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, 1999
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 (IRS Employer
incorporationor organization) Identification 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 Small Cap 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: $27,889,000.00
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of November 11, 1999 was
approximately $1,196,055 (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 November 11, 1999.
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 care services to elderly and disabled persons within
their homes. Such services consist of nutritional planning and
assistance, household management, personal care, and to a minor extent
skilled nursing services. The majority of the Company's clients are
obtained and served through 36 regional contracts with the Illinois
Department on Aging ("IDOA") and 26 contracts with other state and
municipal 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. Accordingly the Company's three
certified home healthcare agencies were closed by December 31, 1998.
The Company operates 28 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 and medical and technological advances which enable
a growing number of treatments to be administered at home rather than
in a medical facility. Although Medicare expenditures are expected to
decrease by $700,000 million in 1999, it is expected that private and
other public sources will increase, expenditures in order to keep pace
with the demand for homecare services in an aging population. ***witht
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, which were
formerly provided through the Company's Medicare certified home health
agencies which have since been closed, were 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 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, Missouri, and Indiana. The Company has
established 3 new offices since July 1998 for the purpose of
responding to contract opportunities that enable the company to
provide custodial services to clients in previously underserved
areas. The Company has been able to continue to serve clients in
the areas where it has closed locations through a system which
employs field coordinators assigned to specific regions. 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
both 1998 and 1999, 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 four. 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
implemented a flat rate for 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 a position to offer intermittent
nurse/aide staffing services to acute care institutions,
physicians' clinics and other facilities.
<PAGE>
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.
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 has 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 1999 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 60% of
the Company's revenues during fiscal 1999 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.
<PAGE>
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.
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. Prior to their closing
all of the Company's Medicare provider units had successfully passed
their annual Medicare surveys.
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. The 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.
<PAGE>
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 Medicaid Waiver 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 care 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.
Employees.
Exclusive of field personnel who work on a per diem basis the Company
has 169 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 28 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 December.
1) Election of the Company's Board of Directors (See Part III,
Item 9) for the ensuing year.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock and Warrants are traded on the NASDAQ
Small Cap 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.
<TABLE>
Common Stock Bid Prices by Fiscal Year
1998 High 1998 Low 1999 High 1999 Low
--------- -------- --------- --------
<S> <C> <C> <C> <C>
HAHI:
First Quarter $4.00 $3.25 $1.63 $ .63
Second Quarter 3.25 1.38 1.88 .63
Third Quarter 2.13 1.06 1.88 1.19
Fourth Quarter 2.00 1.31 2.88 .94
HAHIW:
First Quarter $ .88 $ .38 $ .38 $ .19
Second Quarter .56 .22 .56 .19
Third Quarter .50 .31 .38 .13
Fourth Quarter .38 .25 .31 .06
</TABLE>
There were approximately nine holders of record of the Common Stock as
of September 30, 1999 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 1998 and 1999 relate to the
fiscal years ended June 30, 1998 and 1999, 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 the custodial home care and home health care
segments of the market, provided that working capital necessary to
sustain such growth can be secured.
<PAGE>
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.
2000 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 and consolidated into other remaining
locations. The Company also established two new offices in Missouri
1999. In order to take advantage of opportunities for expansion of its
business, the Company must have continued access to working capital.
In July of 1999 the Company secured financing which it believes will
provide the necessary funds to realize its operating goals; however
there can be no assurances that the financing will be sufficient.(See
Liquidity and Capital Resources).
Factors that May Affect 2000 Operating Results.
The Company received a 7.9% rate increase on its IDOA contracts
effective as of July 1, 1999. Most of the homemakers providing
services in Illinois are compensated at a rate slightly above 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 is currently in negotiations with the Union regarding a wage
increase for its members. The Company believes that it will be able to
negotiate a reasonable wage that will not impact its gross margin;
however, there can be no assurances.
In September of 1998 the Company received rate increases, averaging
approximately 11% under its contracts for the provision of homemaker
and personal care services in Alabama. In July of 1999 the Company
received rate increases, averaging approximately 5% in the aggregate,
for certain of its Mississippi contracts.
<PAGE>
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.
In connection with its discontinuation of this segment of its business,
the Company had estimated, as of June 30,1998, a $507,000 loss on
disposal of the Medicare business which was based on 1998 operating
results and known financial obligations. For the year ended 1999, the
Medicare operations had a net loss of $311,000 that offset the reserve
for discontinued operations which includes the sale of certain assets
of Homemakers for $350,000 and account receivable write offs of
approximately $630,000. While the Company believes that its estimate
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 1999 and 1998, certain
items from the Company's Consolidated Statement of Operations expressed
as a percentage of net sales.
