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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-28134
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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HOUSECALL MEDICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 58-2114917
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
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1000 ABERNATHY ROAD, BUILDING 400, SUITE 1825, ATLANTA, GEORGIA 30328
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 379-9000
Name of exchange on which registered: None
Securities pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark 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-K or any amendment to this
Form 10-K --------- .
Aggregate market value of the voting stock held by non-affiliates (which
for purposes hereof are all holders other than executive officers and directors)
of the registrant as of September 25, 1996: $23,796,921.75 (based on 10,218,900
shares outstanding at $5 1/4 per share; the last sale price on The Nasdaq Stock
Market on September 25, 1996.)
At September 25, 1996, there were issued and outstanding 10,218,900 shares
of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1996 Annual
Meeting of Shareholders, to be filed with the Commission, are incorporated into
Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Housecall Medical Resources, Inc. (the "Company" or "Housecall") is a
Delaware corporation formed on June 6, 1994 to acquire Housecall, Inc. (referred
to herein as the "predecessor" of the Company) and to develop a home health care
services company that provides a comprehensive range of high quality, cost-
effective services and products with a substantial market share in the
Southeastern United States and select other geographic regions. As of August 1,
1996, the Company had 114 owned and 39 managed branch offices in fourteen states
and the District of Columbia. Housecall provides a comprehensive range of home
health care services, including nursing and related care, infusion therapy,
hospice care, respiratory therapy, and home medical equipment. The Company also
provides management services -- consisting of clinical and marketing support,
computerized billing and records retention services, staffing, and other general
administrative support -- to 37 clients who own home health agencies.
By offering a comprehensive range of high quality, cost-effective services
and products, the Company seeks to provide an efficient and convenient
"one-stop-shop" for patients, their physicians, managed care organizations, and
other third party payors to efficiently source their home health care service
requirements from a single provider. Housecall's approach to "one-stop-shop"
home health care services includes the capacity to provide care in residential
environments other than patients' homes, such as nursing homes and retirement
communities, and includes hospice care services as well. Through strategic
acquisitions and alliances and by internal expansion, Housecall is seeking to
develop a substantial market presence as the leading provider of comprehensive
home health care services in the Southeast and select Midwestern states.
SIGNIFICANT ACQUISITIONS
The Company acquired its predecessor on July 1, 1994. Since the acquisition
of its predecessor, the Company has completed three significant acquisitions
(the "1995 Acquisitions"): (i) the purchase of all the stock of Medical Support
Services, Inc. ("MSS") on February 3, 1995; (ii) the purchase of all the stock
of Home Care Affiliates, Inc. ("Home Care") on May 31, 1995; and (iii) the
purchase of all the stock of Biomedical Home Care, Inc. ("Biomedical") on July
10, 1995. MSS, based in Centreville, Alabama, had been engaged for four years
exclusively in providing management and administrative service to home health
care agencies; its operations now form the principal portion of the Company's
Housecall Management Services Division. Home Care, based in Louisville,
Kentucky, had commenced operations in 1986, and provided substantially the same
range of services and products as the Company's predecessor. Home Care had
operations in Florida, Indiana, and Kentucky, in addition to Tennessee.
Biomedical, based in Raleigh, North Carolina, had been formed in 1983 and was
engaged primarily in the provision of infusion therapy services in markets
across the United States. The Biomedical acquisition added substantially to the
Company's infusion therapy services business and contributed a large
professional staff of infusion therapists and pharmacists. The Company has
organized its Housecall Infusion Services Division around the operations
acquired in the Biomedical transaction.
Unless otherwise indicated, references herein to "the Company" or
"Housecall" with respect to the nature or source of operations (or to the length
of time operations have been conducted) include the historical operations of
MSS, Home Care, and Biomedical, but such references with respect to historical
financial data do not include the historical financial data of any such entity
prior to the time of its acquisition by the Company.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Many of the matters discussed in this Annual Report on Form 10-K are
forward looking statements. These statements involve a number of risks and
uncertainties that could cause actual results to differ
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materially from any such statement. The following is a nonexclusive list of
factors that could cause actual results to differ materially:
Health Care Reform. The health care industry has experienced extensive and
dynamic change. In addition to economic forces and regulatory influences,
continuing political debate is subjecting the health care industry to
significant reform. Health care reform proposals have been formulated by the
current administration, members of Congress, and, periodically, state
legislators. Government officials can be expected to continue to review and
assess alternative health care delivery systems and payment methodologies.
Changes in the law or new interpretations of existing laws may have a dramatic
effect on the definition of permissible or impermissible activities, the
relative costs of doing business, and the methods and amounts of payment for
medical care by both governmental and other payors. Such reforms could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Unpredictability of Changes in Government Reimbursement Programs. In
fiscal 1996 approximately 61% of the Company's net revenues was derived from
Medicare cost-based reimbursement; approximately 5% was derived from Medicare
charge-based reimbursement; approximately 6% was derived from the TennCare
Program; and approximately 2% was derived from Medicaid. Currently, Medicare
(cost-based) reimburses the Company for covered home health care services at the
lowest of the Company's reimbursable costs (based on Medicare regulations), cost
limits established by the Health Care Financing Administration ("HCFA"), or the
Company's charges. Medicare (charge-based) reimburses the Company on a
"prospective payment" system. The TennCare Program in Tennessee provides for
reimbursement based on a fee schedule for covered services. The level of net
revenues and profitability of the Company, like those of other home health care
companies, will be subject to the effect of possible reductions in coverage or
payment rates by such payors or the application by payors of existing
regulations in a manner designed to maximize cost savings. Such changes could
have a material adverse effect on the Company's business, results of operations,
or financial condition.
The ultimate timing or effect of legislative efforts and market-driven
reforms with respect to Medicare, Medicaid, and other government reimbursement
programs cannot be predicted. For example, HCFA has issued regulations, which
are stated to be effective from July 1, 1996, that establish new Medicare cost
limits that could reduce the level of Medicare cost-based payments for certain
home health care services as provided in certain regions of the country,
depending primarily upon the effect of the regulations' wage index budget
neutrality factor. An industry group has challenged the new HCFA limits, and
President Clinton's fiscal 1997 budget contains a proposal to extend the
moratorium on changes to Medicare cost limits that had been established by the
Omnibus Budget Reconciliation Act of 1993.
More generally, the United States Department of Health and Human Services
("HHS") has been studying for some time the feasibility of changing the current
Medicare cost-based reimbursement system for home nursing services to a
charge-based system. In August 1993, Congress passed the Omnibus Budget
Reconciliation Act of 1993, which included plans for approximately $56 billion
in reimbursement reductions to the Medicare program over five years. Congress
has considered from time to time proposals to reduce Medicare and Medicaid
spending increases over the next few years. In another particular situation
involving home health care services, HCFA proceeded in August 1996 with its
proposal to recommend a 40% reduction in Medicare's reimbursement for oxygen and
certain related services, by issuing an inherent reasonableness notice. The
proposal was submitted by HCFA for approval by the Secretary of the HHS and, if
it is approved there, would be subject to final approval by the Office of
Management and Budget ("OMB"). Home health care industry groups are challenging
the proposal, which had been dormant for over a year, and there is no required
time frame within which either the Secretary of HHS or the OMB must act on the
proposal. The impact of any such changes, when and if implemented, on the
Company's results of operations cannot be predicted at this time. There can be
no assurance that any such efforts or reforms will not have a material adverse
effect on the Company's business, results of operations, or financial condition.
Increased Pricing Pressure. The health care industry is currently
experiencing market-driven reforms from forces within the industry that are
exerting pressure on health care companies to reduce health care costs.
Specifically, Medicare, Medicaid, and other payors such as health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), traditional
indemnity insurers, and third party
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administrators ("TPAs") are increasing pressure on health care providers to
control health care costs and are limiting increases in, and in some cases
decreasing, reimbursement rates for medical services. In addition, such payors
are carefully examining each reimbursement claim to find ways to maximize cost
savings, thereby cutting the payor's costs. Such pricing pressures and practices
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
According to recent press reports, an industry study found Tennessee to
have the highest Medicare home health care costs in the nation, primarily due to
a higher than average number of visits per patient. As a result of the study's
findings and the related publicity, the Company expects increased scrutiny by
both governmental and private third party payors of reimbursement claims for
services provided in the State of Tennessee, and in other parts of the
southeastern United States, where the study also found home health care costs to
be higher than the U.S. average. A heightened level of examination of costs
associated with the provision of home health care services in Tennessee may
result in more audits of the Company's revenues and expenses, different
interpretations of existing laws and regulations, or new laws and regulations,
which could cause reimbursement delays, adjustments in the Company's claims for
reimbursement, or the disallowance of certain claims. Any such developments
could have a material adverse effect on the Company's business, results of
operations, or financial condition.
Risks Associated with Acquisitions and Geographic Expansions. An important
element of the Company's growth strategy is the acquisition of other home health
care companies. The Company has acquired five such companies since July 1, 1994,
and intends to pursue additional acquisitions in the future. There can be no
assurance that the Company will be able to realize expected operating and
economic efficiencies from the recent acquisitions or from any future
acquisitions. In attempting to make acquisitions, the Company often competes
with other potential acquirors, many of whom have greater financial or
operational resources. There can be no assurance that the Company will be able
to successfully locate, negotiate, finance, and integrate the types of
acquisitions it desires. Even if the Company is able to complete such
acquisitions, there can be no assurance that the operations, personnel, and
management information systems of such acquired businesses will be successfully
integrated into the Company without material disruptions or unexpected expenses.
Any such failure to effectively integrate acquisitions may adversely impact
operations or profitability. The consummation of acquisitions could result in
the incurrence or assumption by the Company of additional indebtedness and the
issuance of additional equity. There can be no assurance that any such financing
can be obtained by the Company on favorable terms or at all.
The Company will seek to acquire market share in other areas of the
Southeast and in the Midwest. While such geographic expansion is expected to
yield significant competitive benefits for the Company's overall operations,
entering new geographic markets will require the Company to establish
relationships with new or additional referral sources. When such entry is
accomplished through an acquisition, the Company may be dependent upon prior
management to continue or assist with developing important relationships with
local referral sources. In addition, the Company may face competitors with
stronger relationships with referral sources in such local markets. There can be
no assurance that the Company will be able to maintain prior local management in
acquired companies, will be able to integrate prior local management into a
larger business with various divisions, establish referral sources, realize
operating efficiencies, or otherwise establish a significant preference in these
new geographic markets.
High Level of Current Geographic Concentration. Approximately 83% of the
Company's net revenues in fiscal 1996 were derived from its operations in
Tennessee and Florida. Unless and until the Company's operations become more
diversified geographically (as a result of acquisitions or internal expansion),
adverse economic, regulatory, or other developments in Tennessee or Florida
could have an adverse effect on the Company.
Dependence on Referral Sources. The growth and profitability of the
Company depend on its ability to establish and maintain close working
relationships with referral sources, including payors, hospitals, physicians,
and other health care professionals. Managed care organizations, which are
exerting an increasing amount of influence over the health care industry, have
become, and will continue to be, increasingly important to the Company as
referral sources. There can be no assurance that the Company will be able to
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successfully maintain existing referral sources and cultivate new referral
sources, or that certain of its referral sources, particularly managed care
organizations and hospitals, will not become providers of home health services.
The loss of any significant existing referral sources or the failure to
cultivate important new referral sources (such as managed care organizations)
could have a material adverse effect on the Company's business, results of
operations, or financial condition.
Other Governmental Regulations. The Company is subject to extensive
federal, state, and local regulation, in addition to the reimbursement programs
discussed above. New laws and regulations are adopted periodically to regulate
new and existing products and services in the health care industry. Changes in
laws or regulations or new interpretations or applications of existing laws or
regulations can have a dramatic effect on operating methods, costs, and
reimbursement amounts provided by government and other third-party payors. For
instance, the Company was recently denied Medicare reimbursement for 325 claims
for home health care visits because the physicians that authorized and reviewed
the patients' plans of care delegated the responsibility for manually signing
the physicians' names on required Medicare forms to their personnel, rather than
signing each form themselves. Because the signatures were original and in proper
form, the Company had no reason to suspect that the signatures did not conform
to Medicare requirements, yet Medicare reimbursement was denied.
In addition to Medicare reimbursement, federal laws governing the Company's
activities include regulations covering the repackaging and dispensing of drugs,
payment of remuneration in exchange for patient referrals, and the provision of
certain services where a financial relationship exists between the physician and
the person providing the service. The Company is subject to state laws governing
Medicaid, professional training, certificates of need, licensure, the dispensing
and storage of pharmaceuticals, payment of remuneration in exchange for patient
referrals, and the provision of certain services where a financial relationship
exists between the physician and the person providing the service. The branch
offices operated by the Company must comply with all applicable laws,
regulations, and licensing standards. In addition, many of the Company's
employees must maintain certain licenses in order to provide some of the
services offered by the Company. There can be no assurance that federal, state,
or local governments will not change existing standards, or impose additional
standards, or that the Company will meet, or continue to meet, existing or
future standards relating to some aspect of the Company's operations. Any such
development might adversely affect the Company's business.
The Company is subject to federal and state laws prohibiting direct or
indirect payments for patient referrals and regulating reimbursement procedures
and practices under Medicare, Medicaid and state programs, as well as in
relation to private payors, which prohibit referrals to an entity in which the
referring provider has a financial interest. The anti-kickback provisions of the
federal Medicare and Medicaid Patient and Program Protection Act of 1987 (the
"Anti-Kickback Statute") prohibit the offer, payment, solicitation, or receipt
of any remuneration in return for the referral of items or services paid for in
whole or in part under the Medicare or Medicaid programs (or certain other state
health care programs). To date, courts and government agencies have interpreted
the Anti-Kickback Statute to apply to a broad range of financial relationships
between providers and referral sources, such as physicians and other
practitioners. The criminal penalty for conviction under the Anti-Kickback
Statute is a fine of up to $25,000 and up to five years of imprisonment. In
addition, conviction mandates exclusion from participation in the Medicare and
Medicaid programs.
The federal government has also enacted legislation (commonly known as
"Stark II"), which prohibits physicians from making referrals to entities in
which they (or immediate family members) have an investment interest or other
compensation arrangement where such referral is for the provision of specific
"designated health services" covered by Medicare or Medicaid. The current
listing of "designated health services" includes home health services, equipment
and supplies, parenteral and enteral nutrients, ultrasound services, and home
medical equipment, all of which are provided by the Company. If such a financial
relationship exists and referrals are made for the provision of such designated
health services, the physician will be prohibited from making a referral to the
health care provider, and the provider will be prohibited from billing for the
designated health service for which Medicare or Medicaid payment would otherwise
be made. It is the Company's policy to monitor closely its compliance with Stark
II and to take appropriate actions to ensure
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such compliance, but there can be no assurance that all relationships between
the Company and physicians will be found to be in compliance with Stark II. A
violation of Stark II could result in civil penalties and exclusion from
participation in Medicare and Medicaid programs.
