Management has elected to identify the Company's reportable segments
based on geographic areas: Alabama, Illinois/Indiana, Missouri/Arkansas
and Mississippi.
Information related to the Company's reportable segments for fiscal 1998
is as follows(in thousands):
<TABLE>
AL IL MO MS TOTAL
From Continuing Operations:
<S> <C> <C> <C> <C> <C>
Revenue $ 3,740 $15,405 $ 882 $ 3,110 $23,137
Direct Costs 2,991 10,586 542 2,075 16,194
-------- ------- ----- ------- -------
Gross margin 749 4,819 340 1,035 6,943
Operating
expenses 986 3,221 303 2,879 7,389
-------- ------- ---- ------- -------
Operating income
(loss) (237) 1,598 37 (1,844) (446)
From Discontinued Operations:
Gain (loss) from
operations (764) (365) 22 (1,107)
Loss on disposal (245) (262) (507)
-------- ------- ---- ------- -------
Net Gain (loss) $ (1,246) $ 971 $ 59 $(1,844)$(2,060)
======== ======= ====== ======= =======
Total Assets $ 1,377 $ 3,143 $1,187 $ 1,596 $ 7,303
======== ======= ====== ======= =======
</TABLE>
<PAGE>
A reconciliation of the segments' operating income to the consolidated
net loss is as follows (in thousands):
<TABLE>
<S> <C>
Segments' operating income: $(2,060)
Plus:
Non-operating income 541
Income tax benefit 845
Less:
Corporate overhead expense (2,928)
-------
Consolidated net loss $(3,602)
=======
</TABLE>
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
<TABLE>
<S> <C>
Segments' total assets $ 7,303
Plus:
Corporate/support entities'
total assets 1,258
-------
Consolidated total assets $ 8,561
=======
</TABLE>
Information related to the Company's reportable segments for 1997 is as
follows (in thousands):
<TABLE>
AL IL MO MS TOTAL
From Continuing Operations:
<S> <C> <C> <C> <C> <C>
Revenue $ 3,266 $13,567 $ $ 2,350 $19,183
Direct Costs 2,400 9,160 1,559 13,119
-------- ------- ----- ------- -------
Gross margin 866 4,407 791 6,064
Operating
expenses 1,507 2,271 735 4,513
-------- ------- ---- ------- -------
Operating income
(loss) (641) 2,136 56 1,551
From Discontinued Operations:
Gain (loss) from
operations 23 (106) (87) (170)
-------- ------- ---- ------- -------
Net Gain (loss) $ ( 618) $ 2,030 $ (87) $ 56 $ 1,381
======== ======= ====== ====== =======
Total Assets $ 2,928 $ 3,772 $ 298 $1,628 $ 8,626
======== ======= ====== ====== =======
</TABLE>
<PAGE>
A reconciliation of the segment' operating income to the consolidated
net loss is as follows (in thousands):
<TABLE>
<S> <C>
Segments' operating income: $ 1,381
Plus:
Income tax expense 103
Corporate overhead expense 1,757
-------
Consolidated net loss $ (479)
=======
</TABLE>
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
<TABLE>
<S> <C>
Segments' total assets $ 8,626
Plus:
Corporate/support entities'
total assets 942
-------
Consolidated total assets $ 9,568
=======
</TABLE>
Earnings Outlook.
As noted previously, the Company has elected to discontinue its Medicare
operations and has recognized expense associated with their disposal as
of June 30, 1998. During its first quarter of 1999, the Company also
closed four Mississippi offices and one Alabama office to reduce
administrative expense burdens. In addition, the Company has sold its
airplane, cut back on executive travel, eliminated corporate staff
positions and significantly reduced promotional campaigns in an effort
to contain expense.
The Company will benefit from rate increases recently instituted by the
Illinois Department on Aging (9.4%), the Illinois Department of
Rehabilitative Services (9.4%) and several of the Alabama area agencies
on aging with which it contracts (11.5% overall).
In an effort to improve operating results in its Alabama and Mississippi
locations, the Company has also instituted wage caps for field staff and
maximums for reimbursement of mileage between clients' homes.
Similarly, the Company has recently elected to impose field staff wage
caps for its Illinois operations to ensure continued adequacy of
operating margins in those locations. Although the Company may be
forced to adjust its union pay scale slightly upward as a direct result
of the aforementioned IDOA rate increase, the Company does not believe
at this time that any such wage increases will consume a significant
portion of the rate increase.
<PAGE>
Liquidity and Capital Resources.
The Company's basic cash requirements are for operating expenses,
generally comprised of labor, occupancy and administrative costs. The
Company relied in 1998 on approximately $1.9 Million of new borrowings
under its existing credit facility to augment cash flow from operations
for business expansion. The Company's secured debt obligations total
approximately $2.9 Million as of June 30, 1998. Total long term debt as
of June 30, 1997 totaled $1.5 Million. Total working capital stood at
$1.5 Million as of June 30, 1998 versus total working capital of $2.8
Million as of the same date in 1997.
The Company, as of June 30, 1998, was in technical default relative to
two financial ratios enumerated in the loan agreement for its secured
bank debt of $2.9 Million. At June 30 the loan agreement required that
the Company's current ratio be maintained at a level of 1.25:1 and
tangible net worth equal at least $2,625,000. As of June 30, 1998 the
current ratio (as defined in the loan agreement) was 1.21:1 and tangible
net worth stood at $1.8 Million. The Company's lender has declined to
waive the technical defaults as noted, but has agreed to a standstill
agreement effective through November 30, 1998. The Company, in the
meantime, is working to effectuate replacement financing while
continuing to work with its existing lender to ensure adequate time to
close a transaction with a new lender. The Company has also taken steps
to reduce its outstanding indebtedness (See Financial Statements, Note
17). The Company believes that it will be successful in closing a
replacement credit facility by November 30; however, there can be no
assurance as to what action its current lender will take in the event an
alternate financing arrangement is unattained as of the expiration of
the standstill agreement (See 1998 Financial Statements, Report of
Independent Accountants).
Cash used by operating activities in 1997 was $2.0 Million versus $2.2
Million used by operating activities in 1998. The operating cash flow
differential of approximately $200,000 generally relates to the increase
in accounts receivable due to overall revenue growth among continuing
operations. The Company reduced indebtedness arising from the
transaction through which the Oxford companies were acquired by $325,000
and increased borrowings under its existing credit facility by
approximately $2.0 Million causing net cash provided from financing
activities to reach $1.7 Million versus $439,000 for the previous year.
Net cash provided by investing activities was $94,000 for the year ended
in 1998 versus $330,000 of net cash used in such activities during the
prior year. The Company experienced a net cash depletion, on a year to
year basis, of $458,000.
The Company had approximately $412,000 of cash on hand as of June 30,
1998 as contrasted to $870,000 of cash on hand in 1997. Based on the
Company's operating projections, cash flows from established operations
should be sufficient to fund the business during the coming year.
Proceeds realized from the sale of discontinued operations will be used
to reduce overall indebtedness relative to the Company's credit
facility.
Management intends to continue its pursuit of internal growth and
development opportunities and will utilize cash from operations, future
indebtedness and any exercise of its outstanding Warrants to fund such
growth.
<PAGE>
Year 2000 Compliance.
The Company acquired new accounting software packages in fiscal 1997
including general ledger, payroll, purchasing, accounts receivable and
scheduling modules, all of which are year 2000 compliant. The Company
does not expect to expend any monies, as a result, in updating or
otherwise modifying its operating software systems to achieve year 2000
compliance.
Item 7. Financial Statements.
Financial Statements for the Years Ended June 30, 1998 and 1997.
Attached hereto and filed as a part of this Form 10-KSB are the
Consolidated Financial Statements of the Company.
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
There have been no disagreements between the Company and its
accountants, PricewaterhouseCoopers, LLP, regarding accounting
principles or financial disclosures.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers.
The following table sets forth certain information concerning each of
the current executive officers and directors of the Company. The
company's officers and directors are elected to serve in such capacities
until the earlier to occur of the election and qualification of their
respective successors or until their respective deaths, resignations or
removal by the Company's Board of Directors or shareholders,
respectively, from such positions. Directors do not currently receive
compensation for their services as such. One director received shares
of Common Stock in consideration for agreeing to serve as a director.