<TABLE>
Fiscal Years Ended June 30
1999 1998
-----------------
<S> <C> <C>
Net sales 100% 100%
Direct cost of services 68% 70%
Gross margin 32% 30%
Operating expenses 39% 45%
Non-operating income 0% 2%
Loss from continuing operations
before income taxes (7%) (12%)
Income Tax (Benefit) Expense (0%) (3%)
Income(Loss) from continuing operations (8%) (10%)
(Loss) from Discontinued Operations (6%)
Net (Loss) (8%) (16%)
</TABLE>
<PAGE>
Fiscal 1999 Compared to Fiscal 1998:
Sales.
Client service revenue from continuing operations grew from $23.1
Million in 1998 to $27.9 Million in 1999, for an overall increase of
$4.8 Million or 21%. Approximately $4.4 Million of the revenue
increase originated with Help at Home, Inc. (IL) with the remaining
$400,000 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 $16.9 Million, representing 60% of
total revenues for the year as compared with $13.7 Million or 59% for
1998. 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 33% of
total receivables as of June 30, 1999 compared to 29% 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 $9.4 Million (34%) versus $8.0 Million
(35%) in 1998. Revenue from private, commercial and staffing services
yielded $1.6 Million (6%) versus $1.4 Million (6%) in 1998.
Direct Costs of Services.
Direct costs of providing all services reached $19.1 Million (68% of
revenues) versus $16.2 Million (70% of revenues) in 1998. The growth
of $2.9 Million relates to increased volume and an increase in the
Illinois homemaker minimum wage from $5.15 to $5.35 in November of
1998. The decrease in direct costs as a percentage of revenues was
mostly attributable to the increase in revenue from the IDOA rate
increase.
Selling, General and Administrative Expense.
Operating expenses grew by approximately $500,000 from $10.3 Million in
1998 to $10.8 Million in 1999 and comprised, respectively 45% and 39%
of the Company's revenues. The increase in operating expenses is
predominately attributable to the Company's reserve for bad debt and
direct write off of uncollectible receivables which increased from
$800,000 in 1998 to $3 million in 1999.
<PAGE>
Administrative salaries decreased from $4.2 Million in 1998 to $3.4
Million in 1999 for an overall decrease of 19%. This decrease is
partially attributable to the reduction of administrative staff in
Mississippi and Alabama in connection with the consolidation of offices
in those states as well as a reduction in staff at the corporate level.
Administrative salaries were 18% of revenues in 1998 versus 12% in
1999. Professional fees and insurance expenses increased by 42% from
approximately $600,000 in 1998 to approximately $856,000 in 1999. This
increase was partially attributed to increased worker's compensation
premiums as a result of the increase in business as well as the
utilization of outside accounting assistance. Occupancy costs
decreased from $1.6 Million in 1998 to $1.1 million in 1999. Travel
expenses decreased by 37% during 1999 to $212,000 from $335,000 the
year before with most of the decrease attributable to less travel
required due to the consolidation of offices.
Depreciation and amortization expense moved from approximately $1.6
Million in 1998 to $110,000 in 1999. The decrease is due entirely to
the write-off of goodwill associated with the Oxford companies.
Advertising and promotional expense decreased, moving from $343,000 to
$613,000 in 1998 to 242,000 in 1999. The 60% decrease is attributable
to the Company's implementation of cost cutting measures in 1998 which
de emphasized the use of promotional items as a marketing tactic.
Interest.
Interest expense decreased by $96,000 from $333,000 in 1998 to $237,000
in 1999 due to a decrease in the Company's long term debt. Indebtedness
related to the Company's revolving credit facility decreased by
$1.3,from $2.9 million as of June 30, 1998 to $1.6 Million as of June
30, 1999.
Earnings.
The net loss income in 1999 of $2.1 million compares to a net (loss) of
3.6 million in 1998 representing a decrease of $1.5 million. The loss
per share of common stock was $1.13 versus a loss per share of 1.93 in
1998. The income (loss) is based on 1,869,375 shares of Common Stock
issued and outstanding.
<PAGE>
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
1999 is as follows(in thousands):
<TABLE>
AL IL MO MS TOTAL
----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
From Continuing
Operations:
Revenue $3,103 $19,447 $1,328 $4,011 $27,889
Direct Costs 2,193 13,216 811 2,871 19,091
----- ------ ----- ----- ------
Gross margin 910 6,231 517 1,140 8,798
Operating
expenses 868 4,925 575 1,614 7,982
----- ------ ----- ----- ------
Operating income
(loss) 42 1,306 (58) (474) 816
Total Assets $1,398 $ 2,889 $1,637 $1,225 $ 7,149
===== ====== ===== ===== ======
A reconciliation of the segments' operating income to the consolidated
net loss is as follows (in thousands):
<S> <C>
Segments' operating income: $ 816
Plus:
Non-operating income 12
Less:
Income Tax expense (130)
Corporate overhead expense (2,799)
------
Consolidated net loss $(2,101)
======
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
<S> <C>
Segments' total assets $ 7,149
Plus:
Corporate/support entities'
total assets 545
------
Consolidated total assets $ 7,694
======
</TABLE>
<PAGE>
Information related to the Company's reportable segments for 1998 is as
follows (in thousands):
<TABLE>
AL IL MO MS TOTAL
----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
From Continuing
Operations:
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) $ (1246) $ 971 $ (59) $1,844 $ 2,060
===== ====== ===== ===== ======
Total Assets $ 1,377 $ 3,143 $1,187 $1,596 $ 7,303
===== ====== ===== ===== ======
A reconciliation of the segment' net loss to the consolidated net loss
is as follows (in thousands):
<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
======
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
<S> <C>
Segments' total assets $ 7,303
Plus:
Corporate/support entities'
total assets 1,258
------
Consolidated total assets $ 8,561
======
<PAGE>
Earnings Outlook.