Many states have also adopted statutes and regulations that vary from state
to state prohibiting provider referrals to an entity in which the provider has a
financial interest (direct or indirect), remuneration or fee-splitting
arrangements between health care providers for patient referrals, and other
types of financial arrangements with health care providers. Sanctions for
violation of these state restrictions may include loss of licensure and civil
and criminal penalties. Certain states also require health care practitioners to
disclose to patients any financial relationship with a provider and to advise
patients of the availability of alternative providers.
Reimbursement Payment Delays. The Company generally is paid for its
services by government health administration authorities, insurance companies,
or other third party payors, not by the patients themselves. The home health
care industry is generally characterized by long collection cycles for accounts
receivable due to the complex and time consuming requirements for obtaining
reimbursement from private and governmental third party payors. In addition,
reimbursement from government payors is subject to examination and retroactive
adjustment. Such delays or retroactive adjustments can lead to cash shortages,
which may require the Company to borrow funds to meet its ongoing obligations.
The Company would be adversely affected if it were to experience such
difficulties and were unable either to borrow funds or to borrow funds on
acceptable terms to meet possible cash shortages.
The Company's average collection cycle is currently 36 days for
governmental third party payors and 84 days for private third party payors, both
of which the Company believes are consistent with or below the averages in the
industry, and neither of which has fluctuated in any significant respect.
Dependence on Key Personnel. The Company's growth and success are highly
dependent on the skills and efforts of its Chief Executive Officer, George D.
Shaunnessy; its Chief Operating Officer, Harold W. Small; its Chief Financial
Officer, Peter J. Bibb; and a number of its other key management and
professional personnel. Although the Company has been successful in hiring
qualified and experienced personnel, the loss of services of any of the above
executive officers or other key personnel could have a material adverse effect
on the Company. In addition, the Company's future growth and development will
require it to continue to attract and retain additional qualified personnel.
Competition for qualified management personnel and health care professionals is
strong. There can be no assurance that the Company will be able to attract and
retain personnel with the skills and experience needed to successfully manage
the Company's business and operations.
Competition. Although the home health care market currently remains highly
fragmented, there are increasing pressures toward market consolidation. The
increasing role of third party payors in directing patients to specific
companies and the economies of scale associated with larger operations are
expected to result in further market consolidation. While the Company's
objective is to increase market share and presence in its markets, the Company
will face significant competition from other companies in making acquisitions.
The Company will also face competition for patient referrals and important
personnel in many (if not most) of its markets regardless of the market share
and presence it is able to establish. In addition, relatively few barriers to
entry exist in the home health care industry in states that do not impose a
certificate of need ("CON") requirement, and so new companies (perhaps including
managed care organizations and major health care providers not currently serving
the home health care market) may become competitors. Some of the Company's
present or potential competitors have or may obtain greater financial or other
important resources than the Company, which could have a material adverse effect
on the Company's ability to achieve its objectives.
Liability and Adequacy of Insurance. Providing health care services
entails an inherent risk of liability. In recent years, participants in the home
health care industry have become subject to an increasing number of lawsuits
alleging malpractice, product liability, or negligence, many of which involve
large claims and significant defense costs. It is expected that the Company
periodically will be subject to such suits as a result of the nature of its
business. The Company currently maintains liability insurance intended to cover
such
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claims. There can be no assurance, however, that claims in excess of the
Company's insurance coverage or claims not covered by the Company's insurance
coverage (e.g., claims for punitive damages) will not arise. A successful claim
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company and its financial condition. Claims
against the Company, regardless of their merit or eventual outcome, may also
have a material adverse effect upon the Company's ability to attract patients or
to expand its business. In addition, the Company's insurance policies must be
renewed annually. There can be no assurance that the Company will be able to
obtain liability insurance coverage in the future on acceptable terms, if at
all.
INDUSTRY OVERVIEW
Home health care is among the fastest growing segments of the health care
industry, with total expenditures in 1994 of approximately $30.3 billion, up
from approximately $12.9 billion in 1990, and estimated expenditures in 1995 of
approximately $36.1 billion. With total health care expenditures increasing at
twice the rate of inflation in recent years to approximately $1.1 trillion in
1995, the pressure to contain health care costs, while maintaining high quality
care, has intensified. As a result, the growth of less expensive alternate site
care that reduces hospital admissions and lengths of stays, such as home health
care (which in 1995 is estimated to have accounted for only 3% of total health
care expenditures), has accelerated. The Company believes that such growth in
home health care is influenced by the following industry and demographic factors
and trends:
- Cost-Effective Alternative. Medicare's diagnostic related group (DRG)
reimbursement system makes it more cost-effective for hospitals to
discharge Medicare patients earlier, requiring follow-up professional care
for many patients in their homes or other residential environments. In
addition, managed care organizations, which have become increasingly
important in recent years, have recognized that home health care offers a
less costly alternative to in-patient hospital care.
- Technological Advances. Advances in medical technology have made it
possible to deliver an increasing amount of high quality professional
health care in the home and other residential environments. In the last 15
years, the number of medical conditions treated in the home increased from
approximately 30 to over 1,200. Not only are there more types of medical
services that can be safely and effectively performed at home, but such
services can also be administered to higher acuity patients.
- Demographic Trends. As the U.S. population ages, the number of patients
with chronic conditions requiring professional home care services is
increasing. The U.S. Bureau of the Census has estimated that in 1995 12.8%
of the U.S. population would be 65 or more years of age, with the
population of persons over 85 years of age growing at an annual rate of
3.6%, more than three times faster than the total population.
- Patient Preference for Home Care. In general, patients prefer to
recuperate in their homes, where they are more comfortable than in a
hospital or other institutional environment and can enjoy the close
support of family and friends. Moreover, it is generally believed that
patients recover more quickly in such home environments.
Historically, the home health care industry has been highly fragmented,
with a large number of small local providers serving in discrete geographic
areas and typically offering a single service or perhaps offering a range of
services on terms that are not cost-effective. An estimated 13,000 home health
agencies, with an average of 34 full-time and 36 part-time employees per agency,
were providing home health care services in the United States in 1994. However,
as managed care has become more prevalent, payors for home health care are
increasingly seeking single providers that can deliver or coordinate the
delivery of a cost-effective, comprehensive range of services in broad
geographic markets. Small local providers often do not have the capital
necessary to expand the geographic scope of their operations or to offer a
comprehensive range of services, which limits their ability both to compete for
such managed care business and to realize efficiencies in their operations.
These factors are driving rapid consolidation in the home health care industry.
Because of
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the extent of the historical fragmentation, however, consolidation opportunities
remain for several existing companies and well-capitalized new companies.
STRATEGY AND PRINCIPAL INITIATIVES
The Company has based its strategy and growth objectives on the above
industry trends. Housecall's principal strategic initiatives include:
Leveraging Nursing Services into Additional Services. The largest
sector of the home health care industry is the provision of nursing and
related care, which in 1994 represented approximately 64% of the $30.3
billion home health care market in the United States. Home nursing and
related care represents the core of the Company's business. The
relationship of the home nurse to patients and referral sources provides an
opportunity to identify other service requirements, such as hospice care,
infusion therapy, and respiratory therapy, and to influence referral
decisions to a specific home health care provider. The Company's principal
strategy is to leverage its substantial expertise and capacity in home
nursing services to create opportunities to provide additional types of
home health care services. Such other services have traditionally yielded
higher operating margins for the Company than basic nursing services.
Cultivating Managed Care Referral Sources. The Company has focused a
major part of its development and marketing efforts on managed care
organizations, as these organizations are increasingly influencing the
decision of which home health provider a patient will use. After assuring
high quality of care, managed care organizations are primarily concerned
with cost-effectiveness and the convenience of accessing a comprehensive
range of patient services through contracts or other arrangements with a
limited number of home health care providers. Housecall intends to meet
these needs by offering comprehensive "one-stop-shop" services, by
providing utilization and outcomes reporting that facilitate cost
containment goals, and by developing specialty programs that address
specific needs of population groups that are particularly important to such
organizations. The Company is also developing the necessary infrastructure
to offer capitated arrangements where required by such organizations.
Building Critical Mass and Market Presence. The Company believes that
a critical mass of operations within selected markets promotes important
internal operating efficiencies. Such efficiencies, in turn, are essential
to Housecall's ability to offer a comprehensive range of high quality,
cost-effective home health care services that will attract significant
referrals from cost-conscious managed care organizations. The Company also
believes that its presence as a leading provider in its markets will
facilitate such referrals. The Company will continue to acquire critical
mass and build market presence through targeted acquisitions, internal
expansion, and strategic alliances.
Developing Strategic Alliances. The Company seeks, in select markets,
to develop alliances with leading institutional health care providers,
primarily hospitals, by providing management services for their home health
care operations. The scope of alliances may range from providing management
or consulting services to Medicare certified home health agencies to
entering into joint ventures in infusion therapy, private nursing or
hospice programs. Such management relationships typically increase the
Company's presence as a home health care provider because Housecall and its
personnel are often directly involved (on behalf of the managed provider
agency) with the referral and payor sources doing business with the agency.
For example, in one instance to date, the Company has employed a
sale/manage-back model for such affiliations in a situation where Housecall
has duplicate certificates of needs ("CONs"). The Company sold its local
Medicare-certified home health agency to a community hospital, and the
hospital engaged the Company to manage the business on the hospital's
behalf.
Developing Provider Networks. A key element of the Company's
"one-stop-shop" objective is to develop the capacity to offer a
comprehensive range of home health services in each of its geographic
markets. In important geographic markets where the Company's direct
provision of certain services is not feasible or desirable, the Company
will utilize subcontracting arrangements with other providers to form a
network that is directly accessible through a single call to the Company.
The Company's provider networks include over 100 Housecall-credentialed
home health providers under contract with the
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Company who provide coverage for home health services in various locations
in eight states where such services or products are not presently provided
directly by the Company.
SERVICES AND PRODUCTS
The Company derives substantially all of its net revenues from the
provision of nursing and related care services, infusion therapy, hospice care,
respiratory therapy, home medical equipment, and other specialty services and
programs for patients in the home and other residential environments. The
Company also provides various management services for home health agencies owned
by other providers. The following table sets forth the percentage of net
revenues from the above lines of business for the periods presented:
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TWELVE MONTHS
ENDED
JUNE 30,
(PRO FORMA
COMBINED)(1) YEAR ENDED
------------- JUNE 30,
1994 1995 1996
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Nursing and related care..................................... 77.4% 76.8% 78.5%
Infusion therapy............................................. 14.0 12.0 9.7
Hospice care................................................. 2.8 3.8 5.0
Respiratory therapy.......................................... 1.1 1.4 .9
Management services.......................................... 4.0 3.9 4.0
Home medical equipment....................................... 0.7 2.1 1.9
----- ----- -----
Total.............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- - ---------------
(1) The above amounts for the 1994 and 1995 fiscal year periods are presented on
a pro forma combined basis to reflect the results achieved by the companies
acquired by Housecall in the 1995 Acquisitions.
High quality, professionally supervised care for all patients is the
Company's paramount objective. In order to assure that patients are receiving an
appropriate level of care in a cost-effective manner, each patient is assigned
to a Care Management Team of the Company's professional employees. Under the
direction of a Case Manager, typically a registered nurse, team members work
together with the patient's physicians and payors to implement a cost-effective
plan of treatment tailored to the patient's individual needs and goals. The Case
Manager closely monitors the patient's care plan and maintains ongoing contact
with his or her physicians to report any changes in the patient's condition. The
Case Manager also communicates with the payor's case managers at agreed-upon
intervals to keep the payor apprised of the patient's progress.
NURSING AND RELATED CARE
It is estimated that approximately $22.8 billion was expended in the United
States in 1995 for nursing and related care services (or "nursing services")
provided in the home, and that expenditures for these services have grown at a
compound annual rate of approximately 26.7% from 1989 to 1994. For 1996, it is
estimated that 63% of all home health care expenditures in the United States
will be for nursing services.
Nursing services represent the core of the Company's business. Management
expects such services to continue to account for the largest proportion of the
Company's revenues, and to achieve significant growth, over the next several
years. Housecall intends to use its expertise and market coverage in providing
nursing services to increase its volume of other health care services, such as
hospice care, infusion therapy, and respiratory therapy, which are reimbursed by
all payors on a charge-based system.
9
<PAGE> 10
Housecall offers a broad range of nursing services through its team of
Company-employed nursing professionals, specialty therapists, and home health
aides. The Company's nursing professionals fall into the following categories:
Nursing Professionals
- Registered Nurses to provide a broad range of nursing care services,
including pain management, respiratory therapy, infusion therapy, skilled
observation and assessment, communication with the attending physician,
and patient instruction regarding medical and technical procedures.
- Licensed Practical Nurses to perform a variety of technical nursing
procedures, including injections and dressing changes.
Specialty Therapists
- Physical Therapists to provide services related to the reduction of pain
and improved rehabilitation of joints and muscles, including strength and
range-of-motion exercise and massage.
- Occupational Therapists to assist patients in restoring their ability to
perform routine activities of daily life.
- Speech Therapists to retrain patients who have swallowing difficulties or
speech, language, or hearing problems.
- Social Workers to help patients and their families deal with the
emotional, financial, and personal problems that may occur as a result of
illness or disability.
Home Health Aides
- Home Health Aides, operating under the supervision of a nurse, to provide
a variety of personal care services, such as bathing and assistance with
walking.
- Homemakers/Companions to assist with meal preparation and housekeeping.
The Company also offers several specialty nursing services and programs to
meet the needs of identified patient groups covered by a managed care or other
third party program: Housecall BabyCARE -- a specialized prenatal care service
which offers prenatal education to members of managed care organizations;
Housecall PediCARE -- which provides home-based care in a cost-effective manner
to children with special medical needs; Housecall SeniorCARE -- which offers
senior citizens customized benefits designed to complement Medicare HMO
benefits; Housecall CancerCARE -- which offers traditional hospice care services
to terminally ill cancer patients who choose not to enroll in a Medicare
certified hospice program; Housecall PsychCARE+ -- which provides an
interdisciplinary team approach for patients with primary psychiatric disorders
or secondary emotional problems; and Housecall Rehab CARE+ -- which offers
patients recovering from accidents, surgery, stroke and other debilitating
illnesses professional rehabilitation, including physical, speech and
occupational therapies, in the convenience of their homes.
INFUSION THERAPY
It is estimated that approximately $6.2 billion was expended in 1995 for
home infusion therapy in the United States, and that expenditures for such
services have grown at a compound annual rate of approximately 24% from 1989 to
1994.