<TABLE>
<S> <C> <C>
Name Age Position and Offices
Louis Goldstein 55 Chairman of the Board, Chief
Executive Officer and Treasurer
Joel Davis 34 Chief Operating Officer, Secretary
and Director
Sharon Harder 49 Chief Financial Officer
Robert Kirshner 55 Director
Robert Rubin 58 Director
Steven Venit 38 Director
</TABLE>
Louis Goldstein. Mr. Goldstein, the founder of the Company, has served
as the Company's chief executive officer and director since its
inception in 1974.
<PAGE>
Joel Davis. Mr. Davis joined the Company in July 1995 as General
Counsel. Mr. Davis was named Chief Operating Officer of the Company in
March 1996. From October 1989 through July 1995, Mr. Davis was an
Associate at the law firm of Hlustik, Huizenga, Williams and Vander
Woude, Ltd. In Chicago.
Sharon Harder. Ms. Harder joined the Company in March 1996 as Chief
Financial Officer. For six years prior to joining the Company, Ms.
Harder was the Chief Operating Officer and Chief Financial Officer of
Child Health Systems, Inc. and Pediatric Homecare of America. The
companies offered a wide range of alternate site home health care
services including center-based day health care, skilled home nursing
care, rehabilitative therapies, infusion therapy, home medical equipment
and case management services.
Robert Kirshner. Mr. Kirshner became a director of the Company in June
1998. Mr. Kirschner is currently retired and served as a Regional
Manager of Plywood Minnesota for 15 years. Mr. Kirschner's duties
included overseeing the daily operations of multiple retail store
locations while employed by Plywood Minnesota.
Robert Rubin. Robert Rubin has served as a Director of the Company
since December 1995. Since June 1992, Mr. Rubin has been a Director of
Diplomat Corporation, a public company engaged in the business of direct
mail order sales of womens' apparel and accessories. In October 1996
Mr. Rubin became a director of Med-Emerg International, Inc., an
operator of nursing homes and related health care services. Currently,
Mr. Rubin is also a director or Arzan International, an Israeli food
distributor.
Mr. Rubin has served as the Chairman of the Board of Directors of
Western Power and Equipment Corporation ("WPEC"), a construction
equipment distributor, since November 20, 1992. Between November 20,
1992 and March 7, 1993, Mr. Rubin served as Chief Executive Officer of
WPEC. Between October 1990 and January 1, 1994 Mr. Rubin served as the
Chairman of the Board and Chief Executive Officer of American United
Global, Inc., a telecommunications and software company ("AUGI") and
since January 1, 1994, solely as Chairman of the Board of AUGI. Mr.
Rubin was the founder, President, Chief Executive Officer and a Director
of Superior Care, Inc. (SCI") from its inception in 1976 until May 1986
and continued as a Director of SCI( now known as Olsten Corporation
("Olsten") until the latter part of 1987. Olsten, a New York Stock
Exchange listed company is engaged in providing home care and
institutional staffing services and health care management services.
Mr. Rubin was formerly a Director and Vice Chairman, and is a minority
stockholder of American Complex Care, Inc. ("ACCI"), a public company
which provided on-site health care services, including intradermal
infusion therapies. In April 1995, the principal operating subsidiaries
of ACCI petitioned the Circuit Court of Broward County, Florida for an
assignment for the benefit of creditors. Mr. Rubin is also a Director,
Chairman and minority stockholder of Universal Self Care, Inc., a public
company engaged in the sale of products used by diabetics, and Response
USA, Inc., a public company engaged in the sale and distribution of
<PAGE>
personal emergency response systems. Mr. Rubin is also Chairman, Chief
Executive Officer and a Director and a principal stockholder of ERD
Waste Corporation, a public company specializing in the management and
disposal of municipal solid waste, industrial and commercial
nonhazardous solid waste and hazardous waste. In September 1997, ERD
Waste Corporation filed for protection under Title 11 for reorganization
under Chapter 11 of the Bankruptcy Code.
Steven Venit. Mr. Venit has been a sole practitioner with the Law
Offices of Steven L. Venit, Esq. For more than ten years and is licensed
to practice law in the states of Illinois, Nevada and Wisconsin. (See
Certain Relationships and Related Transactions.)
Section 16 Compliance.
During fiscal 1998, there were no failures to timely report on Forms 3
or 4 pursuant to the provisions of Section 16(a) of the Exchange Act.
Item 10. Executive Compensation.
The following table sets forth the cash compensation, as well as certain
other compensation paid or accrued, by the Company to the Company's
Chief executive Officer, Chief Operating Officer and chief Financial
Officer for the fiscal years ended June 30, 1997 and 1998. No other
individuals had total annual compensation exceeding $100,000 during
these fiscal years.
<TABLE>
Annual Compensation Long-Term Compensation
Name and Position Year Salary Bonus Other Stock Options
<S> <C> <C> <C> <C> <C>
Louis Goldstein
Chairman, CEO, Dtr. 1998 $241,447 $37,950 $224,013(1) 300,000(3)
1997 $206,250 $22,000 $121,592(1) 200,000(3)
Joel Davis
Chief Operating
Officer, Dtr. 1998 $134,037 $13,000 -(2) 100,000(3)
1997 $100,000 $10,000 -(2)
Sharon Harder
Chief Financial
Officer 1998 $158,339 $16,000 -(2) 100,000(3)
1997 $123,333 $13,000 -(2)
</TABLE>
(1) Pursuant to provisions in his revised Employment Contract approved
by the Compensation Committee of the Board of Directors, Mr. Goldstein
received certain compensation related to personal expenses. Such
compensation totaled approximately $129,082 in 1998 and $41,000 in 1997.
In addition, the Company paid expenses associated with automobiles for
Mr. Goldstein's business and personal use. Auto expenses totaled
approximately $31,490 in 1998 and $20,000 in 1997. The Company also
assumed financial responsibility, on Mr. Goldstein's behalf, for certain
legal services in the amount of $8,435 in 1998 and $25,000 during 1997.
Utilizing an effective tax rate of 40%, the Company assumed income taxes
associated with personal expenses in the amount of $55,006 in 1998 and
$34,740 in 1997.
(2) With respect to each named officer, the aggregate amount of
perquisites was less than either $50,000 or 10% of the salary reported.
<PAGE>
(3) Pursuant to an action of the Compensation Committee of the Board of
Directors, Mr. Goldstein received options to purchase 300,000 shares of
the Company's Common Stock in 1998 and 200,000 options to purchase
Common Stock in 1997. The options are priced at $1.63 and $4.65 per
share and are fully vested; however, the market price of the underlying
securities was less than the exercise price as of September 30, 1998.
Ms. Harder and Mr. Davis received options to purchase 100,000 share of
the Company's Common Stock, each, in 1998. The options are priced at
$1.12 per share and are fully vested. As noted previously, the market
price of the underlying securities was less than the exercise price as
of September 30, 1998.
Employment Agreement.
As of December 1997 the Company entered into a revised employment
agreement with Louis Goldstein. Pursuant to the agreement, Mr.
Goldstein receives an annual base salary of $230,000 per year, subject
to increase in each successive year of the contract term at the
discretion of the Compensation Committee of the Board of Directors. In
addition, Mr. Goldstein is entitled to receive a benefit allowance equal
to 10% of his annual compensation, a monthly automobile allowance and
full reimbursement of personal expenses necessitated by travel on behalf
of the Company. Based on the Company's financial performance, Mr.
Goldstein shall also be entitled to receive annual incentive payments
ranging incrementally from $25,000 to $100,000 based upon after-tax
income adjusted for non-cash expenses and extraordinary items. In the
event of a change in control of the Company, Mr. Goldstein shall be
entitled to receive a one-time cash payment equal to 10% of the excess
market capitalization as defined in the agreement. Excess market
capitalization is defined as an amount equal to the outstanding shares
of the Company's capital stock multiplied by the closing share price on
the 30th day following the change in control less $6 Million. In the
event of Mr. Goldstein's involuntary termination without cause, he shall
be entitled to receive severance pay for the unexpired portion of the
agreement's term equal to the sum of his base compensation, benefit
allowance and the incentive payments, as applicable. The agreement is
for a term of ten years beginning in December 1997.