The Company has closed six Mississippi offices and three Alabama
offices during the 1999 fiscal year in order to reduce administrative
expense burdens. In addition, the Company has cut back on executive
travel, eliminated corporate staff positions and significantly reduced
promotional campaigns and advertising expense in an effort to contain
expense.
The Company will benefit from rate increases recently instituted by the
Illinois Department on Aging (7.9%), the Illinois Department of
Rehabilitative Services (7.9%) and Missouri Department on Aging(8.3%
overall).
In an effort to improve operating results in its Alabama and
Mississippi locations, in 1998 the Company has also instituted wage
caps for field staff and maximums for reimbursement of mileage between
clients' homes, in Alabama and Mississippi. Similarly, the Company also
elected to impose field staff wage caps for its Illinois operations to
ensure continued adequacy of operating margins in those locations.
Despite the low unemployment levels nationwide, the Company has been
successful in recruiting field staff at its current wage and
reimbursement rate. 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.
Liquidity and Capital Resources.
The Company's basic cash requirements are for operating expenses which
are generally comprised of labor, occupancy and administrative costs.
The Company reduced its long-term debt in 1999 by $1.3 million in part
by utilizing the proceeds ($350,000) from the sale of Homemakers of
Montgomery to pay down the facility. The Company's secured debt
obligations total approximately $1.6 Million as of June 30, 1999.
Total long term debt as of June 30, 1998 totaled $2.9 Million. Total
working capital deficiency was $196,000 as of June 30, 1999 versus
total working capital of $1.6 Million as of the same date in 1998.
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. The Company's loan agreement for its long
term secured debt with Harris Bank became due at December 30, 1998 and
remained past due at June 30, 1999. During this period the Company and
Harris Bank operated under a series of standstill agreements and the
Company was able to reduce its loan balance by approximately $1.3
million and remained current on its interest payments. Subsequent to
June 30, 1999 the Company secured replacement financing with Oxford
Commercial Funding LLC. On July 1, 1999 the Harris Bank loan was paid
off in its entirety.
The terms of the Oxford financing include an advance rate based on the
net collectable value of the Company's accounts receivables which are
less than 90 days old and an interest rate of prime plus 3.5%. The
Oxford financing does not contain financial covenants.
<PAGE>
Cash provided by operating activities in 1999 was $1.2 Million versus
$2.2 Million used by operating activities in 1998. The operating cash
flow differential of approximately $3.4 million generally relates to
the accrued expenses relative to untimely payroll tax deposits. The
Company reduced borrowings under its existing credit facility by
approximately $1.3 Million which accounts for the cash used in
financing activities versus cash provided by financing in the prior
year of 1.7 Million as result of net borrowings from its lenders. Net
cash used in investing activities was $56,000 for the year ended in
1999 versus $95,000 of net cash provided by investing activities during
the prior year. The Company experienced a net cash depletion, on a
year to year basis, of $198,000.
The Company had approximately $214,000 of cash on hand as of June 30,
1999 as contrasted to $412,000 of cash on hand in 1998. Based on the
Company's operating projections, cash flows from established operations
should be sufficient to fund the business during the coming year. In
July of 1999 the Company began a campaign to focus on collecting
certain large account receivables balances and in September of 1999
began to collect on these balances.
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.
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
has also modified its proprietary billing system so that it is 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, 1999 and 1998.
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,
Richard A. Eisner LLP and Company and PricewaterhouseCoopers, LLP,
regarding accounting principles or financial disclosures.
<PAGE>
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.
Name Age Position and Offices
Louis Goldstein 56 Chairman of the Board, Chief
Executive Officer and Treasurer
Joel Davis 35 President, Chief Operating Officer,
Secretary and Director
Robert Kirshner 55 Director
Robert Rubin 58 Director
Steven Venit 38 Director
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.
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 and President in February of 1997. 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.
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.
<PAGE>
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 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.
<PAGE>
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, 1998 and 1999.
No other individuals had total annual compensation exceeding $100,000
during these fiscal years.
</TABLE>
<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. 1999 $279,396 0 $59,967(1)
1998 $241,447 $37,950 $224,013(1) 300,000(3)
Joel Davis
Chief Operating
Officer, Dtr. 1999 $130,000 0
1998 $134,037 $13,000 -(2) 100,000(3)
Sharon Harder (4)
Chief Financial
Officer 1999 $130,824 - - -
1998 $158,339 $16,000 -(2) 100,000(3)
</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 42,834 in 1999 and $129,082 in 1998.