Housecall provides infusion therapy services from four Company-owned
pharmacies in North Carolina and Florida. For service areas where the Company
does not have a branch office, the Company contracts with other pharmacies
through its networks to provide coverage in those areas. See "-- Provider
Networks". The Company is seeking to increase its volume of infusion therapy
business, and has formed one of the Company's three operating Divisions around
the delivery of infusion therapy services. See " -- Operations".
10
<PAGE> 11
Infusion therapy involves the administration of antibiotics, nutrients, or
other medications intravenously, intramuscularly, subcutaneously, or through a
feeding tube. All pharmacy services necessary to support infusion therapy
treatments provided by the Company are directed by a licensed pharmacist and
coordinated by a group of specially trained registered nurses who use advanced
medical equipment and supplies to carry out the prescribed treatment plan.
Infusion therapy nurses also assist with the ongoing monitoring of the patient's
treatment plan as part of the Company's Care Management Team. Patient progress
and performance are reported on a regular basis to the attending physician and
the payor case manager, and adjustments are made to the treatment plan when and
as ordered by the physician. The Company's pharmacists are accessible to the
patient, nurse, payor case manager, and physician for consultation.
The Company provides a comprehensive range of home infusion therapy
services, including the following:
- Antibiotic Therapy -- the infusion of antibiotic agents directly into the
patients' blood stream to treat a variety of serious infections, such as
osteomyelitis (bone infections), bacterial endocarditis (infection of the
heart), cellulitis, septic arthritis/bursitis, wound infections, and the
recurrent infections associated with the kidney and urinary tract and
AIDS.
- Enteral Nutrition Therapy -- the administration of nutrients to patients
who cannot eat as a result of an obstruction of the digestive tract or
because they are unable to swallow due to a neurological or mechanical
problem.
- Pain Management Therapy -- the administration of analgesic medications to
terminally or chronically ill patents suffering from acute or chronic
pain.
- Total Parenteral Nutrition -- the intravenous administration of life
sustaining nutrients to patients with impaired or altered digestive tracts
due to a gastrointestinal illness.
- Chemotherapy -- the intravenous administration of medications to patients
with various types of cancer.
- Congestive Heart Failure Therapy -- the administration of drugs such as
dobutamine to help strengthen cardiac functions.
- Hemophilia Therapy -- the administration of agents that promote blood
clotting (such as Factor VIII, Anti-inhibitor Coagulant, and Factor IX
complex).
- Immunomodular Therapy -- the administration of a number of endogenous
human proteins, as well as synthetic glycoproteins, which are used to
augment or stimulate the immune system. These therapies are usually
administered subcutaneously or intravenously on a daily or intermittent
basis.
HOSPICE CARE
It is estimated that approximately $1.2 billion was expended on
Medicare-certified hospice care services in the United States in 1994, and that
such services have grown at a compound annual rate of approximately 42%.
Medicare initiated reimbursement for hospice benefits in 1982, eight years after
hospice programs were first offered in the United States. Medicare's
charge-based reimbursement for hospice programs is at a regionally adjusted
daily rate, with the hospice being responsible for most health care costs
required to care for the patient. Medicare hospice benefits are available to
Medicare beneficiaries with an estimated life expectancy of less than six
months. The number of Medicare-certified hospices has grown from 31 in January
1984 to 1,602 in 1994, though only 22% of home health agencies in the United
States offer hospice care services. Hospice care has traditionally been offered
primarily by non-profit and charitable organizations, but has recently become
more attractive to for-profit providers.
The Company offers a Medicare-certified hospice program throughout
Tennessee and in portions of Virginia. Hospice care is a coordinated program of
palliative and supportive services provided in both the home and in-patient
settings that provides for physical, psychological, social, and spiritual care
for terminally ill persons and their families. Hospice care services include
nursing and personal care, counseling and specialized therapy services, and the
provision of equipment, supplies, and medications. Hospice care services
11
<PAGE> 12
are provided by an interdisciplinary team of professionals and volunteers, under
the direction of a medical professional. Bereavement care is also available to
the family following the death of the patient.
Hospice care is a service area that the Company has targeted for
significant expansion over the longer term. Management believes such expansion
will be facilitated by Housecall's substantial expertise and presence in the
nursing services and infusion therapy areas. In states where a certificate of
need is required to provide hospice care, including Tennessee and Florida, any
expansion would require the acquisition of an existing provider or the issuance
of a new CON; in states where no CON is required, the Company expects to expand
internally by opening new locations. Very few of the Company's home health care
services competitors provide hospice care, and management believes the Company
may be able to further distinguish itself from its competitors by including
hospice care as part of its more comprehensive "one-stop-shop" home health
services approach.
RESPIRATORY THERAPY
It is estimated that approximately $4.8 billion was expended in the United
States in 1995 for respiratory therapy services provided in the home, and that
such services have grown at a compound annual rate of approximately 26% from
1989 to 1994.
The Company provides home respiratory therapy services to patients who
suffer from a variety of conditions, including asthma, chronic obstructive
pulmonary diseases (for example, emphysema and bronchitis), cystic fibrosis, and
neurologically-related respiratory conditions. The Company owns and operates
respiratory therapy branch offices in Florida and North Carolina and its network
of subcontracted home health care providers includes respiratory therapy
providers in Florida. The Company presently offers the following respiratory
therapy services:
- Oxygen systems, of which there are three types: (i) Oxygen concentrators,
which are stationary units that extract oxygen from ordinary air to
provide a continuous flow of oxygen, (ii) liquid oxygen systems, which are
portable, thermally-insulated containers of liquid oxygen, and (iii) high
pressure oxygen cylinders, which are used for portability with oxygen
concentrators.
- Nebulizers, which deliver aerosol medication to patients to treat asthma,
chronic obstructive pulmonary diseases, cystic fibrosis and
neurologically-related respiratory problems.
- Home ventilators, which sustain a patient's respiratory function
mechanically when a patient can no longer breathe normally.
- Continuous positive airway pressure therapy, which forces air through
respiratory passage-ways during sleep for patients suffering from sleep
apnea.
- Apnea monitors, which monitor and warn parents of apnea episodes in
newborn infants as a preventive measure against sudden infant death
syndrome (SIDS).
- Sleep studies, which are used to detect sleep disorders and the magnitude
of such disorders.
MANAGEMENT SERVICES
The Company provides a variety of management services to home health
agencies that are owned by others. The Company's clients for such services are
hospital-based home health agencies. The Company's clients are located in ten
states, and the Company plans to continue to develop client relationships
nationwide. Management has formed one of the Company's three operating Divisions
around the delivery of management services. See "-- Operations".
Under Housecall's typical management services agreement, the Company
provides clinical and marketing support, computerized billing services,
staffing, and other general administrative support services. In return, the home
health agency pays the Company a prescribed amount for each home health care
visit made by the agency that is billed to Medicare or another relevant payor.
The Company's management services agreements typically provide for a term of
several years, are terminable at the option of either party upon
12
<PAGE> 13
minimal notice, and are subject to renegotiation in the event of certain changes
in the current Medicare reimbursement structure.
The Company believes that its management services enhance the Company's
overall presence as a home health care provider because Housecall and its
personnel are often directly involved (on behalf of the managed agency) with the
referral and payor sources doing business with the agency. Such enhanced
presence is expected to increase the likelihood for referrals to the Company to
provide home health services in markets where Housecall operates its own
agencies. Providing management services to another provider's agency also may
give the Company an advantage over competitors in seeking to acquire the home
health agency if the owner subsequently decides to sell the business. The
provision of management services also permits (i) the labor and systems expenses
associated with developing or improving management systems and processes to be
shared between Housecall's owned and managed agencies; and (ii) the Company and
its clients to benefit by broader geographic coverage for managed care
contracting. In addition, the provision of management services has permitted
Housecall to convert a duplicate CON into a continuing source of revenue and net
income by employing the sale/manage-back model.
Housecall also explores opportunities to offer select components of its
range of management services to providers or others who have needs in specific
areas only. For example, Housecall presently provides consulting and select
management services to home health agencies in the areas of organizational
effectiveness, regulatory affairs, quality improvement, and financial systems.
These services are billed on either a retainer or project basis. In addition,
Housecall uses sophisticated customized computer software to perform important
aspects of its management services in a manner that improves quality and
accountability for the provider and improves efficiency and cost-effectiveness
for the Company. See "-- Operations -- Management Information Systems".
HOME MEDICAL EQUIPMENT
The Company provides home medical equipment, including hospital beds,
wheelchairs, ambulatory aids, bathroom aids, patient lifts, and rehabilitation
equipment, to its patients from the same branch offices as its Florida and North
Carolina respiratory therapy branches. The Company also subcontracts with other
home medical equipment providers in the other states in which it operates.
Though home medical equipment does not represent a substantial part of the
Company's operations, the Company views it as an important component to the
Company's ability to provide "one-stop-shop" home care services. Accordingly,
the Company will seek to contract with local home medical equipment providers
through its provider networks to satisfy the equipment needs of its patients and
referral sources. See "-- Provider Networks".
PROVIDER NETWORKS
A key to the Company's ability to provide comprehensive home health
services has been to enter into subcontract arrangements with other providers of
home health services. Such arrangements are necessary to provide the geographic
coverage and substantive services required by targeted payors and referral
sources in areas where the Company believes it is either not feasible or not
desirable for the Company to offer the required service directly. The provider
networks formed by such arrangements enable the Company to offer managed care
organizations, physicians, and others the convenience of contacting the Company
for all of their home health care services requirements. All authorized services
can then be coordinated by Housecall throughout the particular agencies in the
network (whether owned by or subcontracting with the Company), from that initial
assessment and pre-certification of patients for services, to all follow up care
and ultimate discharge. The types of services under contract in provider
networks include nursing, hospice, pediatric clinics, infusion therapy,
respiratory therapy, orthotics and prosthetics, and home medical equipment.
The Company's provider networks presently include over 100 home health care
providers in various locations across Housecall's primary coverage area in the
Southeast, as well as nationwide for infusion therapy services. All providers in
the Company's provider networks are subject to the Company's credentialing
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<PAGE> 14
program and are contractually bound to precertify services through Housecall and
to adhere to Housecall's case management, utilization and quality assurance
programs.
PAYOR MIX
The Company derives substantially all of its net revenues from Medicare,
Medicaid, and private third party payors, which include managed care
organizations such as health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs"), traditional indemnity insurers, and third party
administrators. The following table outlines the payor mix for the Company's net
revenues for the periods presented.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30,
(PRO FORMA
COMBINED)(1) YEAR ENDED
--------------- JUNE 30,
1994 1995 1996
----- ----- ----------
<S> <C> <C> <C>
Medicare -- cost based(2)........................................ 61.1% 60.7% 61.1%
Medicare -- charge based(3)...................................... 7.3 5.1 4.8
Medicaid(4)...................................................... .7 1.5 1.6
TennCare(5)...................................................... 2.7 8.0 5.9
Managed care organizations(4).................................... 5.9 5.8 7.1
Other private payors............................................. 18.3 15.0 15.5
Management services contracts.................................... 4.0 3.9 4.0
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- - ---------------
(1) The above amounts for the twelve-month periods of 1994 and 1995 are
presented on a pro forma combined basis to reflect the results achieved by
the companies acquired by Housecall during 1995. See -- "Significant
Acquisitions", above.
(2) Represents reimbursement for all nursing services (including related
products) to Medicare patients, except for any such services provided in
connection with hospice care.
(3) Represents reimbursements for all home health care services reimbursed by
Medicare, except for nursing services.
(4) Does not include TennCare payments.
(5) The percentage of the Company's net revenues from TennCare is expected to
decline even further in the future as a result of the Company's February
1996 cancellation of its contract with its principal TennCare managed care
organization.
OPERATIONS
The Company owns or manages a total of 153 branch locations in fourteen
states and the District of Columbia. The Company's branches are organized into
three divisions: Housecall Home Health; Housecall Infusion Services Division;
and Housecall Management Services Division. Each of the three divisions operates
semi-autonomously, with financial and operating accountability to the Company's
Atlanta headquarters, and certain administrative support functions, such as
human resources and quality improvement, being coordinated for the Company by
assigned managers attached to the Divisions. Each Division is headed by a
President who reports directly to the Company's corporate level Chief Operating
Officer.
Management has implemented a decentralized model for day-to-day operational
responsibilities and administrative functions that establishes each relevant
geographic market as a single regional business unit for all home health
services offered by the Company in that particular market. The Company has
established 15 such regional market areas, and will periodically evaluate the
need to add or reconfigure designations in response to acquisition and other
expansion initiatives. A regional manager oversees all home health services
provided within the region's business unit. The regional managers are supported
in all aspects of business operations by Division-level management and staff
from the Company's Home Health Division, based in
14
<PAGE> 15
Louisville. The Home Health Division is supported by the Infusion Services and
Management Services Divisions, based in Raleigh, North Carolina, and
Centreville, Alabama, respectively.
MANAGEMENT INFORMATION SYSTEMS
The Company relies on its management information systems to monitor patient
and client outcomes and costs. The Company's management information systems are
largely decentralized by Division, with each Division supporting its own
information systems designed to suit its particular needs and services. At the
corporate level, Housecall coordinates information systems planning
Company-wide, and intends eventually to integrate many of the Division-level
information systems functions, particularly in such areas as patient data bases,
scheduling, clinical outcomes, and financial systems.
QUALITY IMPROVEMENT
Housecall's Quality Improvement Department monitors all of the Company's
home health service activities to improve processes and performances, with the
single goal of improving patient and client outcomes. The Company's quality
improvement program operates at two levels. At the corporate level, the
Corporate Quality Improvement Department provides guidance and recommends
resources for quality improvement activities and assesses organization-wide
activities. At the agency level, the Department assists in the collection of
data, facilitates quality improvement activities, and provides education for
implementing the quality improvement processes. Quality Improvement Specialists
are continually training local management personnel on health care regulatory
and licensure requirements to ensure that systems and documentation are properly
maintained. Regular surveys are mailed to referral sources and patients to
solicit assessment about the quality of the Company's performance.
Since 1994, the Company has been accredited by the Joint Commission on
Accreditation of Hospitals (JCAHO), a nationally recognized organization that
develops standards for various health care industry segments and monitors
compliance with those standards through voluntary surveys of participating
providers. Not all home health providers have chosen to undergo the
accreditation process, because of its expense and time burden. As the home
health care industry has grown, the need for objective quality measurements has
increased. Housecall has chosen to undergo the rigorous review of its operations
attendant to JCAHO accreditation, and, consequently, management believes
Housecall has better positioned itself to procure managed care contracts and
referrals from other sources.