Change in Control Agreements.
As of March 1998 the Company entered into employment agreements with
Joel Davis and Sharon Harder, respectively, the Company's Chief
Operating Officer and Chief Financial Officer. The agreements are for
a term of 36 months and provide for annual compensation of Mr. Davis and
Ms. Harder at the rate of $130,000 and $170,000, respectively. In the
event of a change in control, as defined in the agreements, both
individuals shall be deemed to have been terminated without cause and
shall be entitled to severance payments equal to three times their
annual salary.
<PAGE>
Stock Option Plan.
The company adopted a Stock Option Plan in August, 1995. The plan is
administered by the Board of Directors through its Compensation
Committee. In January 1997 the Company's shareholders approved an
amendment to the plan to increase, by 1,500,000, the aggregate number of
shares of common Stock available for which options may be granted.
Pursuant to the plan, options to acquire an aggregate of 1,764,375
shares of Common Stock may be granted, 720,000 of which have been
granted to date, at exercise prices ranging from $1.12 (200,000 options)
to $5.88 (20,000 options). The plan provides for grants to employees,
consultants and directors of the Company.
The 1995 Stock Option Plan authorizes the Board to issue incentive stock
options (ISOs) as defined in section 422 A of the Internal Revenue Code
of 1986, as amended (the Code), as well as stock options that do not
conform to the requirements of the Code section (Non-ISOs). Consultants
and directors who are not also employees of the Company could be granted
only Non-ISOs. The exercise price of each ISO may not be less than 100%
of the fair market value of the common Stock at the time of grant,
except that in the case of a grant to an employee who owns 10% or more
of the outstanding stock of the Company or a subsidiary or parent of the
company (a 10% Stockholder), the exercise price may not be less than
100% of the fair market value on the date of the grant. The exercise
price of each Non-ISO shall be determined by the Board of Directors in
its discretion and may be less than the fair market value of the common
Stock (but not less than 85%) on the date of grant. Notwithstanding the
foregoing, the exercise price of any option granted on or after the
effective date of the registration of any class of equity security of
the company pursuant to Section 12 of the Securities and Exchange Act of
1934, and prior to six months after the termination of such registration
may be no less than 100% of the fair market value per share on the date
of the grant. ISOs may not be exercised after the tenth anniversary
(fifth anniversary in the case of any option granted to a 10%
Stockholder) of their grant. Non-ISOs may not be exercised after the
tenth anniversary of the date of grant. Options may not be transferred
during the lifetime of an option holders. No stock options could be
granted under the plan after August 15, 2005.
Subject to the provisions of the Plan, the Board has the authority to
determine the individuals to whom the stock options are to be granted,
the number of shares to be covered by each option, the exercise price,
the type of options, the option period, the restrictions, if any, on the
exercise of the option, the terms for the payment of the option price
and other terms and conditions. Payments by option holders upon
exercise of an option may be made (and determined by the Board) in cash
or such other form of payment as may be permitted under the Plan,
including without limitation, by promissory note or by shares of Common
Stock.
<PAGE>
Indemnification of Officers and Directors.
The Articles of Incorporation and Bylaws of the Company provide for
indemnification of each director and officer or former director or
officer or any person who may have served at the request of the Company
as a director or officer of another corporation in which the Company
owns shares of capital stock or is a creditor. The company will
indemnify against reasonable costs and expenses incurred in connection
with any action, suit or proceeding to which any of the individuals
described herein were made a party by reason of his/her or their being
or having been such a director or officer, unless such director has been
adjudicated to have been liable for negligence or misconduct in his or
her corporate duties. As of the date of this filing, The company is
unaware of any existing, threatened or pending litigation involving a
former or current director that will require the indemnification of the
Company.
Notwithstanding the foregoing indemnification provisions of the
Company's Articles of Incorporation and Bylaws, the Company has been
informed that, in the opinion of the Commission, indemnification for
liabilities arising under the Securities Act is against public policy
and is, therefore, unenforceable.
Item 11. Security ownership of Certain Beneficial owners and
Management.
The following tables set forth, as of the date of this filing, certain
information with respect to stock ownership of (i) all persons known by
the Company to be beneficial owners of 5% or more of its outstanding
shares of Common Stock, Warrants and/or options; (ii) all directors and
officers individually and as a group, together with their respective
percentage ownership of such shares.
<TABLE>
Name Shares Owned Percentage Owned
<S> <C> <C>
Robertson Stephens & Co., Inc. (1) 204,559 4.5%
Herbard, Ltd. (2) 217,000 4.8%
</TABLE>
(1) The address for Robertson Stephens & Co., Inc. is 555 California
Street, Suite 2600, San Francisco, CA 94104
(2) The address for Herbard, Ltd. Is P.O. Box 438, Road Town Tortola,
British Virgin Islands, Tottola, D9.
(3) Based on fully diluted, weighted average number of shares at June
30, 1998. Includes Common Stock, Common Stock Options and
Warrants. This information is taken from various filings and, to
the best of management's knowledge, is correct as of September 30,
1998.
<PAGE>
<TABLE>
Name Shares Option Percentage Owned
<S> <C> <C> <C>
Louis Goldstein (1) 962,500 500,000 32.9%(2)
Joel Davis (1) 50 110,000 2.5%(2)
Sharon Harder (1) - 100,000 2.2%(2)
Robert Kirschner - - - (2)
Robert Rubin (1) 52,500 150,000 4.5%(2)
Steven Venit (1) - 10,000 .2%(2)
Officers and Directors as
A Group 1,065,000 870,000 42.3%(2)
</TABLE>
(1) The address for the named individual is 223 West Jackson blvd,
Chicago, IL.
(2) This is based on fully diluted, weighted average number of shares at
June 30, 1998. Mr. Goldstein's percentage of common shares actually
issued and outstanding at June 30, 1998 is approximately 51%.
Item 12. Certain Relationships and Related Transactions.
In connection with the formation of the Company, on August 7, 1995, the
company issued to Louis Goldstein 962,500 shares of common Stock in
exchange for 2,750 shares of common stock of Help at Home, Inc., an
Illinois corporation (Help at Home, IL). Mr. Goldstein was awarded
200,000 options to purchase shares of the Company's common stock in
April 1997 and 300,000 options to purchase Common Stock in March 1998.
The options are exercisable at a price of $4.65 per share and $1.63 per
share, respectively.
In 1992, 1993 and 1994 Help at Home, IL loaned to Mr. Goldstein
$135,470, $101,135 and $92,721, respectively. The loans bear interest
at nine percent per year and are due on July 31, 1999. The balance of
such loans at June 30, 1998 was $133,668. The loans increased by
$12,104 during the year due to accumulation of interest.
During 1998, the Company paid an aggregate of approximately $24,022
(including accrued fees from the prior year) to Steven Venit, a
director, for certain routine legal services.
The Company, acting as a subcontractor, billed $91,454 and $112,000,
respectively, to a not-for-profit organization in which Mr. Goldstein is
an officer.
The Company has adopted a policy that all future transactions, including
loans between the Company and its officers, directors, principal
stockholders and their affiliates must be approved by a majority of the
Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Except as otherwise noted, the Exhibit listed below has previously
been filed as an exhibit to the Company's Registration Statement on
form SB-2 Registration No. 33-97034 (the Registration Statement)
and/or the Post Effective Amendment No. 1 thereto (the amendment,
and is incorporated herein by reference.
3.1 Articles of Incorporation of Help at Home of Evanston, Inc., an
Illinois corporation, dated February 27,1975 as amended on June 17,
9182 changing its name to Help at Home, Inc.
3.2 Certificate of Incorporation of Help at Home, Inc., a Delaware
corporation, dated August 7, 1995.
3.3 Certificate of Incorporation of Lakeside Home Health Agency, Inc.,
a Missouri corporation, dated April 20, 1993.
3.4 Certificate of Incorporation of Rosewood Home Health, Inc., an
Illinois corporation, dated march 4, 1994.