Utilizing an effective tax rate of 40%, the Company assumed income
taxes associated with personal expenses in the amount of $17,133 in
1999 and $55,006 in 1998.
(2) With respect to each named officer, the aggregate amount of
perquisites was less than either $50,000 or 10% of the salary reported.
(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, 1999.
(4) Effective February 19, 1999 Ms. Harder regigned as CFO, she did
not receive any severance package or other compensation in connection
with her resignation.
<PAGE>
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 an employment agreements with
Joel Davis the Company's Chief Operating Officer. The agreement is for
a term of 36 months and provides for annual compensation of Mr. Davis
and at the rate of $130,000. In the event of a change in control, as
defined in the agreement, Mr. Davis shall be deemed to have been
terminated without cause and shall be entitled to severance payments
equal to three times his annual salary.
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.
<PAGE>
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.
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.
<PAGE>
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.
Name Shares Owned Percentage Owned
---- ------------ ----------------
Robertson Stephens & Co., Inc. (1) 204,559 4.5% (3)
Herbard, Ltd. (2) 217,000 4.8% (3)
(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.
<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, 1999. Mr. Goldstein's percentage of common shares actually
issued and outstanding at June 30, 1999 is approximately 51%.
<PAGE>
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. Subsequent to June 30, 1999 the loans are
restructured to run concurrent with the Employment Agreement expiring
in December 2007, and include an approximately $15,000 annual payment
with a balloon payment at the end of the term. The balance of such
loans at June 30, 1999 was $146,200. The loans increased by $12,538
during the year due to accumulation of interest.
During 1998, the Company paid an aggregate of approximately $4,364
(including accrued fees from the prior year) to Steven Venit, a
director, for certain routine legal services.
The Company, acting as a subcontractor, billed $73,000, in 1998 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, 1982 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.
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: November 12, 1999 HELP AT HOME, INC.
By: /s/ Louis Goldstein
Louis Goldstein
Chairman and Chief Executive Officer
By: /s/ Joel Davis
Joel Davis
Chief Operating Officer
By: _________________________
Robert Rubin
Director
By: _________________________
Steven Venit
Director
By: _________________________
Robert Kirschner
Director
HELP AT HOME, INC. AND SUBSIDIARIES
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Report of Independent Accountants F-2A
Balance sheet as of June 30, 1999 F-3
Statements of operations for the years
ended June 30, 1999 and 1998 F-4
Statements of changes in stockholders'
equity (capital deficiency) for the years
ended June 30, 1999 and 1998 F-5
Statements of cash flows for the years
ended June 30, 1999 and 1998 F-6
Notes to financial statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Help At Home, Inc.
Chicago, Illinois
We have audited the consolidated balance sheet of Help at Home, Inc.
and its subsidiaries (collectively, the "Company") as of June 30, 1999,
and the related consolidated statements of operations, changes in
stockholders' equity (capital deficiency) and cash flows for the year
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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial
position of Help at Home, Inc. and its subsidiaries as of June 30,
1999, and their consolidated results of operations and their cash flows
for the year 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 B to the consolidated financial statements, the
Company has incurred recurring operating losses, has negative cash
flows and negative working capital, and has failed to make payroll tax
deposits with respect to certain periods. 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 B. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
October 1, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Help At Home, Inc.
Chicago, Illinois
We have audited the consolidated balance sheet of Help At Home, Inc.