SALES AND MARKETING
The Company focuses its marketing and sales efforts on its existing and
prospective referral sources. The Company's marketing department provides
planning and development, market research, marketing communications, and public
and community relations support for all of the Company's branch locations. Most
referrals for home health services have historically come to the Company from
physicians and human service professionals within the local health care
community, and the Company will continue to cultivate these traditional sources.
Management believes, however, that managed care organizations and other third
party payors are rapidly becoming the most important sources of referrals to
home health care providers as well as to other providers of health care. As a
result, the Company has targeted such organizations and payors for major
marketing initiatives. The Company believes that an essential aspect of
marketing to all referral sources (but especially managed care organizations and
other third party payors) is the capacity to deliver high quality, comprehensive
home health services on a cost-effective basis. The Company's implementation of
its "one-stop-shop" approach seeks to maximize the inherent marketing potential
of that approach for cultivating such payor referral sources. In addition, the
Company has designed special disease management programs for the treatment of
asthma, cancer, and other chronic illnesses, as well as outcome and utilization
reports that facilitate implementation of cost containment initiatives by these
payors.
15
<PAGE> 16
COMPETITION
The home health care industry is highly competitive. The Company competes
with a number of home health care providers, ranging from national companies who
seek to offer a comprehensive range of home health care services to
locally-owned, single service nursing companies. Some current and potential
competitors have or may obtain significantly greater financial and marketing
resources than the Company. In addition, relatively few barriers to entry exist
in the home health care industry, other than in those states that require CONs.
Accordingly, other companies, including managed care organizations and health
care providers that are not currently serving the home health care market, may
become competitors.
The Company believes that the principal competitive factors in the home
health care industry are quality of care, including responsiveness of services
and quality of professional personnel; breadth of services offered; geographic
coverage; general reputation with payors and the medical community, including
patients, physicians, hospitals, and other health care professionals; and
relationships with referral sources generally. Management believes that the
Company is well-positioned to compete effectively with respect to each of these
factors. Management also believes that the Company's inclusion of hospice care
services as part of its comprehensive home health care services may offer a
competitive advantage, because relatively few home health care companies offer
hospice care services. In addition, in those states where much of the Company's
present operations are located (including Florida, Tennessee, Alabama, and
Kentucky), CONs are required to open or operate home health agencies, which may
serve to limit the number of competitors in those markets.
REGULATION
All home health care companies are subject to extensive federal, state, and
local regulation, including the requirement of special licenses or permits to
operate, detailed rules regarding permissible costs and payments for services,
and complex rules designed to deter and punish fraud and abuse.
Permits and Licensure
Certain states require companies providing certain home health care
services to be licensed as home health agencies. The Company currently is
licensed as a home health agency where required by the law of the states in
which it operates. In addition, certain of the Company's pharmacy operations
require state licensure and are also subject to federal and other state laws and
regulations governing pharmacies and the packaging and repackaging and
dispensing of drugs (including oxygen). Federal laws may also require
registration with the Drug Enforcement Administration of the United States
Department of Justice and the satisfaction of certain requirements concerning
security, record keeping, inventory controls, prescription, order forms, and
labeling. In addition, certain health care practitioners employed or otherwise
engaged by the Company require state licensure or registration and must comply
with laws and regulations governing standards of practice. The failure to
obtain, renew, or maintain any of the required regulatory approvals or licenses
could adversely affect the Company's business. There can be no assurance,
however, that either the states or the Federal government will not impose
additional regulations upon the Company's activities that might adversely affect
its business, results of operations, or financial condition.
Certificates of Need
Certain states, including Florida, Tennessee, Alabama, and Kentucky,
require companies providing hospice and other home health care services to
obtain a CON issued by a state health planning agency. Where required by law,
the Company has obtained certificates of need from those states in which it
operates. There can be no assurance, however, that the Company will be able to
obtain any certificates of need that may be required in the future if and when
the Company expands the geographic scope of its operations or seeks to offer new
services, or if state laws change to impose additional certificate of need
requirements. Any requirement to obtain additional certificates of need will
cause the Company to incur certain expenses and may affect the ability of the
Company to offer certain services in certain states.
16
<PAGE> 17
Fraud and Abuse Laws
The Company is subject to federal and state laws prohibiting direct or
indirect payments for patient referrals and regulating reimbursement procedures
and practices under Medicare, Medicaid and state programs, as well as in
relation to private payors, which prohibit referrals to an entity in which the
referring provider has a financial interest. While the Company believes that it
is in material compliance with such laws, it monitors such compliance on a
continuous basis.
The anti-kickback provisions of the federal Medicare and Medicaid Patient
and Program Protection Act of 1987 (the "Anti-Kickback Statute") prohibit the
offer, payment, solicitation, or receipt of any remuneration in return for the
referral of items or services paid for in whole or in part under the Medicare or
Medicaid programs (or certain other state health care programs). To date, courts
and government agencies have interpreted the Anti-Kickback Statute to apply to a
broad range of financial relationships between providers and referral sources,
such as physicians and other practitioners. The United States Department of
Health and Human Services has adopted regulations creating a limited number of
"safe harbors" from federal criminal and civil penalties under the Anti-Kickback
Statute by exempting certain types of ownership interests and other financial
arrangements that do not appear to pose a threat of Medicare and Medicaid
program abuse. Transactions covered by the Anti-Kickback Statute that do not
conform to an applicable safe harbor are not necessarily in violation of the
Anti-Kickback Statute, but the practice may be subject to increased scrutiny and
possible prosecution. The criminal penalty for conviction under the
Anti-Kickback Statute is a fine of up to $25,000 and up to five years of
imprisonment. In addition, conviction mandates exclusion from participation in
the Medicare and Medicaid programs. Such exclusion can also result from a
conviction under other federal laws which impose civil and criminal penalties
for submitting false claims, such as claims for services not provided as
alleged. Exclusion from participation in the Medicare and Medicaid programs may
also occur as a civil penalty. Several health care reform proposals have
included an expansion of the Anti-Kickback Statute to apply to referrals of any
patients, regardless of payor source. The federal government has recently
increased its investigatory efforts to determine whether various business
practices constitute remunerations for or to induce referrals in violation of
the Anti-Kickback Statute.
The federal government has also enacted legislation (commonly known as
"Stark II"), which prohibits physicians from making referrals to entities in
which they (or immediate family members) have an investment interest or other
compensation arrangement where such referral is for the provision of specific
"designated health services" covered by Medicare or Medicaid. The current
listing of "designated health services" includes home health services, equipment
and supplies, parenteral and enteral nutrients, ultrasound services, and home
medical equipment, all of which are provided by the Company. If such a financial
relationship exists and referrals are made for the provision of such designated
health services, the physician will be prohibited from making a referral to the
health care provider, and the provider will be prohibited from billing for the
designated health service for which Medicare or Medicaid payment would otherwise
be made. Certain exceptions are available under Stark II, which may or may not
be available to the Company for arrangements in which the Company may be
involved. Submission of a claim that a provider knows or should know is for
services for which payment is prohibited under Stark II could result in refunds
of any amounts billed, civil money penalties of up to $15,000 for each such
service billed, and possible exclusion from the Medicare and Medicaid programs.
Furthermore, Medicare regulations contain similar self-referral restrictions
that provide that, unless certain conditions are met, a plan of care for home
health services generally may not be certified by a physician who has a
significant ownership interest in, or a significant financial or contractual
relationship with, the home health agency. It is the Company's policy to monitor
closely its compliance with Stark II and to take appropriate actions to ensure
such compliance, but there can be no assurance that all relationships between
the Company and physicians will be found to be in compliance with Stark II. A
violation of Stark II could result in civil penalties and exclusion from
participation in Medicare and Medicaid programs.
Many states have also adopted statutes and regulations that vary from state
to state prohibiting provider referrals to an entity in which the provider has a
financial interest (direct or indirect), remuneration or fee-splitting
arrangements between health care providers for patient referrals, and other
types of financial arrangements with health care providers. Sanctions for
violation of these state restrictions may include loss of licensure and civil
and criminal penalties. Certain states also require health care practitioners to
disclose to
17
<PAGE> 18
patients any financial relationship with a provider and to advise patients of
the availability of alternative providers.
The federal government has increased significantly the financial and human
resources allocated to enforcing the fraud and abuse laws. The Office of the
Inspector General, in cooperation with other federal agencies, announced in
mid-1995 its intention to scrutinize the activities of home health agencies,
home medical equipment suppliers, and skilled nursing facilities in five states,
including Florida, a state in which the Company has significant operations.
Private insurers and various state enforcement agencies also have increased
their scrutiny of health care providers' practices and claims, particularly in
the home health and home medical equipment areas. While regulations interpreting
Stark I (prohibiting referrals to clinical laboratories where the physician has
a financial interest in such laboratory) were recently issued, regulations
interpreting Stark II have not been promulgated to date. No assurance can be
given that all of the practices of the Company, if reviewed, would be found to
be in compliance with such laws or with any future laws or regulations, as such
laws and regulations ultimately may be interpreted.
Reimbursement
Effective for July 1, 1996, HCFA issued regulations that established new
Medicare cost limits that could reduce the level of Medicare cost-based payments
for certain home health care services as provided in certain regions of the
country, depending primarily upon the effect of the regulations' wage index
budget neutrality factor. An industry group has challenged the new HCFA limits,
and President Clinton's fiscal 1997 budget contains a proposal to extend the
moratorium on changes to Medicare cost limits that had been established by the
Omnibus Budget Reconciliation Act of 1993. As a result, the ultimate effect of
these developments on the Company's future results can not be predicted.
In August 1993, Congress passed the Omnibus Budget Reconciliation Act of
1993 ("OBRA 1993"), which included approximately $56 billion in reimbursement
reductions to the Medicare program over five years. In January 1994, two
developments lowered the Company's reimbursement by Medicare for nebulizers,
each of which had a significant impact on net revenues of the Company
attributable to the rental of nebulizers. First, reclassification of nebulizers
to "capped rental equipment" pursuant to OBRA 1993 capped the total allowable
rental payments at the allowable purchase cost of such equipment. Second, new
fee schedules published by the various Durable Medical Equipment Carriers
("DMERCs") effective January 1, 1994, reduced by approximately 50% the allowable
monthly rental fees for nebulizers. Additionally, in December 1994 the DMERCs
issued a composite draft policy, which, if adopted, would further restrict
Medicare coverage of nebulizers and aerosol medication treatments. Comments on
the proposed draft policy have been submitted by members of the home care
industry and currently are being reviewed by the DMERCs and HCFA. In its
continuing effort to contain health care costs, Congress also is contemplating
changes in oxygen reimbursement. In addition, in August 1996, HCFA proceeded
with its proposal to recommend a 40% reduction in Medicare's reimbursement for
oxygen and certain related services, by issuing an inherent reasonableness
notice. The proposal was submitted by HCFA for approval by the Secretary of the
Department of Health and Human Services ("HHS"), and if it is approved there,
would be subject to final approval by the Office of Management and Budget
("OMB"). Home health care industry groups are challenging the proposal, which
had been dormant for over a year, and there is no required time frame within
which either the Secretary of HHS or the OMB must act on the proposal.
More generally, government officials are continuing to review and assess
alternative health care delivery systems and payment methodologies in efforts to
curtail costs. Several proposals involving potential changes in the way home
health care services are reimbursed are presently under consideration. See
"-- Current Developments".
Current Developments
Political, economic, and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation, the Company
anticipates that Congress and state legislatures will continue to review and
assess alternative
18
<PAGE> 19
health care delivery and payment systems and may in the future propose and adopt
legislation effecting fundamental changes in the health care delivery system. In
1995 and 1996 Congress considered proposals to reduce Medicare spending
increases by $270 billion over the following several years. Legislative debate
on health care reform is expected to continue in the future. While the principal
focus of these broad initiatives is not on costs in the home health care segment
of the industry (which in 1995 represented only approximately 3% of total health
care costs), it can be expected that the home health care segment would be
effected to some extent by the passage of any such initiative.
During 1996, Congress and President Clinton attempted to reach an accord on
budget legislation that included reforms that would have reduced Medicare and
Medicaid spending growth. To date, comprehensive budget legislation that would
reduce Medicare or Medicaid spending has not been enacted. The Company is unable
to predict the impact that any such future legislation will have on Medicare or
Medicaid reimbursement.
Congress considered establishing a prospective payment system ("PPS") for
home health services. The proposal would have lowered cost limits over the
short-run and implement a per-episode PPS for home health not later than 1999.
Currently, HCFA is running a demonstration project to test per episode
reimbursement for home health services.
The Company is unable to predict whether the proposed Medicare prospective
payment system, the Medicare and Medicaid reform, the DMERCs draft policy, or
the August 1996 HCFA respiratory therapy reduction proposal will be enacted or
what final form such legislation might take. Furthermore, the Company cannot
predict what additional government regulations, if any, affecting its business
may be enacted in the future, how existing or future laws and regulations might
be interpreted, or whether the Company will be able to comply with such laws and
regulations in its existing or future markets. In addition, the level of net
revenues and profitability of the Company, like those of other health care
providers, will be affected by the continuing efforts of payors to contain or
reduce the costs of health care by lowering reimbursement rates, increasing case
management review of services, negotiating reduced contract pricing, and
capitation arrangements.
INSURANCE
The Company maintains a commercial general liability policy with both a
per-occurrence and annual aggregate coverage limit of $2,000,000. In addition,
the Company has an umbrella liability or "excess" policy with a single limit of
$10,000,000 for any one occurrence in excess of the $10,000 retention limit with
respect to each occurrence. The umbrella policy excludes professional liability.
The Company maintains a health care agency professional liability insurance
policy with limits of $1,000,000 per occurrence and an annual aggregate limit of
$3,000,000. Health care providers with whom the Company has contracted as part
of its Housecall Alternative Network must provide evidence that they carry at
least an equivalent level of insurance coverage, although there is no assurance
that such providers will continue to do so; or that such insurance is, or will
continue to be, adequate or available to protect the Company; or that the
Company will not have liability independent of that of such providers and their
insurance coverage. While the Company believes that it has adequate insurance
coverage, there can be no assurance that such insurance will be sufficient to
cover any judgments, settlements, or costs relating to legal proceedings or that
any such insurance will be available to the Company in the future on
satisfactory terms, if at all. If the insurance carried by the Company is not
sufficient to cover any judgments, settlements, or costs relating to legal
proceedings, the Company's business could be materially adversely affected.
EMPLOYEES
As of August 1, 1996, the Company had more than 5,000 employees. In
addition, the Company maintains registries of licensed nurses, therapists, home
health aides, and other home health care providers who are available for
staffing assignments on a temporary basis. Management believes that the
Company's employee relations are good. None of the Company's employees are
represented by a labor union or other collective bargaining organization.