3.5 Certificate of Incorporation of HASC Staffing Services, Inc., a
Mississippi corporation, dated March 23, 1986.
3.6 Certificate of Incorporation of Homemakers of Montgomery, Inc., an
Alabama corporation, dated March 27, 1985.
3.7 Certificate of Incorporation of Statewide Healthcare Services,
Inc., a Mississippi corporation, dated January 10, 1974.
3.8 Help at Home, Inc. Bylaws.
4.1 specimen Common Stock Certificate.
4.2 specimen Redeemable Common Stock Purchase Warrant.
4.3 Form of Warrant Agreement.
4.4 form of Underwriter's Warrant.
10.1 Employment Agreement with Louis Goldstein.
10.2 Form of contract with the Illinois Department on Aging.
10.3 1995 Stock Option Plan.
11.1 Computation of Earnings Per Share.*
21.1 Subsidiaries.
27.1 Financial Data Schedule.
Filed as an Exhibit hereto.
(b) Reports filed on or in conjunction with Form 8-K.
There were no reports filed on form 8-K during fiscal 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: October 15, 1998 HELP AT HOME, INC.
By: _________________________
/s/ Louis Goldstein
Chairman and Chief Executive Officer
By:__________________________
/s/ Sharon Harder
Chief Financial officer
By:__________________________
/s/ Joel Davis
Chief Operating Officer
By: _________________________
/s/ Robert Rubin
Director
By: _________________________
Steven Venit
Director
By: _________________________
Robert Kirschner
Director
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
INDEPENDENT ACCOUNTANTS' REPORT
TABLE OF CONTENTS
<S> <C>
Report of Independent Accountants 1
Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Help At Home, Inc.
Chicago, Illinois
We have audited the consolidated balance sheets of Help at Home, Inc.
and its subsidiaries (collectively, the "Company") as of June 30, 1998
and 1997, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Help at Home, Inc. and its subsidiaries as of June 30, 1998
and 1997, and their consolidated results of operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has incurred significant operating losses, has negative cash
flows and has not complied with the terms of its debt covenants. These
factors raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do no
include any adjustments that might result from the outcome of this
uncertainty.
Chicago, Illinois
October 9, 1998
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and 1997
1998 1997
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 412,012 $ 870,634
Accounts receivable (net of allowance
for doubtful accounts of $560,000
and $167,000 respectively) 6,789,224 5,055,469
Prepaid expenses and other 154,163 154,774
Federal income tax receivable 436,583 281,052
Deferred income taxes - current 335,283 119,000
---------- ----------
Total Current Assets 8,127,265 6,480,929
Furniture and equipment, net 203,703 474,979
Due from officer 133,668 121,564
Goodwill (1997 net of amortization of
$154,000) 2,401,816
Other assets 88,275 88,275
---------- ----------
Total Assets $8,552,911 $9,567,563
Liabilities
Current Liabilities:
Accounts payable $ 841,511 $ 685,466
Accrued expenses 1,858,821 1,142,735
Due to third-party payors 713,269 239,436
Current maturities of long-term debt 2,919,969 1,290,485
Current income taxes payable 151,337
Deferred income taxes - current 152,600 146,000
---------- ----------
Total Current Liabilities 6,486,170 3,655,459
Deferred income taxes - noncurrent 158,600 242,000
Long-term debt, less current portion 2,793 162,475
---------- ----------
Total Liabilities 6,647,563 4,059,934
Stockholders' Equity
Preferred stock, par value $.01 per share;
1,000,000 shares authorized, none issued
or outstanding
Common stock, par value $.02 per share;
14,000,000 shares authorized, 1,869,375
issued and outstanding 37,388 37,388
Additional paid in capital 3,694,406 3,694,406
Retained (deficit) earnings (1,826,446) 1,775,835
---------- ----------
Total Stockholders' Equity 1,905,348 5,507,629
Total Liabilities and
Stockholders' Equity $8,552,911 $9,567,563
========== ==========
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part hereof.
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30, 1998 and 1997
1998 1997
<S> <C> <C>
Revenues $23,137,194 $19,183,213
Direct cost of services 16,194,249 13,119,095
----------- -----------
Gross margin 6,942,945 6,064,118
Selling, general and
administrative expense 10,317,147 6,336,845
----------- -----------
Loss from operations (3,374,202) (272,727)
Non-operating income 540,840 71,898
----------- -----------
Loss from continuing operations
before income taxes (2,833,362) (200,829)
Income tax (benefit) expense (560,412) 103,000
----------- -----------
Loss from continuing operations (2,272,950) (303,829)
Discontinued operations:
Loss from operations of Medicare agencies
[less applicable income tax (benefit)
expense of $(81,900) in 1998 and
$5,000 in 1997] (1,025,131) (175,361)
Loss on disposal of Medicare agencies,
including provision for operating losses
during phase-out period (less applicable
income tax benefit of $202,800 in 1998)(304,200)
----------- -----------
Net loss $(3,602,281) $ (479,190)
=========== ===========
Basic and Diluted Loss Per Share:
Loss from continuing operations $ (1.22) $ (.16)
Discontinued Operations:
Loss from operations of Medicare agencies (.55) (.10)
Loss on disposal of Medicare agencies (.16) -
----------- -----------
Net loss $ (1.93) $ (.26)
Weighted average number of common shares: 1,869,375 1,869,375
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part hereof.
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 1998 and 1997
1998 1997
<S> <C> <C>
Common Stock Shares:
Balance, beginning of year 1,869,375 1,869,375
Stock issued
--------- ---------
Balance, end of year 1,869,375 1,869,375
Common Stock:
Balance, beginning of year $ 37,388 $ 37,388
Stock issued
----------- -----------
Balance, end of year $ 37,388 $ 37,388
Additional Paid in Capital:
Balance, beginning of year $ 3,694,406 $ 3,694,406
Stock issued
----------- -----------
Balance, end of year $ 3,694,406 $ 3,694,406
Retained (Deficit) Earnings:
Balance, beginning of year $ 1,775,835 $ 2,255,025
Net loss for year ended
June 30 (3,602,281) (479,190)
----------- -----------
Balance, end of year $(1,826,446) $ 1,775,835
=========== ===========
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part hereof.
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998 and 1997
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,602,281) $ (479,190)
Noncash changes in net loss:
Depreciation 147,118 136,648
Amortization 136,305 159,060
Bad debt expense 928,054 346,671
Loss on sale of fixed assets 17,614 3,880
Gain on forgiveness of debt (241,282)
Write-off of impaired goodwill 2,265,511 235,972
Deferred tax benefit (293,083) (260,000)
Changes in:
Accounts receivable (2,661,809) (2,362,863)
Prepaid expenses and other 610 13,280
Accounts payable 156,046 403,269
Other current liabilities 748,368 463,632
Due to third-party payors 473,833 140,192
Current income taxes (306,868) (773,715)
----------- -----------
Net cash used in operating activities (2,231,864) (1,973,164)
Cash flows from investing activities:
Acquisition of property (63,456) (329,962)
Proceeds from sale of property 170,000
Acquisition of subsidiaries (161,125)
(Increase) decrease in due from officer (12,104) 6,443
Other 154,950
----------- -----------
Net cash provided by (used in) investing
activities 94,440 (329,694)
Cash flows from financing activities:
Proceeds from long-term debt 3,004,486 1,231,855
Repayment of long-term debt (1,325,684) (793,068)
----------- -----------
Net cash provided by financing activities 1,678,802 438,787
----------- -----------
NET DECREASE IN CASH (458,622) (1,864,071)
Cash and cash equivalents:
Beginning of year 870,634 2,734,705
----------- -----------
End of year $ 412,012 $ 870,634
=========== ===========
Supplemental disclosure of cash flow information:
Cash payments for:
Income taxes $ $ 934,068
Interest 326,857 32,369
Supplemental disclosures of non-cash investing and financing activities:
Forgiveness of debt and accrued interest$ 241,282 $
Transfer of leased vehicle for assumption
of lease obligation 31,008
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part hereof.