its subsidiaries (collectively, the "Company") as of June 30, 1998, and
the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 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 audit provides 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 their consolidated results of operations and their cash flows
for the year 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 B 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 B. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Pricewaterhouse Coopers
Chicago, Illinois
October 9, 1998
F-2A
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999
<CAPTION>
1999
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 214,000
Accounts receivable (net of allowance for
doubtful accounts of $1,821,000 6,782,000
Prepaid expenses and other current assets 123,000
Income tax receivable 50,000
Deferred income taxes - current 156,000
---------
Total current assets 7,325,000
Furniture and equipment, net 138,000
Due from officer 146,000
Other assets 88,000
---------
$7,697,000
=========
LIABILITIES
Current liabilities:
Current maturities of long-term debt $1,607,000
Accounts payable 574,000
Accrued expenses and other current liabilities 5,102,000
Due to third-party payors 454,000
Deferred income taxes - current 156,000
---------
Total current liabilities 7,893,000
---------
Commitments and contingencies
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
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 37,000
Additional paid-in capital 3,694,000
Deficit (3,927,000)
---------
(196,000)
---------
$7,697,000
=========
See independent auditors' report and notes to financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended
June 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues $27,889,000 $23,137,000
Direct cost of services 19,090,000 16,194,000
---------- ----------
Gross margin 8,799,000 6,943,000
Selling, general and administrative expenses 10,782,000 10,317,000
---------- ----------
Loss from operations (1,983,000) (3,374,000)
Non-operating income 12,000 541,000
---------- ----------
Loss from continuing operations
before income taxes (1,971,000) (2,833,000)
Income tax expense (benefit) 130,000 (560,000)
---------- ----------
Loss from continuing operations (2,101,000) (2,273,000)
Discontinued operations:
Loss from operations of Medicare
agencies (less applicable income tax
expense of $(81,900) in 1998) - (1,025,000)
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) - (304,000)
---------- ----------
Net loss $ (2,101,000) $(3,602,000)
========== ==========
Basic and diluted loss per share:
Loss from continuing operations $(1.12) $(1.22)
Discontinued operations:
Loss from operations of Medicare agencies (.55)
Loss on disposal of Medicare agencies (.16)
---------- ----------
Net loss per share $(1.12) $(1.93)
---------- ----------
Weighted average number of common shares -
basic and diluted 1,869,375 1,869,375
========== ==========
See independent auditors' report and notes to financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficiency)
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
--------- ------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance - July 1, 1998 1,869,375 $37,000 $3,694,000 $ 1,776,000 $ 5,507,000
Net loss for the year (3,602,000) (3,602,000)
--------- ------ --------- ---------- ----------
Balance - June 30, 1998 1,869,375 37,000 3,694,000 (1,826,000) 1,905,000
Net loss for the year (2,101,000) (2,101,000)
--------- ------ --------- ---------- ----------
Balance - June 30, 1999 1,869,375 $37,000 $3,694,000 $(3,927,000) $ (196,000)
========= ====== ========= ========== ==========
See independent auditors' report and notes to financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
HELP AT HOME, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended
June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,101,000) $(3,602,000)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation 110,000 147,000
Amortization - 136,000
Non-operating income (12,000) -
Bad debt expense 3,045,000 928,000
Loss on sale of fixed assets - 18,000
Gain on forgiveness of debt - (241,000)
Write-off of impaired goodwill - 2,266,000
Deferred tax expense (benefit) 24,000 (293,000)
Changes in:
Accounts receivable (3,038,000) (2,662,000)
Prepaid expenses and other current assets 31,000 1,000
Accounts payable (268,000) 156,000
Accrued expenses and other current liabilities 3,243,000 748,000
Due to third-party payors (259,000) 474,000
Current income taxes 387,000 (307,000)
---------- ----------
Net cash provided by (used in) operating activities 1,162,000 (2,231,000)
---------- ----------
Cash flows from investing activities:
Acquisition of property (44,000) (63,000)
Proceeds from sale of property - 170,000
Increase in due from officer - (12,000)
---------- ----------
Net cash (used in) provided by investing activities (44,000) 95,000
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt - 3,004,000
Repayment of long-term debt (1,316,000 (1,326,000)
Net cash (used in) provided by financing activities (1,316,000) 1,678,000
---------- ----------
Net decrease in cash (198,000) (458,000)
Cash and cash equivalents - beginning of year 412,000 870,000
---------- ----------
Cash and cash equivalents - end of year $ 214,000 $ 412,000
========== ==========
<PAGE>
Supplemental disclosure of cash flow information:
Cash payments for:
Interest $220,000 $ 327,000
Supplemental disclosure of noncash investing and
financing activities:
Forgiveness of debt and accrued interest $ 241,000
See independent auditors' report and notes to financial statements
F-6
</TABLE>
<PAGE>
HELP AT HOME, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
NOTE A - 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 D), 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"), provided in-home
skilled health care services. Homemakers operated in the metropolitan
Montgomery, Alabama area; Lakeside (Missouri) and Rosewood operated in
the metropolitan St. Louis area; Lakeside (Illinois) operated in the
Chicago land area. Lakeside (Missouri), Rosewood and Homemakers of
Montgomery, Inc. were certified in their respective states to receive
Medicare reimbursement. On June 27, 1998, the Board of Directors
adopted a plan to dispose of these entities that provided in-home
skilled healthcare services (see Note P).
NOTE B - LIQUIDITY
The Company has incurred recurring operating losses, has negative cash
flows and negative working capital and in fiscal year 1999 has failed
to make payroll tax deposits with respect to certain periods.
Management believes that the Company's viability as a going concern is
dependent upon a return to profitability and positive cash flow and its
ability to better manage its accounts receivables. Management has
implemented several new practices to ensure that invoices are submitted
timely, collections are monitored and service delivery is halted when
it becomes apparent that the Company will not receive payment.
Management has also identified certain shortcomings in the area of
billings in one of its two computer systems and has decided to
eliminate that system and go back to its proprietary system by the end
of the calendar year.
<PAGE>
Management has closed or consolidated several of its unprofitable
operating locations in 1999 and expects to close or consolidate any
locations which are not contributing positively to the Company's
profitability in fiscal year 2000.
Effective July 1, 1999, the Company received a 7.9% increase from
its largest customer, the Illinois Department On Aging ("IDOA").
Management believes that this increase will have a significant positive
impact on the Company's profitability.