19
<PAGE> 20
The recruitment, training, and retention of qualified employees is a high
priority for the Company. Management commits a significant portion of its time
to monitoring these functions, and the Company has developed several programs
designed to implement that priority and to facilitate both high employee
performance and satisfaction. The Company requires that all employees attend
certain training programs, such as the Company's extensive orientation programs,
which is designed to provide all new employees with an understanding of the
mission, philosophy, goals, and expectations of the Company, and with an
explanation of how the employee's work relates to and impacts the Company's
success. The Company's compliance program is also mandatory and ensures that all
employees comprehend basic regulations concerning fraud and abuse issues
affecting the home health industry. Employees are educated on applicable legal
standards and can access a confidential, toll-free number to ask questions or
raise concerns about compliance matters.
TRADEMARKS, COPYRIGHTS AND PROPRIETARY RIGHTS
The Company currently owns five federal service mark registrations for the
mark Housecall(R) and the "house with a heart" design, three of which are
incontestible, covering a variety of services. Although the Company owns such
federal service mark registrations for a variety of services, there are many
unregistered users of marks that include variations of the words "House" and
"Call" in connection with the provision of health care services. A prior user of
such a mark may be able to challenge the Company's use of the Housecall(R) mark
in the specific geographic area of such prior use in connection with the goods
or services for which the prior use was made. In the event of challenge, the
Company could be required to adopt an alternative mark and name for its
operations in certain geographic areas or for use on certain goods and services.
Based on the existence of a company in North Carolina that may have prior rights
in the term "Housecall," the Company may not be able to use the Housecall(R)
mark in that state.
The Company has filed a federal trademark application seeking registration
for its Clinpen(TM) mark used in connection with the Company's proprietary
management information system hardware and customized software.
The Company is involved in a pending opposition proceeding, before the
Trademark Trial and Appeal Board, brought by the Company against an applicant
for a mark believed to be confusingly similar to the Company's Housecall(R)
mark. This action involves the applicant's asserted right to use the mark
Medical Housecall in connection with computer-related products for use in the
health-care field. Although the Company believes that it should prevail in this
proceeding, it is possible that the opposing party could gain the right to use
the mark in connection with goods and services related to those provided by the
Company. Additionally, the Company has received an objection from RehabCare
Group, Inc. ("RGI"), based on the Company's use of the term RehabCare+ to
describe its rehabilitation therapy services. At this point, the Company is
discussing alternatives for resolution of this matter with RGI. The Company does
not believe that these proceedings should have a materially adverse effect on
its competitive position or its operations.
SUPPLIERS
The Company purchases all pharmaceuticals and other materials, and buys or
rents medical equipment and supplies, required in connection with the Company's
business from many suppliers. The Company has not experienced, and does not
anticipate that it will experience, difficulty in purchasing such materials or
renting such equipment and supplies. If the Company's current suppliers should
cease to supply the Company, the Company believes that alternative sources can
readily be located that would adequately meet its needs.
20
<PAGE> 21
EXECUTIVE OFFICERS OF HOUSECALL
Executive officers of the Company are elected by the Board of Directors
annually and hold office until the next annual meeting of stockholders or until
they sooner resign or are removed from office by the Board of Directors.
The executive officers of the Company and their ages and positions with the
Company as of August 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME (AGE) POSITION WITH COMPANY
------------------------------------------------ ----------------------------------------
<S> <C>
George D. Shaunnessy(48)........................ President, Chief Executive Officer, and
Director
Peter J. Bibb(45)............................... Vice President, Chief Financial Officer
and Secretary
Harold W. Small(48)............................. Vice President and Chief Operating
Officer
Thomas F. Luthringer(35)........................ Vice President -- Corporate Development
J. Paul Gordon(47).............................. Vice President -- Strategic Planning
</TABLE>
Mr. Shaunnessy founded the Company with Messrs. Bibb, Small, and Luthringer
and Welsh, Carson Anderson & Stowe VI, L.P. ("Welsh Carson") in 1994, and has
served as President, Chief Executive Officer, and a director since that time.
Prior to the founding of the Company, Mr. Shaunnessy had served as President,
Chief Operating Officer, and a director of Hallmark Healthcare Corporation
(formerly known as National Healthcare, Inc. ("Hallmark")) from 1988 to 1991,
following which he served as a management consultant with Mr. Bibb to various
businesses until the Company was founded. Mr. Shaunnessy has over 20 years of
experience in the health care industry.
Mr. Bibb was a co-founder of the Company in 1994 and has served as its
Chief Financial Officer since that time. Prior to the founding of the Company,
Mr. Bibb had served as Senior Vice President of Hospital Financial Operations
and a director of Hallmark, from 1987 to 1991, following which he served as a
management consultant with Mr. Shaunnessy until the Company was founded. Mr.
Bibb has over 19 years of experience in the health care industry.
Mr. Small was a co-founder of the Company in 1994 and has served as its
Chief Operating Officer since that time. Prior to the founding of the Company,
Mr. Small spent four years (from 1990 to 1994) as an independent consultant to
the health care industry in strategic planning and management, in addition to
serving as President of an elderly housing and services company. Mr. Small has
over 18 years of experience in the health care industry.
Mr. Luthringer was a co-founder of the Company in 1994 and has served as
Vice President -- Corporate Development since that time. Prior to the founding
of the Company, Mr. Luthringer had worked from 1988 to 1991 with Hallmark, where
he was ultimately promoted to Group Director for three medical/surgical
hospitals in Tennessee. Thereafter he worked as chief executive officer or chief
administrative officer at several hospitals owned by National Medical
Enterprises and Charter Medical Corporation, respectively, following which he
served as a management consultant with Mr. Shaunnessy until the Company was
founded. Mr. Luthringer has 10 years of experience in the health care industry.
Mr. Gordon joined the Company in June 1995 as Vice President -- Strategic
Planning, as a result of the Company's acquisition of Home Care, which he
co-founded with his brother in 1986. He had served as Chairman of the Board and
President of Home Care since its founding. Mr. Gordon has over 18 years of
experience in the home health industry. He is a member of the Board of Directors
of the Home Health Services and Staffing Association, Inc., a Washington,
D.C.-based trade association that represents home health providers in
legislative and regulatory issues.
21
<PAGE> 22
ITEM 2. PROPERTIES
The Company leases its executive office in Atlanta, Georgia, which consists
of approximately 10,000 square feet of office space, under a lease expiring in
May 1999. The Company also leases spaces for its various Division administrative
offices in Knoxville, Tennessee, Louisville, Kentucky, and Raleigh, North
Carolina, and owns the offices in Centreville, Alabama in which its Housecall
Management Services Division is located. The Company leases the operating space
required for its 114 owned branch offices under lease terms typically ranging
from three to five years. Management believes that the Company's owned and
leased properties are adequate for its present needs, and that suitable
additional or replacement space will be available as required.
The following is a list of the Company's 114 owned and 39 managed branch
offices (the latter are marked with an asterisk (*)) as of August 1, 1996.
ALABAMA
Alexander City 1*
Atmore 1*
Bay Minette 1*
Brewton 1*
Camden 1*
Centreville 1*
Chatom 1*
Demopolis 2*
Eutaw 1*
Florala 1*
Foley 1*
Georgiana 1*
Grove Hill 1*
Guntersville 1*
Haleyville 1*
Monroeville 1*
Moulton 1*
Opp 1*
Red Bay 1*
Tallassee 1*
Union Spring 1*
Wedowee 1*
Wetumpka 1*
Winfield 1*
FLORIDA
Apollo Beach 1
Bartow 1
Bradenton 2
Bradenton East 1
Brandon 2
Clearwater 2
Cocoa Beach 1
Crystal River 1
Daytona Beach 1
Deland 1
Dunellon 1
Ft. Myers 1
FLORIDA (CONTINUED)
Fort Pierce 1
Gainesville 1
Haines City 1
Holiday 2
Holmes Beach 1
Jacksonville 1
Jasper 1*
Jay 2*
Lady Lake 1
Lakeland 1
Madison 1*
Melbourne 1
Ocala 1
Orange Park 1
Palm Coast 1
Port Charlotte 2
Sarasota 2
Sebring 1
Seminole 1
Spring Hill 1
St. Augustine 1
St. Petersburg 3
Stuart 2
Tampa 2
Tampa South 1
Tavares 1
Venice 1
Vero Beach 1
West Palm Beach 1
Winter Park 2
Zephyrhills 1
GEORGIA
Mineral Bluff 1
ILLINOIS
Anna 1*
Wear Frankfort 1*
22
<PAGE> 23
INDIANA
Brazil 1*
Fort Wayne 1
Indianapolis 1
Mishawaka 1
New Albany 1
Spencer 1*
KENTUCKY
LaGrange 1
Lawrenceburg 1
Louisville 1
NEBRASKA
Papilion 1*
NEVADA
Boulder City 1*
NORTH CAROLINA
Charlotte 1
New Bern 1
Raleigh 1
OHIO
Wadsworth 1*
TENNESSEE
Adamsville 1
Athens 1
Bean Station 1
Chattanooga 1
Chattanooga 1*
Cleveland 1
Columbia 1
Cookeville 1
Covington 1
Dayton 1
Dyersburg 1
Elizabethton 2
Greeneville 1
Hampton 1
TENNESSEE (CONTINUED)
Harriman 1
Harrogate 1
Jackson 1
Jasper 1
Jefferson City 1
Johnson City 1
Knoxville 5
Lenoir City 1
Madisonville 1
Manchester 1
Memphis 2
Morristown 2
Mountain City 2
Murfreesboro 1
Nashville 1
Newport 1
Oak Ridge 1
Rogersville 1
Sevierville 1
Sneedville 1
Somerville 1
Tazewell 1
TEXAS
Tomball 1*
VIRGINIA
Daleville 1
Jonesville 1
Martinsville 1
Roanoke 2
Rocky Mount 1
Salem 1
Tyson's Corners 1
WASHINGTON, D.C. 1
WEST VIRGINIA
Webster Springs 1*
None of the properties owned by the Company is subject to encumbrances.
ITEM 3. LEGAL PROCEEDINGS
Lawrence D. Paskowitz IRA, et al. v. Housecall Medical Resources, Inc., et
al., Civil Action No. 96-CV-2220-JEC (N.D. Ga.) and Taam Associates, Inc., et
al. v. Housecall Medical Resources, Inc., et al., Civil Action No.
96-CV-2214-JEC (N.D. Ga.) were filed on August 30, 1996 by certain persons who
seek to represent a class of shareholders who purchased shares of the Company's
Common Stock in its April 1996 initial public offering or in the subsequent
aftermarket, respectively. The individual plaintiffs in both cases allege that
they were induced to purchase the Company's stock on the basis of
misrepresentations about the Company and its prospects. Both complaints assert
claims under sec.sec. 11, 12(2) and 15 of the Securities Act of
23
<PAGE> 24
1933. Both complaints name as defendants the Company, its directors and certain
of its officers, and the lead underwriters associated with its public offering.
The Company intends to vigorously defend these lawsuits.
While the Company is engaged in routine litigation incidental to its
business, there are no other material legal proceedings to which the Company or
any of its subsidiaries is a party or to which any of their properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of its fiscal year.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on The Nasdaq Stock Market since
April 4, 1996. Prior to such date, there was no public trading market for the
Common Stock. The high and low sales prices of the Common Stock during the
period from April 4, 1996 through the quarter ended June 30, 1996 were $23 1/8
and $16 1/2, respectively. The high and low sales prices of the Common Stock for
the first quarter of the 1997 fiscal year through September 25, 1996 were
$20 3/8 and $5, respectively. As of September 17, 1996, there were 70 holders of
record of the Company's Common Stock.
The Company has paid no dividends on its Common Stock since its
organization. It does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The payment of future dividends will be at the
sole discretion of the Company's Board of Directors and will depend on, among
other things, future earnings, capital requirements, contractual restrictions,
the general financial condition of the Company, and general business conditions.
The Company's credit facility proscribes the payment by the Company of dividends
on any of its capital stock, including Common Stock, while any amounts are
outstanding thereunder.
24
<PAGE> 25
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------- ------------------
ELEVEN
MONTHS
ENDED
YEAR ENDED JULY JUNE YEAR ENDED JUNE
31, 30, 30,
----------------- ------- ------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $15,447 $31,753 $49,883 $84,219 $205,389
Operating expenses:
Patient care.................................. 6,935 15,010 27,314 42,879 95,688
General and administrative.................... 8,003 15,973 21,237 34,069 94,940
Provision for doubtful accounts............... 42 474 1,435 3,395 6,074
Depreciation and amortization................. 249 363 744 1,568 3,262
------- ------- ------- ------- --------
Total operating expenses.............. 15,229 31,820 50,730 81,911 199,964
------- ------- ------- ------- --------
Income (loss) from operations................... 218 (67) (847) 2,308 5,425
Interest expense, net................. 10 -- 127 902 4,331
------- ------- ------- ------- --------
Income (loss) before income taxes............... 208 (67) (974) 1,406 1,094
Provision (credit) for income taxes............. 82 71 (242) 709 895
------- ------- ------- ------- --------
Net income (loss)............................... $ 126 $ (138) $ (732) 697 199
======= ======= =======
Cumulative dividends and accretion on Series A
Preferred Stock (redeemable).................. (1,327) (2,006)
------- --------
Net loss attributable to common stockholders.... $ (630) $ (1,807)
======= ========
Net loss per common share....................... $ (0.10) $ (0.24)
======= ========
Weighted average common shares outstanding...... 6,283 7,425
======= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------- ------------------
JUNE
JULY 31, 30, JUNE 30,
----------------- ------- ------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 1,059 $ 1,486 $ 619 $18,349 $ 7,785
Working capital (deficiency).................... 236 (317) (616) 19,302 18,646
Total assets.................................... 5,678 9,064 10,601 92,403 103,945
Long-term debt and capital lease obligations,
net of current portion........................ 125 305 234 41,480 11,720
Series A Preferred Stock (redeemable)........... -- -- -- 17,871 --
Stockholders' equity............................ 1,551 1,933 1,890 8,096 66,751
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The Company generates net revenues primarily from providing home health
care services to patients through the operation of home health agencies that it
owns and providing management services to home health care agencies owned by
others. Since the acquisition of its predecessor on July 1, 1994, Housecall has
pursued a growth strategy that has expanded its operations from 58 branch
offices, primarily in Tennessee, to
25
<PAGE> 26
114 owned and 39 managed branch offices in fourteen states and the District of
Columbia as of August 1, 1996.