<PAGE>
HELP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
Note 1 - Organization and Business
Help at Home, Inc., a Delaware corporation ("Help (Delaware)" or the
"Company"), was incorporated on August 7, 1995. In connection with the
formation of the Company, 2,100,000 shares of Common Stock were issued
to the shareholders of Help at Home, Inc., an Illinois corporation
("Help (Illinois)") in exchange for all the common stock of Help
(Illinois).
The consolidated financial statements presented include the accounts of
Help (Delaware) and its wholly owned subsidiaries: Help (Illinois),
Rosewood Home Health, Inc. ("Rosewood"), Lakeside Home Health Agency,
Inc., a Missouri corporation ("Lakeside (Missouri)"), the Oxford group
(see Note 3), Lakeside Home Health Agency, Inc., an Illinois corporation
("Lakeside (Illinois)"), Preferred Nursing Care ("Preferred") and HAH
Aviation ("Aviation").
The Company, through its Help (Illinois) subsidiary, provides homemaker
and general housekeeping services to elderly and disabled persons within
their homes in the mid-west region of the United States. The vast
majority of the clients are obtained and served through regional
contracts with various state and municipal agencies. In addition, the
Company provides homemaker and respite services to elderly and disabled
persons in Alabama and Mississippi under the terms of contracts with
various state and regional area agencies on aging. These agencies
receive their funding from the Alabama and Mississippi Medicaid Waiver
block grants.
The Company, through its Homemakers of Montgomery, Inc. ("Homemakers",
part of the Oxford group), Lakeside (Missouri), Lakeside (Illinois), and
Rosewood subsidiaries ("Medicare agencies"), provides in-home skilled
health care services. Homemakers operates in the metropolitan
Montgomery, Alabama area; Lakeside (Missouri) and Rosewood operate in
the metropolitan St. Louis area; Lakeside (Illinois) operates in the
Chicagoland area. Lakeside (Missouri), Rosewood and Homemakers of
Montgomery, Inc. are certified in their respective states to receive
Medicare reimbursement.
Note 2 - Liquidity
The Company's viability as a going concern is dependent upon the
restructuring of its obligations and a return to profitability and
positive cash flows. As is further described in Notes 4 and 16,
management has decided to sell or liquidate the operations of the
Medicare agencies due to their continuing financial losses and estimated
additional losses stemming from decreasing Medicare reimbursement.
In addition, management has closed certain unprofitable operating
locations and continues to review the profitability of all remaining
individual operating locations and will close or consolidate any
locations which are not contributing positively to the Company's
profitability in fiscal 1999.
<PAGE>
Management is currently considering several options to restructure its
secured bank debt (see Notes 9 and 17). Management believes that it
will be successful in obtaining a formal debt or capital commitment
prior to the expiration of the current secured lender's forbearance.
Finally, effective July 1, 1998, the Company received a 9.4% increase
from its largest customer, the Illinois Department of Aging (see Note
5). Management believes that this increase will have an immediate and
significant positive impact on the Company's profitability.
There can be no assurance that the Company's operations restructuring
efforts described above will be successful or that sales of the Medicare
agencies or debt/capital commitments can be successfully accomplished on
terms that are acceptable to the Company. Under current circumstances,
the Company's ability to continue as a going concern depends upon the
successful restructuring of the secured bank debt and return to
profitability and positive cash flows. If the Company is unsuccessful
in its efforts, the Company may be unable to meet the obligations of the
secured lender upon expiration of the forbearance as well as other
obligations, making it necessary to undertake other such actions as may
be appropriate.
Note 3 - Summary of Significant Accounting Policies
[1] Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
[2] Revenue recognition
The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates.
Payment arrangements include reimbursed costs, discounted charges and
per diem payments. Revenue is reported at the estimated net realizable
amounts from clients, third-party payors and others for services
rendered. Revenue under certain third-party payor agreements is subject
to audit and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the related
services are rendered. Differences between the estimated amounts
accrued and interim and final settlements are reported in operating
results in the year of settlement.
[3] Goodwill
Goodwill has been recognized for the excess of the purchase price paid
over the fair value of the net assets acquired and was being amortized
on a straight-line basis over periods of ten to twenty years.
Management calculates expected undiscounted future cash flows from
operations to evaluate recoverability whenever events or changes in
circumstances indicate a possible impairment. (See Note 4).
[4] Accounts Receivable
Accounts receivable are stated at estimated net realizable value. The
allowance for doubtful accounts is based on management's estimate of
collectibility, which considers outstanding accounts receivable,
historical experience and current economic conditions.
<PAGE>
[5] Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using accelerated and straight-line methods over the estimated useful
lives of the assets. Amortization of capitalized lease costs is
included in depreciation expense. The estimated useful lives of
property and equipment are as follows:
<TABLE>
<S> <C>
Software 3 years
Computers, autos, office and medical equipment 5 years
Furniture and fixtures 7 years
Aircraft 10 years
Leasehold Improvements Lease term
</TABLE>
[6] Earnings Per Share
In February, 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". SFAS No. 128 changed the computational guidelines for earnings
per share information and is effective for both interim and annual
reporting periods ending after December 15, 1997. Earlier application
was not permitted. SFAS No. 128 eliminates the presentation of primary
earnings per share and replaces it with basic earnings per share. Basic
earnings per share differs from primary earnings per share because
common stock equivalents are not considered in computing basic earnings
per share. Fully diluted earnings per share will be replaced with
diluted earnings per share. Diluted earnings per share is similar to
fully diluted earnings per share, except in determining the number of
dilutive shares outstanding for options and warrants, the proceeds that
would be received upon the conversion of all dilutive options and
warrants are assumed to be used to repurchase the Company's common
shares at the average market price of such stock during the period. For
fully diluted earnings per share, the higher of the average market price
or ending market price was used.
<PAGE>
The following table provides a reconciliation of the income and number
of shares used in basic and diluted earnings per share calculations.
<TABLE>
1998 1997
<S> <C> <C>
Numerator:
Net (Loss) $(3,602,281) $(479,190)
Denominator:
Denominator for basic earnings
per share - weighted average
shares 1,869,375 1,869,375
Effect of dilutive securities:
Stock Options - -
Common Stock Warrants - -
----------- ----------
Dilutive potential common shares 1,869,375 1,869,375
----------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 1,869,375 1,869,375
Basic loss per share $ (1.93) $ (.26)
========== ==========
Diluted earnings per share $ (1.93) $ (.26)
========== ==========
</TABLE>
[7] Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less
are considered to be cash equivalents.
[8] Income Taxes
Deferred taxes are recognized for the temporary differences between the
bases of assets and liabilities for financial and tax reporting
purposes. Deferred income taxes are provided for certain transactions
which are reported in different periods for financial reporting than for
income taxes. Such differences relate primarily to the reporting of
income and expenses of Help (Illinois) on the cash basis of accounting
for income tax purposes and on the accrual method of accounting for
financial reporting purposes.
The Company was required to change to the accrual method for reporting
its income for tax reporting purposes for years ending June 30, 1997 and
thereafter. Such change requires that the Company include in its
taxable income, starting with the year ended June 30, 1997, the
cumulative difference between the cash and accrual methods, as of June
30, 1996, over a period not to exceed four years. This change is not
expected to have a material effect on net income or earnings per share.
<PAGE>
[9] Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Significant
estimates include allowances, accruals, third-party settlements and
deferred taxes. The actual results will differ from those estimates and
the differences could be material.
[10] Reclassifications
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation.
Note 4 - Acquisitions
On July 21, 1995, Help (Illinois) purchased all the stock of Lakeside
(Missouri) for $100,000. Goodwill in the amount of $66,000 was
recognized based on an allocation of cost to the fair value of the
assets acquired. The goodwill was being amortized on a straight-line
basis over a ten year period. During fiscal year 1997, management
determined there was an impairment of this goodwill due to the
continuing decline of operating results and the excess of direct costs
over reimbursable limits and, as a result, wrote off remaining net
goodwill of $40,000. The write-off of goodwill is included in
Administrative Expenses.
On January 30, 1996, the Company purchased all of the stock of Rosewood
for $20,000. The Company recognized goodwill in the amount of $171,000
based on an allocation of cost to the fair value of the assets acquired.