Finally, as further discussed in Notes I & Q the Company has refinanced
its long term debt which was in technical default at June 30th 1998.
There can be no assurances that the Company's ability to restructure
its accounts receivable collections as described above will be
successful. Management believes that the Company's ability to continue
as a going concern depends upon the successful collections of its
accounts receivable, a return to profitability and positive cash flows.
If the Company is unsuccessful in its efforts, the Company may be
unable to meet its obligations, making it necessary to undertake such
other actions as may be appropriate.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. 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. Management continually evaluates the outcome of these
reimbursement audits and provides allowances for any potential
adjustments. In the opinion of management retroactive adjustments,
if any, would not be material to the financial position or results
of operations of the company.
[3] 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>
[4] 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:
Software 3 years
Computers, autos, office and
medical equipment 5 years
Furniture and fixtures 7 years
Leasehold Improvements Lease term
[5] Loss per share:
Basic loss per share is based on the weighted average number of
common shares outstanding during the year. Diluted loss per share
reflects the potential dilution assuming common shares were issued
upon the exercise of outstanding options and warrants and the
proceeds thereof were used to purchase outstanding common shares.
The effect of the exercise of warrants and options issued are not
included as their effect on diluted earnings per share is anti-
dilutive.
[6] Cash and cash equivalents:
All highly liquid investments purchased with a maturity of three
months or less are considered to be cash equivalents.
[7] 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 the years ended
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>
[8] 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.
NOTE D - ACQUISITIONS
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. 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 in the year ended June 30,
1998. The write off of goodwill is included in Administrative Expenses
($1,404,000) and Loss from Operations of Medicare Agencies ($732,000).
<PAGE>
NOTE E - 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 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, 1999 and
1998, was as follows:
June 30,
-------------
1999 1998
---- ----
IDOA 33% 29%
Medicaid waiver 46 10
Medicare 5 13
Medicaid 6 21
Other third-party payors 1 18
Clients 9 9
---- ----
100% 100%
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 P).
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
June 30,
-------------------
1999 1998
------- -------
<S> <C> <C>
Furniture and fixtures $316,000 $342,000
Office, computer and medical 414,000 379,000
equipment
Autos 31,000 31,000
------- -------
761,000 752,000
Less accumulated depreciation (623,000) (548,000)
------- -------
$138,000 $204,000
======= =======
</TABLE>
The total amount of equipment recorded under capitalized leases
included above was $103,000 at June 30, 1999 and 1998, respectively.
Accumulated amortization on capital leases was $95,000 and $83,000 at
June 30, 1999 and 1998, respectively.
<PAGE>
NOTE G - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
June 30,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Accrued wages $1,080,000 $ 659,000
Accrued loss on discontinued operations 196,000 507,000
Payroll taxes accrued and withheld 393,000 502,000
Payroll taxes accrued and
withheld in arrears 2,167,000 -
Accrued penalties and interest -
payroll taxes 882,000 -
Income tax payable 163,000 -
Other 221,000 191,000
--------- ---------
$5,102,000 $1,859,000
========= =========
</TABLE>
NOTE H - INCOME TAXES
The provision (benefit) for federal and state income taxes consists of
the following:
<TABLE>
Year Ended
June 30,
-------------------
1999 1998
------- --------
<S> <C> <C>
Current:
Federal $ 90,000 $(469,000)
State 16,000 (83,000)
Deferred:
Federal 20,000 (249,000)
State 4,000 (44,000)
------- --------
$130,000 $(845,000)
======= ========
</TABLE>
<PAGE>
A reconciliation of income tax expense with federal income taxes at the
statutory rate follows:
Federal income taxes at the
statutory rate (34.0)% (34.0)%
Increase (decrease) in taxes
resulting from:
State income tax, net of federal benefit 1.0 (6.0)
Nondeductible items 15.5 1.0
Valuation of temporary differences 23.1 -
Amortization and write off of
nondeductible goodwil - 19.0
Other 0.6 1.0
---- ----
Income tax provision (benefit) 6.2 % (19.0)%
==== ====
The income tax effects of temporary differences that give rise to the
net deferred tax asset are as follows:
<TABLE>
1999 1998
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Cash to accrual basis adjustment $(153,000) $(153,000)
Discontinued operations, provision for doubtful
accounts and other 807,000 436,000
-------- --------
654,000 283,000
-------- --------
Noncurrent deferred tax assets (liabilities):
Cash to accrual basis adjustment - (153,000)
Jobs tax credit carryforward 55,000 55,000
Depreciation (3,000) (6,000)
-------- --------
Noncurrent deferred tax assets (liabilities) 52,000 (104,000)
-------- --------
Net deferred tax assets 706,000 179,000
Valuation allowance (706,000) (155,000)
-------- --------
Net deferred tax asset $ 0 $24,000
======== ========
</TABLE>
The Company has job tax credits of approximately $55,000 at June 30,
1999. These job credits expire in 2008. The Company's deferred tax
asset at June 30, 1999 has been fully reserved as its future
realization cannot be determined. 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 I - LONG-TERM DEBT
The following schedule details long-term debt
outstanding as of June 30:
<TABLE>
1999 1998
--------- ---------
<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 collateralized by accounts
receivable and the capital stock of all
subsidiaries. $1,604,000 $2,905,000
Notes collateralized by Company automobiles and
various capital leases for office and computer
equipment (see Note F). The notes are payable
in equal monthly installments and bear interest
at various rates between 9% and 18%. 3,000 18,000
--------- ---------
Total long-term debt 1,607,000 2,923,000
Less current portion 1,607,000 2,920,000
--------- ---------
Noncurrent portion of long-term debt $ 0 $ 3,000
========= =========
</TABLE>
Interest expense included in the results of operations for the years
ended June 30, 1999 and 1998 was approximately $237,000 and $333,000,
respectively.