Through its acquisitions, Housecall has sought to establish or increase its
presence and market share within its targeted geographic areas; to add capacity
necessary to attain its goal of providing comprehensive, cost-effective
"one-stop-shop" home health care services; to add significant sources of home
health care or related revenues; and to solidify its foundation for using home
nursing services to leverage the expansion of its other home health services.
For example, the acquisition of MSS on February 3, 1995 added management
services as a new source of revenue; the Home Care acquisition on May 31, 1995
more than doubled the size of the Company's home health care operations,
expanded the Company's private nursing services, and also added a solid base of
operations in Florida; and the Biomedical acquisition on July 10, 1995 added a
nationwide delivery network and management systems, and contributed significant
(although less than expected) net revenues, to the Company's infusion therapy
services business.
The Company is seeking to expand its home health care business in
geographic areas throughout the Southeast and in select Midwestern states, and
to extend its management services operations nationwide.
In the following discussions, most percentages and dollar amounts have been
rounded to aid presentation; as a result, all such figures are approximations.
References to such approximations have generally been omitted. In addition,
reference is made to the discussion concerning forward looking statements
contained in Item 1 of this Annual Report on Form 10-K under
"Business -- Certain Factors Affecting Forward Looking Statements".
SOURCES OF NET REVENUES
"Net revenues" represent gross revenues for all services or products
provided or sold by the Company, adjusted to reflect anticipated reductions
thereto resulting from contractual adjustments and other allowances to third
party payors. The Company separately reserves for doubtful accounts.
The Company derives substantially all of its net revenues from payments by
Medicare, Medicaid, and private third party payors, which include managed care
organizations such as HMOs and PPOs, traditional indemnity insurers, and TPAs.
The following table outlines the mix of sources for the Company's net revenues
for the periods presented:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30, TWELVE
(PRO FORMA MONTHS
COMBINED)(1) ENDED
--------------- JUNE 30,
1994 1995 1996
----- ----- --------
<S> <C> <C> <C>
Medicare -- cost-based(2).................................. 61.1% 60.7% 61.1%
Medicare -- charge-based(3)................................ 7.3 5.1 4.8
Medicaid(4)................................................ .7 1.5 1.6
TennCare................................................... 2.7 8.0 5.9
Managed care organizations(4).............................. 5.9 5.8 7.1
Other private payors....................................... 18.3 15.0 15.5
Management services contracts.............................. 4.0 3.9 4.0
----- ----- -----
Total............................................ 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- - ---------------
(1) The above amounts for the twelve-month periods are presented on a pro forma
combined basis to reflect the results achieved by the companies acquired by
Housecall during 1995. See "Business -- Significant Acquisitions".
(2) Represents reimbursement for all nursing services (including related
products) to Medicare patients, except for any such services provided in
connection with hospice care.
(3) Represents reimbursements for all home health care services reimbursed by
Medicare, except for nursing services.
(4) Does not include TennCare payments.
26
<PAGE> 27
As reflected above, the Medicare program reimburses for home health care
services under two basic systems: cost-based and charge-based. Under the
cost-based system, the Company is reimbursed at the lower of the Company's
reimbursable costs (based on Medicare regulations), cost limits established by
HCFA, or the Company's charges. While certain of the Company's corporate level
and other overhead expenses are permitted as part of reimbursable costs under
Medicare regulations, such reimbursable costs consist predominately of expenses
and charges directly incurred in providing the related services, and cannot
include any element of profit or net income to the Company. As a result, an
increase of net revenues attributable to Medicare cost-based payments does not
contribute to net income, unless the Company would have otherwise exceeded
applicable Medicare cost limits (and thus not be reimbursed for certain of its
fixed costs and expenses) without such increased revenues. Under the
charge-based system, Medicare reimburses the Company on a "prospective payment"
basis, which consists in general of either a fixed fee for a specific service or
a fixed per diem amount for providing certain services. As a result, the Company
can generate profit or net income from Medicare charge-based revenues by
providing covered services in an efficient, cost-effective manner.
All nursing services (including related products) provided to Medicare
patients are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home health care
services (including non-nursing related products) provided to Medicare patients
are Medicare charge-based reimbursed.
The Company's net revenues from private third party payors such as managed
care organizations, traditional indemnity insurers, and TPAs have profit
potential for the Company if it is able to provide the related services and
otherwise operate in a sufficiently cost-effective manner. The Company's full
range of home health care services is offered and provided to patients for whom
the payments for such services are made by private payors or under state
programs such as TennCare that do not prohibit a profit component for the
Company. However, the Company anticipates that Medicare cost-based payments will
continue to represent a significant component of its net revenues for the
foreseeable future.
Net revenues from the TennCare program are dependent upon Housecall's
contractual relationships with participating managed care organizations to
provide home health care services; the continued participation by those
organizations in the TennCare program; and the ongoing integrity of the provider
network by which the Company subcontracts with numerous other health care
providers in order to fulfill certain of its obligations to the TennCare
participants. Initiated on January 1, 1994, TennCare is Tennessee's state-wide
managed care program for Medicaid-eligible individuals, state employees,
retirees, and uninsured individuals. TennCare was designed to replace, among
other things, Tennessee's Medicaid program. Housecall's contractual arrangements
with its TennCare participating managed care organizations and the subcontract
providers in its Tennessee provider network are generally for one-year,
automatically renewable terms, but with either party typically having the right
to terminate the arrangement on 90-days' notice. In February 1996, Housecall
canceled its contract with Tennessee Primary Care Network, Inc. a/k/a Access
MedPlus, a TennCare participating managed care organization (the "Canceled
Contractor") from whom Housecall had derived approximately 12% of its net
revenues during fiscal 1995. In major part as a result of that cancellation, the
Company's percentage of its net revenues from the TennCare program declined in
fiscal 1996 to approximately 6%, and the amount and percentage of such net
revenues will continue to decline. To the extent the Company enters into
arrangements with one or more other participating managed care organizations to
provide a higher level of services or products to their TennCare enrollees than
the Company has provided for them in the past, the amount of such decline will
be mitigated. However, no assurance can be given that the Company will enter
into any such arrangements.
In connection with its management services, the Company is typically paid a
negotiated fixed fee per patient visit performed by the home health care
provider for whom the Company is providing management services. The Company has
been able to perform these services in a sufficiently cost-effective manner such
that its costs have been less than the amount of the fees it has received.
The absence of a profit component in Medicare cost-based payments, and the
profit potential of management services contracts, led the Company to develop
its sale/manage-back model. That model permits
27
<PAGE> 28
the Company to explore the sale of certain of its duplicate CONs for
Medicare-certified agencies to other providers in conjunction with entering into
an agreement to provide management services for the purchaser. The Company has
already done so in one case. The resulting "loss" of Medicare cost-based net
revenues from such sales does not adversely affect the Company's net income
potential (unless such reduced net revenues cause the Company to exceed Medicare
costs limits), and the future fees from such management agreement can contribute
to net income for the Company. However, to the extent that the Company has fixed
costs associated with its operations (such as corporate level and other overhead
expenses) that can no longer be reimbursed as part of Medicare cost-based
payments because its Medicare cost limits are exceeded as a result of such
reduced net revenues, then the Company's ability to recover those costs would be
adversely affected. If the Company were not able to eliminate or reduce those
costs (or to offset those costs with incremental increases to income from other
sources), then the Company's net income would be reduced.
RESULTS OF OPERATIONS
As discussed above, Housecall acquired MSS, Home Care, and Biomedical
during 1995 (the "1995 Acquisitions"), each of which has had significant effects
on the Company. See "-- General". The Company also adopted a June 30 fiscal year
following the acquisition of its predecessor, which resulted in the
predecessor's financial statements for the period ended June 30, 1994 having
only eleven months of operations. The aggregate effects of the 1995 Acquisitions
(each of which was accounted for as a purchase transaction, which results in the
inclusion of certain of their operating results in some historical periods but
not in others), together with the change in fiscal year, make period-to-period
comparisons of the Company's historical operating performance difficult.
The following table sets forth, for the periods indicated, selected
financial information as a percentage of net revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
-------------------------------
YEAR ENDED JUNE
30,
1994 ---------------
PREDECESSOR 1995 1996
----------- ----- -----
<S> <C> <C> <C>
Net revenues..................................................... 100.0% 100.0% 100.0%
Operating expenses:
Patient care costs............................................. 54.8 50.9 46.6
General and administrative..................................... 42.5 40.5 46.2
Provision for doubtful accounts................................ 2.9 4.0 3.0
Depreciation and amortization.................................. 1.5 1.9 1.6
----- ----- -----
Total operating expenses......................................... 101.7 97.3 97.4
----- ----- -----
Income (loss) from operations.................................... (1.7) 2.7 2.6
Interest expense, net............................................ .3 1.1 2.1
----- ----- -----
Income (loss) before income taxes................................ (2.0) 1.6 .5
Provision for income taxes....................................... (.5) .8 .4
----- ----- -----
Net income (loss)................................................ (1.5%) .8% .1%
===== ===== =====
</TABLE>
Fiscal Years 1996 and 1995
The Company's results of operations during the fiscal year ended June 30,
1996 reflect the performance for the entire year of all three companies acquired
in the 1995 Acquisitions, but the Company's results of operations during the
fiscal year ended June 30, 1995 do not reflect any performance by Biomedical and
only reflect the performance of MSS for five months and Home Care for one month.
This factor alone accounts for several significant changes in the Company's
period-to-period results discussed below.
Net Revenues. In fiscal 1996, net revenues increased 144% to $205.4
million from $84.2 million in fiscal 1995. The $121.1 million increase reflects
$16.2 million of net revenues in fiscal 1996 from Biomedical, which was acquired
at the beginning of fiscal 1996, and a $112.0 million increase in net revenues
from Home Care
28
<PAGE> 29
and MSS over the amount attributable to them for relatively the short period
that their respective performances are included in the fiscal 1995 results. The
Company's operations attributable to its predecessor, however, experienced a
$7.0 million reduction in Medicare cost-based revenues (which do not include a
profit or net income component for the Company) during fiscal 1996 from fiscal
1995 levels, primarily caused by cost reductions principally from the
consolidation of certain operations in Tennessee following the Home Care
acquisition.
Although the Company's net revenues increased significantly in fiscal
1996, net revenues for the fourth quarter of fiscal 1996 declined to $47.1
million from $53.7 million for the third quarter. Net revenues from certain
of the Company's operations did not grow during the fourth quarter at the rates
the Company had anticipated, and net revenues from the Company's Infusion
Therapy Services Division actually declined during the fourth quarter from
their third quarter level. As a result of this revenue shortfall and certain
other factors, the Company sustained a $2.87 million net loss before income
taxes in the fourth quarter of fiscal 1996.
The Company's cancellation of its TennCare contract with Access MedPlus
(which was necessitated because of protracted delays in payments to the
Company) led to unanticipated reductions in the volume of other referrals to
the Company in Tennessee during the fourth quarter. Following the cancellation
of that contract, Housecall was required by law to contact its referral sources
throughout Tennessee and direct them to refer all TennCare patients who were
covered by Access MedPlus to other health care providers who replaced the
Company in serving Access MedPlus. Many of those referral sources also
redirected non-Access MedPlus patients (including some private as well as
TennCare patients) to such replacement health care providers for delivery of
home health care services. In addition, when the Company's earlier (now
abandoned) proposal to sell to Columbia/HCA certain of its duplicate Tennessee
CON's and related Medicare-certified agencies became generally known in
Tennessee, several of the Company's traditional referral sources in Tennessee
who were not favorably disposed to the Company's proposed relationship with
Columbia/HCA reduced or ceased entirely their referrals of patients to the
Company. Both of these developments adversely affected net revenues for the
Company's Tennessee operations during the fourth quarter, which caused the
Company's operating costs at one of its home health agencies to exceed
allowable Medicare cost caps by approximately $600,000. The Company is taking
steps in an effort to rebuild or replace those referral sources.
The Company's infusion business has historically had higher profit margins
than the Company's other lines of business (except for the much lower volume
management services business). As a result, the lower level of infusion net
revenues during the fourth quarter had a disproportionate effect on net income
for the fourth quarter and the year ended June 30, 1996, even though the $16.2
million of net revenues for the year resulting from the Biomedical acquisition
caused an increase for this business line over fiscal 1995. As part of its
undertaking to improve that business the Company has hired new management and a
new specially trained sales force at the Infusion Therapy Services Division. In
addition, the Company has introduced a sales incentive program that is designed
to increase both net revenues and net income from that business.
The Company is also acting to increase net revenues in other areas of its
operations, in particular private (non-Medicare) nursing, hospice care, and
management services. The Company has hired new or additional sales personnel for
each of these areas, has introduced sales incentive programs for each of them,
and has installed new management for both the hospice services and management
services divisions. While the volume of such net revenues will continue to
remain small relative to the Company's Medicare cost-based business, such net
revenues (along with revenues from the Company's infusion business) represent
the Company's predominate sources of net income.
Patient Care Costs. Patient care costs are comprised of salaries and
related benefits for patient care personnel and cost of sales for home medical
equipment, infusion products, and supplies. In fiscal 1996, such costs increased
123% to $95.7 million from $42.9 million in fiscal 1995. The $52.8 million
increase is primarily attributable to the acquisitions of Home Care late in
fiscal 1995 and the acquisition of Biomedical at the beginning of fiscal 1996.
These acquisitions significantly increased in fiscal 1996 the Company's volume
of business that generate such costs. As a percentage of net revenues, however,
patient care costs decreased from 50.9% to 46.6%. The decrease reflects the
presence of management services (which do not generate patient care costs) as
part of the Company's operations for all of fiscal 1996 but for only the last
five months of fiscal 1995, due primarily to the acquisition of MSS, and a lower
patient care cost structure at Home Care compared to the Company's predecessor.
29
<PAGE> 30
General and Administrative Expenses. General and administrative expenses
are comprised of salaries and benefits for administrative and support staff,
occupancy expenses, and other non-patient care operating costs. In fiscal 1996,
such expenses increased 179% to $94.9 million from $34.1 million in fiscal 1995.
Substantially all of the increase is attributable to the 1995 Acquisitions,
which expanded the Company's requirements for administrative personnel to
support the substantially higher volume of business resulting from those
acquisitions, as well as its need for additional corporate level management and
other personnel to support implementation of the Company's expansion and growth
plans. As a percentage of net revenues, general and administrative expenses
increased from 40.5% to 46.2%, reflecting the presence of management services
(which require more administrative personnel to provide such services) as part
of the Company's operations for all of fiscal 1996 but for only the last five
months of fiscal 1995, primarily due to the acquisition of MSS, and a higher
general and administrative cost structure at Home Care compared to the Company's
predecessor. These factors were partially offset by cost reduction initiatives
achieved through consolidation of certain of the Company's Tennessee operations
following the acquisition of Home Care.