The goodwill was being amortized over a ten year period. During fiscal
year 1998, management determined there was an impairment of this
goodwill due to the continuing decline of operating results, the
negative financial impact of the enactment of per beneficiary
reimbursement limits for Medicare recipients by the Health Care
Financing Administration (HCFA), and the decision to discontinue the
provision of skilled services through the Company's Medicare certified
agencies. As a result, the Company wrote off remaining goodwill of
$130,000, which is reflected in Loss from Operations of Medicare
Agencies.
On May 31, 1996, the Company purchased all of the stock of Statewide
Healthcare Services, Inc. ("Statewide"), Homemakers, and HASC Staffing
Systems, Inc. ("HASC"), collectively referred to as the Oxford group,
for $2,150,000. The agreement allowed for the purchase price to be
adjusted based on book value of Oxford's consolidated assets on the
purchase date (see Note 9). The Company recognized goodwill in the
amount of $2,384,000 based on an allocation of cost to the fair value of
the assets acquired. The goodwill was being amortized over a twenty
year period. Due to the decline of operating results, the enactment of
per beneficiary limits and the decision to discontinue the provision of
skilled services through the Company's Medicare agencies, net goodwill
in the amount of $2,136,000 was written off. The write off of goodwill
is included in Administrative Expenses ($1,404,000) and Loss from
Operations of Medicare Agencies ($732,000).
<PAGE>
On October 1, 1996, the Company purchased all the stock of Preferred for
$175,012. The Company recognized goodwill in the amount of $210,000
based on an allocation of cost to the fair value of the assets acquired.
The goodwill was being amortized on a straight-line basis over a ten
year period. During fiscal year 1997, management determined there was an
impairment of this goodwill due to a continuing decline in the operating
results of Preferred and, as a result, wrote off remaining net goodwill
of $196,000. The write-off of goodwill is included in Administrative
Expenses.
The results of operations of these acquisitions, all of which were
accounted for using the purchase method, are reported in the
consolidated results of operations from the date of acquisition.
Note 5 - Concentrations of Risk
The Company grants credit without collateral pursuant to various
third-party payor agreements and a limited number of arrangements with
individual clients. The vast majority of the clients served by the
Company are covered under a third-party payor agreement. The mix of
receivables from patients and third-party payors at June 30, 1998 and
1997, was as follows:
<TABLE>
June 30,
1998 1997
<S> <C> <C>
IDOA 29% 32%
Medicaid waiver 10 10
Medicare 13 19
Medicaid 21 13
Other third-party payors 18 17
Clients 9 9
---- ----
100% 100%
=== ===
</TABLE>
Medicare and Medicaid programs are highly regulated and subject to
budgetary, statutory and other constraints. During fiscal 1998, HCFA
enacted regulations effective during the Company's fiscal year 1998,
which limit reimbursement for skilled health care services provided to
Medicare beneficiaries through the use of per beneficiary limits. As a
result of these new regulations, third party payor settlements totaling
$368,000 were accrued in 1998. The estimated negative impact of these
new regulations caused the Board of Directors to discontinue the
provision of these skilled services (see Note 16).
Several additional proposals have been introduced in Congress which
could further limit the growth of federal spending under Medicare and
Medicaid programs; however no specific proposals are pending that would,
in management's opinion, further materially change Medicaid
reimbursement to the Company in the foreseeable future.
<PAGE>
Note 6 - Property and Equipment
Property and equipment consists of the following:
<TABLE>
June 30
1998 1997
<S> <C> <C>
Furniture and fixtures $ 342,016 $ 344,369
Office, computer and medical equipment 379,376 343,233
Autos 30,593 30,593
Aircraft 216,478
--------- --------
751,985 934,673
Less accumulated depreciation (548,282) (459,694)
--------- --------
$ 203,703 $ 474,979
========= =========
</TABLE>
The total amount of equipment recorded under capitalized leases included
above was $102,600 at June 30, 1998 and 1997. Accumulated amortization
on capital leases was $83,200 and $70,800 at June 30, 1998 and 1997,
respectively.
Note 7 - Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
June 30
1998 1997
<S> <C> <C>
Accrued wages $ 659,464 $ 541,998
Accrued loss on discontinued
operations 507,000
Accrued workers' compensation 22,094 225,058
Payroll taxes accrued and withheld 501,555 231,658
Other 168,708 144,021
---------- ----------
$1,858,821 $1,142,735
========== ==========
</TABLE>
<PAGE>
Note 8 - Income Taxes
The (benefit) provision for federal and state income taxes consists of
the following:
<TABLE>
Year ended June 30
1998 1997
<S> <C> <C>
Current:
Federal $(469,225) $320,000
State (82,804) 43,000
Deferred:
Federal (249,121) (221,000)
State (43,962) (39,000)
--------- --------
$(845,112) $103,000
========= ========
</TABLE>
<PAGE>
A reconciliation of income tax expense with federal income taxes at the
statutory rate follows:
<TABLE>
Year ended June 30
1998 1997
<S> <C> <C>
Federal income taxes at the statutory rate (34.0%) (34.0%)
Increase (Decrease) in taxes resulting from:
State income tax, net of federal benefit (6.0) (5.5)
Nondeductible items 1.0 3.4
Amortization and write off of nondeductible
goodwill 19.0 42.8
Other 1.0 25.9
----- -----
Income tax (benefit) expense provided (19.0%) 32.6%
===== =====
</TABLE>
The income tax effects of temporary differences that give rise to the
net deferred tax liability are as follows:
<TABLE>
1998 1997
<S> <C> <C>
Current deferred tax assets (liabilities):
Cash to accrual basis adjustment $(152,600) $(146,000)
Discontinued operations, provision
for doubtful accounts and other 435,600 119,000
--------- ---------
283,000 (27,000)
Noncurrent deferred tax assets (liabilities):
Cash to accrual basis adjustment (152,600) (292,000)
Jobs tax credit carryforward 55,000 55,000
Depreciation (6,000) (5,000)
--------- ---------
Noncurrent deferred tax liabilities (103,600) (242,000)
Valuation allowance (155,317)
--------- ---------
Net deferred tax asset (liability) $ 24,083 $(269,000)
========= =========
</TABLE>
The Company has job tax credits of approximately $55,000 at June 30,
1998. These job credits expire in 2008. A valuation allowance has been
established at June 30, 1998 for the deferred tax assets which exceed
the deferred tax liabilities, reduced by tax loss carrybacks.
<PAGE>
Note 9 - Long Term Debt
The following schedule details long-term debt outstanding as of June 30:
<TABLE>
1998 1997
<S> <C> <C>
A revolving loan due December 29, 1998,
in the aggregate principal amount of
$3,500,000. Interest is payable
monthly at the prime rate plus 1%.
Loan is secured by accounts
receivable and the capital stock
of all subsidiaries. $2,904,486 $
A revolving loan due October 4, 1997,
in the aggregate principal amount
of $1,000,000. Interest is payable
monthly at the prime rate. Loan
is unsecured. 900,000
A note due January 2, 1998, used
to finance the purchase of the
Oxford group (see Notes 4 and 10).
Interest is payable quarterly at
the prime rate plus 1%. 325,000
An installment note due February 13,
2002, used to finance the purchase
of an airplane. Interest is payable
monthly at the prime rate. Note is
secured by the airplane. 182,000
Notes secured by Company automobiles
and various capital leases for office
and computer equipment (see Note 6).
The notes are payable in equal monthly
installments and bear interest at
various rates between 9% and 18%. 18,276 45,960
---------- --------
Total long-term debt $2,922,762 $1,452,960
Less current portion 2,919,969 1,290,485
---------- ----------
Noncurrent portion of long-
term debt $ 2,793 $ 162,475
========== ==========
</TABLE>
The repayment schedule for long term debt as of June 30, 1998 is as
follows:
<TABLE>
Amount due
<S> <C>
1999 $2,919,969
2000 2,793
</TABLE>
Interest expense included in the results of operations for the years
ended June 30, 1998 and 1997, respectively was $333,493 and $78,022.
<PAGE>
As of June 30, 1998, the Company was in technical default relative to
both financial ratios enumerated in the loan agreement for its secured
bank debt of $2,904,486. The loan agreement requires that the Company's
current ratio, as defined, be maintained at a level of at least 1.25:1.