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. The loan became due on December 30, 1998 at which time the
Company entered into a series of standstill agreements. The loan was
repaid in July 1999 when the Company refinanced its debt with a second
lender (see Note Q).
<PAGE>
NOTE J - COMMITMENTS AND CONTINGENCIES
[1] Leases:
The Company has operating lease commitments for office space and
equipment which have various expirations through 2003. 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, 1999 are as
follows:
Year
Ending
June 30,
-------
2000 $379,000
2001 222,000
2002 42,000
2003 13,000
-------
$656,000
=======
Rent expense under operating leases was $532,000 and $816,000 for
the years ended June 30, 1999 and 1998, 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 including items related to certain acquisitions. While
the ultimate result of the litigation or claims cannot be
determined, it is management's opinion based upon consultation with
counsel, that it has adequately provided for losses that may be
incurred related to these claims.
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. 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).
<PAGE>
[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 an
employment agreement with the Chief Operating Officer. In the
event of a change in control, the maximum aggregate salary
commitment for thise employee would be approximately $390,000 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.
[4] Payroll tax penalties and interest:
The Company has not paid certain federal and state payroll taxes
and payroll tax withholding liabilities during the year ended
June 30, 1999. Management has engaged counsel to represent the
Company with respect to these payments. The Company has reserved
approximately $882,000 for such penalties and interest through
June 30, 1999, however, there can be no assurance that the
respective taxing authorities will not take action against the
Company.
[5] Due to third-parties:
Through December 1998, the Company provided in-home skilled health
care services. Reimbursement for these services had been paid by
Medicare intermediaries to the Company. Amounts paid to the
Company are subject to audit. The Company has reserved
approximately $454,000 at June 30, 1999 to cover open cost report
periods which have not been finalized.
NOTE K - MAJOR CUSTOMER
Fees billed to one major customer, the IDOA accounted for approximately
$16,900,000 (60%) and $13,689,000 (59%) of the total revenues from
continuing operations for the years ended June 30,1999 and 1998,
respectively. The amounts due under such contracts totaled $2,219,000
and $2,110,000 at June 30, 1999 and 1998,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, 1999, management believes
the Company is in compliance with the contract.
<PAGE>
NOTE L - RELATED PARTY TRANSACTIONS
The Company has a loan outstanding to its majority shareholder in the
amount of $146,000 and $134,000, including accrued interest thereon, as
of June 30, 1999 and 1998 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, and again until July 31, 2000. The
majority shareholder has agreed to pay $15,000 annually to be applied
first to interest and the balance to reductions of principal. At the
expiration of his employment agreement, the unpaid balance will
approximate $130,000.
The Company entered into an employment agreement with the
Chairman/Chief Executive Officer, a major stockholder, effective in
December, 1997. Pursuant to the agreement, the stockholder will
receive a base salary of $230,000 subject to increases 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 and an annual
incenative bonus ranging from $25,000 to $100,000 based on after tax
income adjusted for non-cash expenses and extraordinary items.
The agreement also subjects the stockholder to noncompetition
provisions. The agreement includes the reimbursement of certain
personal expenses incurred by the Chairman due to his continuous travel
on the Company's behalf. The agreement also 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, 1999 and
1998 totaled $305,000 and $448,000, 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.
The Company, acting as a subcontractor, billed $73,000 in service fees
for the year ended June 30, 1998, to a not-for-profit organization in
which the majority stockholder is an officer. The amount due from this
organization was $91,000 at June 30, 1998 and was subsequently written
off. The organization occupies certain space in the Company's
leased facilities without charge.
A director of the Company received payments totaling approximately
$4,000 and $24,000 for the years ended June 30, 1999 and 1998,
respectively, for the provision of legal services to the Company.
<PAGE>
NOTE M - STOCK OPTIONS
The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting
for Stock Issued to Employees." Under the provisions of APB No. 25,
compensation arising from the grant of stock options is measured as the
excess, if any, of the quoted market price of the Company's common
stock at the date of the grant over the amount an employee must pay to
acquire the stock. 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 1999 and
1998. All options are excerciseble. No stock options have been
granted during 1999.