The Company has undertaken to reduce general and administrative expenses in
several areas through further consolidation of its acquired operations and
certain Company-wide cost-cutting measures. Because certain of these measures
involve some personnel reductions, the Company will incur certain one-time
severance costs in implementing those measures. In addition, the Company may
incur extra expenses in connection with the defense of the recently initiated
investor litigation, which would increase general and administrative expenses if
or to the extent not reimbursed by the Company's insurance carrier.
The continued growth in the Company's volume of business will necessarily
increase the aggregate amount of general and administrative expenses, and
increases or decreases in the volume of net revenues (including from Medicare
cost-based payments) will directly affect such expenses as a percentage of
overall net revenues. The Company's objective is to reduce the effect of general
and administrative expenses for the Company's net income, which may or may not
be revealed solely by an analysis of such expenses as a percentage of net
revenues, due to the effects of Medicare's cost-based system for most of its
reimbursement payments for home health care services.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased to $6.1 million for fiscal 1996 from $3.4 million for fiscal 1995, as
a result of the Company's significantly higher volume of business in fiscal 1996
and the increase in unpaid claims that had been submitted to the Canceled
Contractor under the TennCare program. The provision for doubtful accounts
decreased, however, as a percentage of net revenues (3.0% versus 4.0% in fiscal
1996 and 1995, respectively), primarily as a result of an improved payor mix
reflected in the generally higher volume of business.
Depreciation and Amortization Expenses. Depreciation is taken on the
Company's property and equipment. Amortization expense includes the
amortization, over a 40-year period, of the excess of the purchase price over
the fair market value of the net identifiable assets acquired by the Company
(goodwill) and the amortization of other intangibles. Depreciation and
amortization expense was $3.3 million and $1.6 million in fiscal 1996 and 1995,
respectively. The large increase is primarily attributable to the 1995
Acquisitions. Depreciation and amortization expense decreased slightly as a
percentage of net revenues for these periods (from 1.9% to 1.6%) because of the
differences in the various assets purchased as part of the Company's
acquisitions as compared with the revenues stream of these acquisitions.
Interest Expense, Net. Interest expense, net, reflects the net result of
interest income earned from short-term investments of cash and the interest
incurred by the Company on indebtedness. Interest expense, net, was $902,000 in
fiscal 1995 and increased substantially to $4.3 million in fiscal 1996,
reflecting a substantial increase in the Company's outstanding indebtedness
during 1996, primarily as a result of the 1995 Acquisitions and an increased
level of borrowings to furnish working capital to support the Company's expanded
volume of business. In April 1996, however, the Company repaid $37.6 million of
its borrowings under the NationsBank Credit Facility (discussed below), which
significantly reduced the interest expense that the Company incurred during the
remainder of fiscal 1996.
30
<PAGE> 31
Net Income. The Company's decrease in net income (to $199,000 for fiscal
1996 from $697,000 for fiscal 1995) reflects a $2.87 million net loss before
income taxes in the fourth quarter of fiscal 1996 and is attributable to the
above factors.
Fiscal Year 1995 and Fiscal 1994 (11 months)
The Company's results of operations for fiscal 1994 do not reflect the
performance of any of the companies acquired in the 1995 Acquisitions. The
results for fiscal 1995 include five months of performance by MSS and one month
by Home Care. Moreover, as a result of the change in fiscal year discussed
above, fiscal 1994 includes only eleven months of operations. These factors
alone account for several significant changes in the Company's period-to-period
results discussed below.
Net Revenues. In fiscal 1995, net revenues increased 69% to $84.2 million
from $49.9 million in fiscal 1994. (Annualizing the fiscal 1994 amount for 12
months, the percentage increase would be 55%.) Of this increase, approximately
$12.0 million (35%) is attributable to the acquisitions of MSS and Home Care.
The increase in net revenues, exclusive of acquisitions, results from internal
growth primarily attributable to increased levels of referrals from existing
referral sources and the cultivation of new referral sources. Referrals from
managed care organizations in the TennCare Program (which was effective for only
six months in fiscal 1994, but for all of fiscal 1995) increased TennCare net
revenues by $9.0 million in fiscal 1995. The Company experienced growth in all
of its primary services and products.
Patient Care Costs. Patient care costs increased 57% to $42.9 million in
fiscal 1995 from $27.3 million in fiscal 1994. (Annualizing the fiscal 1994
amount for 12 months, the percentage increase would be 44%.) Of this increase,
approximately $3.9 million (or 25%) is attributable to the acquisition of Home
Care, with the balance attributable to the higher volume of business resulting
from the Company's internal growth. As a percentage of net revenue, however,
patient care costs decreased from 54.8% in fiscal 1994 to 50.9% in fiscal 1995.
The decrease primarily reflects growth in the Company's management services (due
largely to the acquisition of MSS) which do not generate patient care costs.
General and Administrative Expenses. In fiscal 1995, general and
administrative expenses increased 60% to $34.1 million from $21.2 million for
fiscal 1994. (Annualizing the fiscal 1994 amount for 12 months, the percentage
increase would be 47%.) After allowing for the effect of fiscal 1994 including
only 11 months, substantially all of the increase is attributable to the
Company's acquisition of MSS and Home Care, which increased the Company's
requirements for administrative personnel to support its substantially higher
volume of business, as well as its need for additional corporate level
management and other personnel to support implementation of the Company's
expansion and growth plans. Notwithstanding those factors, however, general and
administrative expenses decreased as a percentage of net revenues, from 42.5% to
40.5%, primarily reflecting management's implementation of several cost
reduction initiatives during fiscal 1995. These initiatives included personnel
reductions and the consolidation of certain of the Company's Tennessee
operations following the acquisition of Home Care. These effects were offset
somewhat by the higher level of general and administrative costs associated with
providing management services, which the Company commenced with the MSS
acquisition.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased to $3.4 million for fiscal 1995 from $1.4 million for fiscal 1994,
primarily as a result of the Company's significantly higher volume of business
in fiscal 1995. In addition, after completing the acquisition of Home Care, the
Company evaluated the collectibility of accounts receivable of Home Care, and
using its regular systematic approach, concluded that it would record a $1
million charge to the provision for doubtful accounts as of June 30, 1995, which
amount is reflected in the Company's financial statements for the year then
ended. Excluding the charge related to Home Care's accounts receivable, the
provision for doubtful accounts as a percentage of net revenues was essentially
unchanged at approximately 3.0% each period.
Depreciation and Amortization. Depreciation and amortization expense was
$1.6 million and $.7 million in fiscal 1995 and 1994, respectively. The increase
(111%) is primarily attributable to the amortization of the Company's goodwill
resulting from the acquisition of its predecessor on July 1, 1994 and the
acquisitions of MSS and Home Care later in fiscal 1995. Depreciation and
amortization expense, as a percentage of net
31
<PAGE> 32
revenues for these periods, increased by 27% (to 1.9% from 1.5%) for the same
principal reason. Amortization expense may increase in the future as a result of
new acquisitions.
Interest Expense, Net. Interest expense, net, was $127,000 in fiscal 1994
and increased significantly to $902,000 in fiscal 1995, reflecting a substantial
increase in the Company's indebtedness during fiscal 1995, both as a result of
the acquisitions of the Company's predecessor, MSS, and Home Care, and an
increased level of borrowings to furnish working capital to support the
Company's expanded volume of business.
Net Income (Loss). The Company had net income of $697,000 for fiscal 1995
compared to a $732,000 loss for fiscal 1994. The $1,429,000 increase is
attributable to the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for acquisitions of
additional home health care companies, expansion of the services provided
through its existing operations, and working capital. The Company's growth
objectives will require that Housecall have available substantial amounts of
capital for the foreseeable future, as Housecall continues to seek to establish
a substantial presence and market share in its select geographic markets.
Historically, the Company has financed these requirements principally through
issuances of Common Stock, Series A Preferred Stock, and subordinated notes
(primarily to Welsh Carson and its affiliates) and borrowings under the
Company's credit facility with a consortium of banks led by NationsBank, N.A.
(Carolinas) ("NationsBank Credit Facility").
At June 30, 1996, the Company had cash and cash equivalents of $7.8 million
and working capital of $18.6 million. As of September 24, 1996, the Company had
approximately $7.9 million of cash and cash equivalents and, subject to
compliance with or waiver of applicable covenants, $21 million of available
borrowing capacity under its NationsBank Credit Facility. The Company is in the
process of negotiating another credit facility with a different financial
institution.
Management believes the new lines of credit the Company is seeking under
the new credit facility being negotiated, together with cash flow generated from
operations, will be adequate to enable the Company to fund its operations and
anticipated growth for at least the next year. However, no assurance can be
given that such sources of capital will be adequate to meet the Company's
requirements or that alternative sources will be available on terms acceptable
to the Company to take advantage of each attractive acquisition or expansion
opportunity that might develop in the future. In addition, delays in
reimbursements to the Company by third party payors (or the effect of a Medicare
adjustment with respect to a prior period's reimbursements) may cause working
capital constraints. While the Company has experienced such delays and
adjustments, the Company has not had a working capital shortfall as a result of
any such occurrence.
During April 1996, the Company completed an initial public offering of
4,140,000 shares of its Common Stock that yielded $59.7 million of net proceeds
to the Company. The Company used those proceeds to, among other things, redeem
its outstanding shares of Series A Preferred Stock and repay all of its $37.6
million of its outstanding indebtedness under the NationsBank Credit Facility,
as discussed below under "-- Analysis of Cash Flows". As a result of the
repayment to NationsBank, the NationsBank Credit Facility currently provides for
a $13 million term loan facility ("Term Loan B"), and a revolving credit
facility of $12 million. Borrowings outstanding under each facility bear
interest, at the Company's option, at either the bank's prime rate plus 1.5% or
an adjusted Eurodollar rate plus 2.75%. In addition, the Company pays a .5%
commitment fee on the unused portion of funds available under the agreement. The
Company's borrowings under the NationsBank Credit Facility are currently $4
million under the revolving credit facility. The Company has obtained a waiver
for compliance with certain covenants of the NationsBank Credit Facility at June
30, 1996. The Company has also obtained a waiver through July 1, 1997 for
compliance with one of the covenants of the subordinated notes issued to an
affiliate of Welsh Carson. Due to the uncertainty of the Company obtaining
additional waivers in fiscal 1997 for compliance with covenants of the
NationsBank Credit Facility, if needed, the $4 million outstanding under the
revolving credit facility has been classified as current portion of long-term
debt. If any such waiver were required and not obtained in the future, the
Company would be denied further borrowings under the NationsBank Credit Facility
and could be required to accelerate
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<PAGE> 33
payment of outstanding amounts. Other information about the NationsBank Credit
Facility is contained in Note 3 to the Company's consolidated financial
statements.
Analysis of Cash Flows
At June 30, 1995, the Company had cash and cash equivalents of $18.3
million and working capital of $19.3 million. At June 30, 1996, these amounts
were $7.8 million and $18.6 million, respectively. The change in these amounts
from the end of fiscal 1995 reflects the acquisition of Biomedical as well as
the Company's initial public offering in April 1996. Cash used by operating
activities was $2.5 million for the fiscal year ended June 30, 1996. A
significant factor increasing the cash used in operations was an increase in
receivables, net of the acquisition of Biomedical, of $5.5 million. This
increase in receivables is primarily a result of growth in net revenues, and the
timing of Medicare reimbursement under the periodic interim payments system.
During the fiscal year ended June 30, 1996, the Company's investing
activities used $11.2 million in cash, substantially all of which was used for
the acquisition of Biomedical (for which the Company paid approximately
$9,000,000 in cash, including transaction costs and bonuses paid to employees,
and a 10% subordinated note in the amount of $1,000,000 that was repaid with net
proceeds from the Company's initial public offering).
Financing activities (apart from the initial public offering) provided $3.2
million of cash during the fiscal year ended June 30, 1996, and included the
sale in August 1995 of 200,000 shares of Common Stock for $800,000. In April
1996, the Company sold 4,140,000 shares of Common Stock in connection with its
initial public offering, which yielded approximately $59.7 million of net
proceeds. The net proceeds were used to: (i) repay $37.6 million of indebtedness
under the Company's NationsBank Credit Facility; (ii) redeem all outstanding
shares of Series A Preferred Stock (at an aggregate redemption price of $19.9
million, including $3.1 million of accrued dividends); and (iii) repay the $1
million of 10% Subordinated Notes issued as part of the Biomedical acquisition.
CERTAIN ACCOUNTING MATTERS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement No. 121 in the first quarter of fiscal year
1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation. Statement No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans, such as stock
purchase plans and stock option plans. Statement No. 123 is effective for
transactions entered into after December 15, 1995. The Company has decided to
adopt Statement No. 123 for use in fiscal year 1997, but to continue to use APB
No. 25 to account for its stock based compensation awards in prior periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, the Consolidated Financial Statements
and Notes to the Consolidated Financial Statements that appear on pages F-1
through F-15 and S-1 of this Annual Report on Form 10-K are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years, the Company did not
change accountants and had no disagreement with its accountants on any matters
of accounting principles or practices or financial statement disclosure.
33
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained under the heading "Nominees for Election to the
Board of Directors" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for the Company's 1996 Annual Meeting of
Shareholders, to be filed with the Commission, is incorporated herein by
reference. Pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation
S-K, information relating to the executive officers of the Company is included
in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Summary Compensation Table,"
"Option Grants in the Last Fiscal Year", "Fiscal Year-End Option Values", and
"Directors' Compensation" in the definitive Proxy Statement to be used in
connection with solicitation of proxies for the Company's 1996 Annual Meeting of
Shareholders, to be filed with the Commission, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained under the headings "Ownership of Stock by
Directors, Executive Officers and Principal Shareholders" in the definitive
Proxy Statement to be used in connection with the solicitation of proxies for
the Company's 1996 Annual Meeting of Shareholders, to be filed with the
Commission, is incorporated herein by reference. For purposes of determining the
aggregate market value of the Company's voting stock held by nonaffiliates,
shares held by all directors and executive officers of the Company have been
excluded. The exclusion of such shares is not intended to, and shall not,
constitute a determination as to which persons or entities may be "affiliates"
of the Company as defined by the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1996 Annual Meeting of Shareholders, to be filed with
the Commission, is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following financial statements and notes thereto of the Company are
incorporated by reference in Item 8 of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets at June 30, 1995 and June 30, 1996
Consolidated Statements of Operations for the Eleven Months ended June
30, 1994 and for the Years ended June 30, 1995 and June 30, 1996
Consolidated Statements of Stockholders' Equity for the Eleven Months
ended June 30, 1994, and for the Years ended June 30, 1995, and June 30,
1996
Consolidated Statements of Cash Flows for the Eleven Months ended June
30, 1994, and for the Years ended June 30, 1995 and June 30, 1996
Notes to Consolidated Financial Statements.