As of June 30, 1998 that current ratio was 1.21:1. The loan agreement
also requires that the Company maintain Tangible Net Worth, as defined,
of at least $2,625,000. As of June 30, 1998 Tangible Net Worth was
$1,772,000. (See Note 17).
Note 10 - Commitments and Contingencies
[1] Leases
The Company has operating lease commitments for office space and
equipment which have various expirations through 2003 (See Note 9 for
capital lease information). Operating leases for office space include
escalation clauses for increases in real estate taxes and certain
operating expenses. Future minimum lease payments under operating
leases as of June 30, 1998 are as follows:
<TABLE>
Year Ending June 30,
<S> <C>
1999 $ 548,513
2000 415,217
2001 233,731
2002 21,171
2003 9,797
----------
$1,228,429
==========
</TABLE>
Rental expense under operating leases was $816,000 and $585,000 for the
years ended June 30, 1998 and 1997, respectively.
[2] Litigation
The Company has been named in several legal proceedings in connection
with matters that arose during the normal course of its business and
related to certain acquisitions. While the ultimate result of the
litigation or claims cannot be determined, it is management's opinion,
based upon information it presently possesses, that it has adequately
provided for losses that may be incurred related to these claims.
<PAGE>
The Company was named as a party to a suit filed by the family of the
Oxford group's former owner in which the family sought to recover
$350,000 in proceeds payable under two key-man life insurance policies
owned by the Company. The Company responded with a counter claim in
which it sought to reduce the amount of the $325,000 note due on the
purchase of the Oxford group (see Note 4). During 1998, both the claim
and the counter claim were settled in the Company's favor. As a result
of this settlement, the Company received the entirety of the life
insurance proceeds. In addition, the note payable and related accrued
interest were reduced $209,000 and $32,000, respectively. The remaining
note and interest payable were satisfied with the insurance proceeds.
The gain from the note and interest reduction (totaling $241,000) has
been reflected in Non-Operating Income. Income from the life insurance
proceeds has been reflected in Non-Operating Income ($250,000) and Loss
from Operations of Medicare Agencies ($100,000).
[3] Termination and Benefits Agreements
In October, 1997 the Company's Compensation Committee established a
termination and benefits policy with respect to key executive employees
which provides for payment of severance and benefits in the event of
involuntary termination without cause and/or a change in control. As of
March 1, 1998, the Company entered into employment agreements with the
Chief Financial and Chief Operating Officers. In the event of a change
in control, the maximum aggregate salary commitment for these employees
would be approximately $900,000 over a period of 36 months.
Additionally on December 5, 1997, a termination and benefits
modification was made to the Chairman's employment agreement. In the
event of a change in control, the maximum aggregate severance commitment
pursuant to this contract provision is approximately $2,555,000, in the
form of a one-time payment. (See Note 12).
Note 11 - Major Customer
Fees billed to one major customer, the Illinois Department on Aging
("IDOA"), accounted for $13,689,000 (59%) and $11,532,000 (52%)of the
total revenues from continuing operations for the years ended June 30,
1998 and 1997, respectively. The amounts due under such contracts
totaled $2,110,000 and $1,667,000 at June 30, 1998 and 1997,
respectively.
The Company is subject to the IDOA's requirement whereby 73% of the
total service fees received from the department must be expended on
direct service worker costs, as defined. As a participant with the
IDOA, the Company is subject to an audit of its systems and procedures
to determine whether the Company is in compliance with the rules and
regulations of the contract. As of June 30, 1998, management believes
the Company is in compliance with the contract.
Note 12 - Related Party Transactions
Approximately 54% of the Company's stock is held by Company officers or
directors.
<PAGE>
The Company has a loan outstanding to its majority shareholder in the
amount of $133,668 and $121,564, including accrued interest thereon, as
of June 30, 1998 and 1997 respectively. The loan bears interest at 9%
per year. The principal plus accrued interest was due on July 31, 1998.
Subsequent to June 30, 1998, the due date on this loan was extended
until July 31, 1999.
The Company entered into an employment agreement with the Chairman/Chief
Executive Officer, a major stockholder, effective in December, 1995.
Pursuant to the agreement, the stockholder's base salary for years one
and two of the contract are set and subsequent years' increases are at
the discretion of the Compensation Committee of the Board of Directors.
In addition, the stockholder is entitled to receive a benefit allowance
equal to 10% of the stockholder's base salary per year. The agreement
is for a period of five years and is automatically renewable for
additional one year terms unless notice is given not less than 90 days
prior to the end of the initial term or any succeeding year. The
agreement also subjects the stockholder to non-competition provisions.
In May, 1997, this employment agreement was modified to include the
reimbursement of certain personal expenses incurred by the Chairman due
to his continuous travel on the Company's behalf. On December 5, 1997
the Compensation Committee approved an additional modification which
provides for severance and a one-time change of control payment in the
event of involuntary termination without cause or termination arising
from a change in the ownership and/or management of the Company. The
maximum aggregate severance commitment pursuant to this contract
provision is approximately $2,555,000, in the form of a one-time
payment. Total compensation under this contract for the years ended
June 30, 1998 and 1997 totaled $448,404 and $294,773, respectively.
In April, 1997, the Chairman was granted 200,000 incentive stock options
at an option price of $4.95. In March, 1998, the Chairman was granted an
additional 300,000 incentive stock options at an option price of $1.63
(See Note 13).
The Company, acting as a subcontractor, billed $73,000 and $112,000 in
service fees for the years ended June 30, 1998 and 1997, respectively,
to a not-for-profit organization in which the majority stockholder is an
officer. The amount due from this organization was $91,000 and $34,000
at June 30, 1998 and 1997, respectively. The organization is provided
certain space in the Company's leased facilities without charge.
A director of the Company received payments totaling $24,000 and $27,700
for the years ended June 30, 1998 and 1997, respectively, for the
provision of legal services to the Company.
Note 13 - Stock Options
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement on Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation." SFAS No. 123 was effective for the
Company's 1996 fiscal year. SFAS No. 123 introduced a preferable fair
value based method of accounting for stock-based compensation. SFAS No.
123 encourages, but does not require, companies to recognize
compensation for grants of stock, stock options, and other equity
instruments to employees based on the new fair value accounting rules.
The Company intends to continue applying the existing accounting rules
contained in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and disclose net income and earnings per
share on a pro forma basis, based on the new fair value methodology.
<PAGE>
In August 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan"). Under the Plan, incentive stock options and nonqualified stock
options may be granted, at the discretion of the Board, to purchase up
to 264,375 shares of the Company common stock through the year 2005. In
January, 1997, the shareholders approved an increase of 1,500,000 shares
to the number of shares available for which options may be granted.
Incentive stock options are to be granted at a price not less than the
fair market value of the Company's Common Stock at the date of the
grant. The exercise price may not be less than 110% of the fair market
value of the Company's Common Stock at the date of the grant if the
shareholder owns 10% or more of the Company's outstanding stock.
Options may be granted to employees, consultants, and directors of the
Company and must be exercised within ten years of the date of the grant.
Incentive options for a total of 200,000 shares were granted to the
Chairman, the majority shareholder, at a price of $4.95 per share in
April, 1997. In March, 1998, the Chairman was granted an additional
300,000 incentive share options at a price of $1.63 per share.
Additionally in March, 1998, incentive options totaling 350,000 shares
at an option price of $1.12 were granted to two employees and one
director. Incentive options for a total of 20,000 shares were granted
at a price of $6.875 per share to two employees in April, 1996. No stock
options have been exercised, forfeited or cancelled during 1998 and
1997.
No compensation expense has been recognized in the Company's financial
statements, as the Company continues to apply the provisions of
Accounting Principles Board Opinion No. 25. However, were the Company
to report under the fair value methodology set out in Statement of
Financial Accounting Standard No. 123, the loss per share would have
been $2.05. This amount was estimated using Black-Scholes stock option
pricing method. The significant weighted average assumptions used are
as follows: risk-free interest rate of 5.7%, expected life of options of
8 years, expected volatility of 66%, grant date fair value per option of
$.74, and expected dividends of zero.