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 $1.22 for the year ended June 30, 1999 and $2.05 for the year
ended June 30, 1998. 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.
<PAGE>
NOTE N - STOCK WARRANTS OUTSTANDING
The Company has 1,638,750 issued and outstanding stock purchase
warrants as of June 30, 1998 and June 30, 1999. 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 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 ten 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.
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 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.
<PAGE>
NOTE O - REPORTABLE SEGMENTS
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 1999 is as follows (in
thousands):
<TABLE>
Alabama Illinois Missouri Mississippi Total
----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
Continuing
operations:
Revenues $3,103 $19,447 $1,328 $4,011 $27,889
Direct costs 2,193 13,216 810 2,871 19,090
----- ------ ----- ----- ------
Gross margin 910 6,231 518 1,140 8,799
Operating expenses 868 4,925 575 1,614 7,982
----- ------ ----- ----- ------
Operating income
(loss) $ 42 $1,306 $ (57) $ (474) $ 817
===== ===== ===== ===== =====
Total assets $1,398 $2,889 $1,637 $1,225 $7,149
===== ===== ===== ===== =====
</TABLE>
A reconciliation of the segments' net loss to the consolidated net loss
is as follows (in thousands):
Segments' net income $ 817
Plus:
Nonoperating income 12
Less:
Corporate overhead expense (2,800)
Income tax expense (130)
------
Consolidated net loss $(2,101)
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
Segments' total assets $7,149
Plus:
Corporate/support entities'
total assets 548
-----
Consolidated total assets $7,697
=====
<PAGE>
Information related to the Company's reportable segments for 1998 is as
follows (in thousands):
<TABLE>
Alabama Illinois Missouri Mississippi Total
----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
Continuing
operations:
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 income (237) 1,598 37 (1,844) (446)
(loss)
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>
A reconciliation of the segments' net loss to the consolidated net loss
is as follows (in thousands):
Segments' net loss $(2,060)
Plus:
Nonoperating income 541
Income tax benefit 845
Less:
Corporate overhead expense (2,928)
------
Consolidated net loss $(3,602)
======
A reconciliation of the segments' net assets to consolidated net assets
is as follows (in thousands):
Segments' total assets $7,303
Plus:
Corporate/support entities'
total assets 1,258
-----
Consolidated total assets $8,561
=====
<PAGE>
NOTE P - 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. In connection
with the Company's disposal plan, Lakeside (Illinois) ceased operations
as of August 31, 1998. Certain assets of Homemakers were sold for
$350,000 on October 9, 1998 and that entity's patients were
simultaneously transferred to a nonaffiliated provider. Rosewood was
closed as of October 30, 1998 and its patients transferred to another
nonaffiliated provider. Lakeside (Missouri) was closed on December 15,
1998 and its patients were transferred to another nonaffiliated
provider. Net liabilities of the Medicare agencies at June 30, are as
follows:
<TABLE>
1999 1998
------- --------
<S> <C> <C>
Cash $ 6,000 $ 32,000
Accounts receivable, net 299,000 842,000
Prepaid expenses and other - 4,000
Property and equipment, net - 10,000
Accounts payable (15,000) (311,000)
Accrued expense (196,000) (605,000)
Due to third-party payors (454,000) (713,000)
Long-term debt, current portion - (2,000)
------- --------
$(360,000) $(743,000)
======= ========
</TABLE>
The Medicare agencies' operations had revenues of $415,000 and
$2,437,000 in 1999 and 1998, respectively and losses from operations of
$311,000 and $1,025,000 in 1999 and 1998, respectively.
NOTE Q - SUBSEQUENT EVENTS
On June 17, 1999, the Company entered into a Master Factoring Agreement
(the "Agreement") with Oxford Commercial Funding, LLC. Under the terms
of the agreement, Oxford will advance 80% of the Net Diluted Value of
eligible accounts receivable, without recourse. The purchaser's fee is
.375% of the face value of each invoice every five days for a maximum
of 90 days. The purchaser's fee is subject to adjustment if certain
minimum terms are not maintained. The proceeds of the initial advance
under this agreement were taken on July 1, 1999, and were used to
satisfy the Company's secured bank debt.
On September 17, 1999, the Company and Oxford agreed on new terms under
the Agreement. Under these terms the purchaser's fee was replaced by
an interest rate of prime + 3.5%: the agreement is for a one-year term.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 4,961
<ALLOWANCES> 1,821
<INVENTORY> 0
<CURRENT-ASSETS> 7,325
<PP&E> 138
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,697
<CURRENT-LIABILITIES> 7,893
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> (233)
<TOTAL-LIABILITY-AND-EQUITY> 7,697
<SALES> 27,889
<TOTAL-REVENUES> 27,889
<CGS> 19,090
<TOTAL-COSTS> 19,090
<OTHER-EXPENSES> 10,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> (1,971)
<INCOME-TAX> 130
<INCOME-CONTINUING> (2,101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,101)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