Nonqualified stock options are exercised at a price to be determined by
the Board of Directors for a period of ten years after the grant date.
No nonqualified options have been granted under the Plan.
Note 14 - Stock Warrants Outstanding
The Company has 1,638,750 issued and outstanding stock purchase warrants
as of June 30, 1998. Each warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $6.00 per share at any
time until December 4, 2000. The exercise price of the warrants is
subject to adjustment in certain events pursuant to the anti-dilution
provisions thereof. The warrants are redeemable, in whole or in part,
at a price of $.10 per warrant commencing December 5, 1996, or sooner,
with the sole consent of the lead underwriter, provided that (a) the
Company gives 30 days prior written notice to the registered holders of
the warrants, and (b) the closing high bid price or sale price per share
of the Common Stock (if the Common Stock is then traded on NASDAQ or a
national securities exchange) for a period of 10 consecutive trading
days, ending on the third business day prior to the date of any
redemption notice, equals or exceeds at least $9.00. The warrants shall
be exercisable until the close of the business day preceding the date
fixed for redemption.
<PAGE>
The Company has also issued to the underwriters, for nominal
consideration, the Underwriters' Warrant to purchase from the Company
up to 71,250 Units. The Underwriters' Warrant is exercisable at a price
of $10.08 per Unit for a period of four years commencing December 5,
1996. These Units will consist of one share of Common Stock and two
redeemable common stock purchase warrants. Each warrant entitles the
holder to purchase one share of Common Stock under terms identical to
the warrants described in the preceding paragraph.
Note 15 - Reportable Segments
In June 1997, the FASB issued Statements on Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. Management elected the early
adoption of this pronouncement in fiscal 1997.
SFAS No. 131 requires that public enterprises report certain information
about reporting segments in financial statements. It also requires the
disclosure of certain information regarding services provided,
geographic areas of operation and major customers.
Management has elected to identify the Company's reportable segments
based on geographic areas (states): Alabama, Illinois, Missouri and
Mississippi. Due to the manner in which the Company's subsidiaries are
organized and managed, it should be noted that segment information for
Illinois includes operations located in Arkansas and Indiana. Revenues
in all four segments are derived from the provision of both skilled
nursing services and unskilled homemaker/respite services.
Information related to the Company's reportable segments for 1998 is as
follows (in thousands):
<TABLE>
Alabama Illinois Missouri Mississippi Total
Continuing Operations:
<S> <C> <C> <C> <C> <C>
Revenues $ 3,740 $15,405 $ 882 $ 3,110 $23,137
Direct costs 2,991 10,586 542 2,075 16,194
Gross margin 749 4,819 340 1,035 6,943
Operating
expenses 986 3,221 303 2,879 7,389
-------- ------- ------ -------- -------
Operating
inc(loss) (237) 1,598 37 (1,844) (446)
Discontinued Operations:
Gain (loss) from
operations (764) (365) 22 (1,107)
Loss on
disposal (245) (262) (507)
-------- ------- ------ ------- -------
Net Gain (Loss)$ (1,246) $ 971 $ 59 $(1,844) $(2,060)
======== ======= ======= ======= =======
Total Assets $ 1,377 $ 3,143 $1,187 $ 1,596 $ 7,303
======== ======= ======= ======= =======
</TABLE>
<PAGE>
A reconciliation of the segments' net loss to the consolidated net loss
is as follows (in thousands):
<TABLE>
<S> <C>
Segments' net loss $(2,060)
Plus:
Non-operating income 541
Income tax benefit 845
Less:
Corporate overhead expense (2,928)
-------
Consolidated net loss $(3,602)
=======
</TABLE>
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
<TABLE>
<S> <C>
Segments' total assets $7,303
Plus:
Corporate/support entities' total assets 1,258
Consolidated Total Assets $8,561
</TABLE>
Information related to the Company's reportable segments for 1997 is as
follows (in thousands):
<TABLE>
Alabama Illinois Missouri Mississippi Total
Continuing Operations:
<S> <C> <C> <C> <C> <C>
Revenues $ 3,266 $13,567 $ $ 2,350 $19,183
Direct costs 2,400 9,160 1,559 13,119
-------- ------- ------- ------- -------
Gross margin 866 4,407 791 6,064
Operating
expenses 1,507 2,271 735 4,513
-------- ------- ------- ------- -------
Operating
inc(loss) (641) 2,136 56 1,551
Discontinued Operations:
Gain (loss) from
operations 23 (106) (87) (170)
-------- ------- ------- ------- -------
Net Loss $ (618) $ 2,030 $ (87) $ 56 $ 1,381
======= ======= ====== ======= =======
Total Assets $ 2,928 $ 3,772 $ 298 $ 1,628 $ 8,626
======= ======= ====== ======= =======
</TABLE>
<PAGE>
A reconciliation of the segments' operating income to the consolidated
net loss is as follows (in thousands):
<TABLE>
<S> <C>
Segments' operating income $1,381
Less:
Income tax expense 103
Corporate overhead expense 1,757
------
Consolidated net loss $ (479)
======
</TABLE>
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
<TABLE>
<S> <C>
Segments' total assets $8,626
Plus:
Corporate/support entities' total assets 942
------
Consolidated Total Assets $9,568
======
</TABLE>
Note 16 - Discontinued Operations
On June 27, 1998, the Board of Directors adopted a plan to dispose of
the Medicare agencies (Homemakers, Lakeside (Illinois), Lakeside
(Missouri), and Rosewood) through sale or liquidation. Negotiations for
the sale of certain of these entities are currently being conducted with
the respective management groups. Should consummation of these sales
not occur, management intends to liquidate these operations during
fiscal 1999. Net assets of the Medicare agencies at June 30, 1998 are
as follows:
<TABLE>
<S> <C>
Cash $ 32,769
Accounts receivable, net 842,151
Prepaid expenses and other 3,577
Property and equipment, net 9,581
Accounts payable (311,322)
Accrued expense (604,497)
Due to third party payors (713,269)
Long term debt, current portion (2,041)
---------
Total $(743,051)
=========
</TABLE>
The Medicare agencies' operations had revenues of $2,437,000 and
$3,030,000 in 1998 and 1997, respectively.
Note 17 - Subsequent Events
Effective September 30, 1998, the lender of the Company's secured bank
debt totaling $2,904,486, issued a 60 day forbearance of the loan
covenant violations (see Note 9).
<PAGE>
As of October 9, 1998, the Company sold certain assets of Homemakers of
Montgomery, Inc. for $350,000 in cash (the "Sale"). The Homemakers Sale
will result in closure of that entity's Montgomery, AL location.
Receipts of the Sale were used, in their entirety, to reduce existing
indebtedness to the Company's lender, thereby reducing outstanding
borrowing under the Company's credit facility to approximately
$2,554,486.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 412,012
<SECURITIES> 0
<RECEIVABLES> 7,349,224
<ALLOWANCES> 560,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,127,265
<PP&E> 203,703
<DEPRECIATION> 147,118
<TOTAL-ASSETS> 8,552,911
<CURRENT-LIABILITIES> 6,486,170
<BONDS> 0
0
0
<COMMON> 37,388
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,552,911
<SALES> 23,137,194
<TOTAL-REVENUES> 23,137,194
<CGS> 16,194,249
<TOTAL-COSTS> 16,194,249
<OTHER-EXPENSES> 9,983,654
<LOSS-PROVISION> 304,200
<INTEREST-EXPENSE> 333,293
<INCOME-PRETAX> (3,678,202)
<INCOME-TAX> (560,412)
<INCOME-CONTINUING> (3,117,790)
<DISCONTINUED> (1,025,331)
<EXTRAORDINARY> 540,840
<CHANGES> 0
<NET-INCOME> 3,602,281
<EPS-PRIMARY> (1.93)
<EPS-DILUTED> (1.93)
</TABLE>
Computation of Earnings Per Share
HELP AT HOME, INC.
Schedule 11.1
1997 1996
---- ----
Net income (loss) $(3,602,281) $(479,190)
========= ========
Weighted average number of shares
of Common Stock outstanding 1,869,375 1,869,375
Net income (loss) per share:
Basic $ (1.93) $ (.26)
Diluted $ (1.93) $ (.26)