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<PAGE> 35
2. Financial Statement Schedules.
The following financial statement schedule is included on page S-1 of this
Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits.
The following exhibits are required to be filed with this Annual Report on
Form 10-K by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ -------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation of the Company, included as Exhibit
3.1 to the Company's Form S-1, File No. 333-688, previously filed with
the Commission and incorporated herein by reference.
3.2 -- Bylaws of the Company, included as Exhibit 3.2 to the Company's Form S-1,
File No. 333-688, previously filed with the Commission and incorporated
herein by reference.
10.1 -- Registration Rights Agreement, dated June 30, 1994, by and among the
Company and the Several Participants named therein, as amended by the
First Amendment thereto, dated June 29, 1995 and the Second Amendment
thereto, dated August 28, 1995, included as Exhibit 10.3 to the Company's
Form S-1, File No. 333-688, previously filed with the Commission and
incorporated herein by reference.
10.2 -- Amended and Restated Employment Agreement, dated as of January 1, 1996,
by and between the Company and George D. Shaunnessy, included as Exhibit
10.4 to the Company's Form S-1, File No. 333-688, previously filed with
the Commission and incorporated herein by reference.*
10.3 -- Amended and Restated Employment Agreement, dated as of January 1, 1996,
by and between the Company and Peter J. Bibb, included as Exhibit 10.5 to
the Company's Form S-1, File No. 333-688, previously filed with the
Commission and incorporated herein by reference.*
10.4 -- Amended and Restated Employment Agreement, dated as of January 1, 1996,
by and between the Company and Harold W. Small, included as Exhibit 10.6
to the Company's Form S-1, File No. 333-688, previously filed with the
Commission and incorporated herein by reference.*
10.5 -- Amended and Restated Employment Agreement, dated as of January 1, 1996,
by and between the Company and Thomas F. Luthringer, included as Exhibit
10.7 to the Company's Form S-1, File No. 333-688, previously filed with
the Commission and incorporated herein by reference.*
10.6 -- Stock Purchase Agreement, dated February 2, 1995, by and between SBS
Acquisition Corp. and Phyllis J. Robertson (related to the acquisition of
Medical Support Services of Tennessee, Inc.), included as Exhibit 10.8 to
the Company's Form S-1, File No. 333-688, previously filed with the
Commission and incorporated herein by reference.
10.7 -- Securities Purchase Agreement, dated June 28, 1995, by and among the
Company and the Several Cash Investors named therein, included as Exhibit
10.9 to the Company's Form S-1, File No. 333-688, previously filed with
the Commission and incorporated herein by reference.
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ -------------------------------------------------------------------------
<S> <C> <C>
10.8 -- Stock Purchase Agreement, dated May 31, 1995, by and among the Company
and the Several Selling Shareholders listed therein (related to the
acquisition of Home Care Affiliates, Inc.), included as Exhibit 10.10 to
the Company's Form S-1, File No. 333-688, previously filed with the
Commission and incorporated herein by reference.
10.9 -- Covenant to Compete, dated May 31, 1995, executed by Home Care
Affiliates, Inc. and the Company in favor of Res-Care, Inc., included as
Exhibit 10.11 to the Company's Form S-1, File No. 333-688, previously
filed with the Commission and incorporated herein by reference.
10.10 -- Stock Purchase Agreement, dated July 9, 1995, by and among the Company
and the Several Selling Shareholders listed therein (related to the
acquisition of Biomedical Services, Inc.), included as Exhibit 10.12 to
the Company's Form S-1, File No. 333-688, previously filed with the
Commission and incorporated herein by reference.
10.11 -- Asset Purchase Agreement between the Company and R.N. Registry Inc. dated
as of June 30, 1996, included as Exhibit 2.1 to the Company's Form 8-K
having an event date of June 30, 1996, previously filed with the
Commission and incorporated herein by reference.
10.12 (a) -- Modified and Restated Credit Agreement("Credit Agreement"), dated July
31, 1995 by and between the Company and NationsBank N.A. (Carolinas) as
party and as agent for Toronto Dominion (Texas), Inc. and AmSouth Bank of
Alabama, included as Exhibit 10.13 to the Company's Form S-1, File No.
333-688, previously filed with the Commission and incorporated herein by
reference.
10.12 (b) -- Amendment No. 1 to Credit Agreement, dated as of September 30, 1996
10.13 -- Master Agreement, dated as of August 31, 1995 by and between the Company
and NationsBank, N.A. (Carolinas) and the Schedule thereto, dated as of
September 1, 1995, included as Exhibit 10.14 to the Company's Form S-1,
File No. 333-688, previously filed with the Commission and incorporated
herein by reference.
10.14 -- Master Agreement, dated as of September 5, 1995 by and between the
Company and Toronto Dominion Bank, acting through its New York Branch,
and the Schedule thereto, dated as of September 5, 1995, included as
Exhibit 10.15 to the Company's Form S-1, File No. 333-688, previously
filed with the Commission and incorporated herein by reference.
10.15 -- Stock Option, granted as of September 19, 1995, by the Company to James
E. Dalton, Jr., included as Exhibit 10.16 to the Company's Form S-1, File
No. 333-688, previously filed with the Commission and incorporated herein
by reference.*
10.16 -- Stock Option, granted as of September 19, 1995, by the Company to Howard
R. Deutsch, included as Exhibit 10.17 to the Company's Form S-1, File No.
333-688, previously filed with the Commission and incorporated herein by
reference.*
10.17 -- Stock Option, granted as of September 19, 1995, by the Company to R. Dale
Ross, included as Exhibit 10.18 to the Company's Form S-1, File No.
333-688, previously filed with the Commission and incorporated herein by
reference.*
10.18 -- Consulting Agreement by and between Green Mountain Software Corporation
and Medical Support Services of Tennessee, Inc., dated October 25, 1994,
included as Exhibit 10.19 to the Company's Form S-1, File No. 333-688,
previously filed with the Commission and incorporated herein by
reference.
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ -------------------------------------------------------------------------
<S> <C> <C>
10.19 -- Performance Stock Option and Restricted Stock Purchase Plan, dated June
1994, included as Exhibit 4.3 to the Company's Form S-8, File No.
333-07257, previously filed with the Commission and incorporated herein
by reference.
10.20 -- Stock Option and Restricted Stock Purchase Plan, dated June 1994 included
as Exhibit 10.20 to the Company's Form S-1, Commission File No. 33-688,
previously filed with the Commission and incorporated herein by
reference.
10.21 -- 1996 Stock Option and Restricted Stock Purchase Plan dated January 1996
included as Exhibit 4.1 to the Company's Form S-8, File No. 333-07257,
previously filed with the Commission and incorporated herein by
reference.
10.22 -- Asset Purchase Agreement between the Company and R.N. Registry, Inc.,
dated as of June 30, 1996, included as Exhibit 2.1 to the Company's Form
8-K, as amended, having an event date of June 30, 1996.
10.23 -- Employment Agreement, dated as of May 31, 1995, by and between Home Care
Affiliates, Inc. and J. Paul Gordon.
11 -- Statement regarding computation of earnings per share.
21 -- Subsidiaries of the Company.
23 -- Consent of Ernst & Young LLP
27 -- Financial Data Schedule (for SEC use only).
99 -- Proxy Statement**
</TABLE>
- - ---------------
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item
14(c) of Form 10-K
** To be filed by amendment
(b) On July 15, 1996, the Company filed a Form 8-K, reporting an Item 2
transaction as of June 30, 1996. The Company filed a Form 8K/A relating to the
transaction on September 13, 1996.
37
<PAGE> 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets at June 30, 1995 and June 30, 1996........................ F-3
Consolidated Statements of Operations -- Eleven Months Ended June 30, 1994, Year Ended
June 30, 1995 and Year Ended June 30, 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity -- Eleven Months Ended June 30, 1994,
Year Ended June 30, 1995 and Year Ended June 30, 1996............................... F-5
Consolidated Statements of Cash Flows -- Eleven Months Ended June 30, 1994, Year Ended
June 30, 1995 and Year Ended June 30, 1996.......................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
Schedule II -- Valuation and Qualifying Accounts...................................... S-1
</TABLE>
F-1
<PAGE> 39
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Housecall Medical Resources, Inc.
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of Housecall, Inc. (Predecessor) for the
eleven months ended June 30, 1994, and the consolidated balance sheets of
Housecall Medical Resources, Inc. (Company) as of June 30, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years then ended. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)2. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the consolidated results of
operations and cash flows of Housecall, Inc. for the eleven months ended June
30, 1994, and the consolidated financial position of Housecall Medical
Resources, Inc. at June 30, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
September 12, 1996
F-2
<PAGE> 40
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $18,349,000 $ 7,785,000
Accounts receivable -- less allowance for doubtful accounts of
$2,510,000 in 1995 and $2,920,000 in 1996..................... 18,048,000 27,293,000
Income taxes receivable.......................................... 978,000 940,000
Deferred income taxes............................................ 2,569,000 3,223,000
Other current assets............................................. 1,549,000 1,987,000
----------- ------------
Total current assets..................................... 41,493,000 41,228,000
Property and equipment:
Land............................................................. 25,000 25,000
Buildings........................................................ 794,000 1,411,000
Furniture and equipment.......................................... 3,553,000 5,660,000
----------- ------------
4,372,000 7,096,000
Less accumulated depreciation and amortization........... 1,001,000 1,927,000
----------- ------------
Net property and equipment............................... 3,371,000 5,169,000
Excess of cost of acquired businesses over fair values of net
assets acquired.................................................. 45,494,000 55,575,000
Deferred financing costs........................................... 1,746,000 1,480,000
Other assets....................................................... 299,000 493,000
----------- ------------
$92,403,000 $103,945,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 7,203,000 $ 7,455,000
Accrued payroll and related expenses............................. 6,837,000 7,749,000
Other accrued liabilities........................................ 3,408,000 2,632,000
Current portion of long-term debt................................ 4,116,000 4,085,000
Current portion of capital lease obligations..................... 627,000 661,000
----------- ------------
Total current liabilities................................ 22,191,000 22,582,000
Long-term debt..................................................... 41,218,000 10,186,000
Capital lease obligations.......................................... 262,000 1,534,000
Other long-term liabilities........................................ 2,316,000 1,887,000
Deferred income taxes.............................................. 449,000 1,005,000
Commitments and contingencies
Series A Preferred Stock (redeemable), $1 par value, 200,000 shares
authorized, 167,960 and 0 shares issued and outstanding in 1995
and 1996, redemption and liquidation values of $18,096,000 in
1995............................................................. 168,000 --
Additional paid-in capital on Series A Preferred Stock
(redeemable)..................................................... 17,703,000 --
Stockholders' equity:
Preferred stock, $.10 par value, 9,800,000 shares authorized, no
shares issued and outstanding................................. -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
5,878,900 and 10,218,900 shares issued and outstanding in 1995
and 1996...................................................... 59,000 102,000
Additional paid-in capital on common stock......................... 8,037,000 66,649,000
Retained earnings.................................................. -- --
----------- ------------
Total stockholders' equity............................... 8,096,000 66,751,000
----------- ------------
$92,403,000 $103,945,000
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 41
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------- --------------------------
ELEVEN MONTHS YEAR ENDED YEAR ENDED
ENDED JUNE 30, JUNE 30,
JUNE 30, 1994 1995 1996
------------- ----------- ------------
<S> <C> <C> <C>
Net revenues.......................................... $49,883,000 $84,219,000 $205,389,000
Operating expenses:
Patient care........................................ 27,314,000 42,879,000 95,688,000
General and administrative.......................... 21,237,000 34,069,000 94,940,000
Provision for doubtful accounts..................... 1,435,000 3,395,000 6,074,000
Depreciation and amortization....................... 744,000 1,568,000 3,262,000
----------- ----------- ------------
Total operating expenses.................... 50,730,000 81,911,000 199,964,000
----------- ----------- ------------
Income (loss) from operations......................... (847,000) 2,308,000 5,425,000
Other income (expense):
Interest income..................................... 31,000 180,000 348,000
Interest expense.................................... (158,000) (1,082,000) (4,679,000)
----------- ----------- ------------
Income (loss) before income taxes..................... (974,000) 1,406,000 1,094,000
Provision (credit) for income taxes................... (242,000) 709,000 895,000
----------- ----------- ------------
Net income (loss)..................................... $ (732,000) 697,000 199,000
===========
Cumulative dividends and accretion on Series A
Preferred Stock (redeemable)........................ (1,327,000) (2,006,000)
----------- ------------
Net loss attributable to common stockholders.......... $ (630,000) $ (1,807,000)
=========== ============
Net loss per common share............................. $ (0.10) $ (0.24)
=========== ============
Weighted average common shares outstanding............ 6,283,000 7,425,000
=========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 42
HOUSECALL MEDICAL RESOURCES, INC
AND HOUSECALL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
----------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at July 31, 1993........... 1,052,668 $1,882,000 $ 52,000 $ 1,934,000
Issuance of common stock to
ESOP.......................... 36,632 312,000 -- 312,000
Shares issued in connection with
the exercise of stock
appreciation rights and
options....................... 31,486 376,000 -- 376,000
Net loss......................... -- -- (732,000) (732,000)
---------- --------- -------- ----------
Balance at June 30, 1994........... 1,120,786 $2,570,000 $(680,000) $ 1,890,000
========== ========= ======== ==========
COMPANY
Issuances of stock for cash...... 5,454,150 $ 56,000 $ 8,340,000 $ -- $ 8,396,000
Issuances of stock in connection
with an acquisition........... 424,750 3,000 327,000 -- 330,000
Net income....................... -- -- -- 697,000 697,000
Accretion on Series A Preferred
Stock (redeemable)............ -- -- -- (27,000) (27,000)
Cumulative dividends on Series A
Preferred Stock
(redeemable).................. -- -- (630,000) (670,000) (1,300,000)
---------- --------- ---------- -------- ----------
Balance at June 30, 1995........... 5,878,900 59,000 8,037,000 -- 8,096,000
Issuance of stock for cash....... 200,000 2,000 798,000 -- 800,000
Issuances of stock in connection
with initial public offering,
net of issuance costs......... 4,140,000 41,000 59,621,000 -- 59,662,000
Net income....................... -- -- -- 199,000 199,000
Accretion on Series A Preferred
Stock (redeemable)............ -- -- (26,000) (199,000) (225,000)
Cumulative dividends on Series A
Preferred Stock
(redeemable).................. -- -- (1,781,000) -- (1,781,000)
---------- --------- ---------- -------- ----------
Balance at June 30, 1996........... 10,218,900 $ 102,000 $66,649,000 $ -- $66,751,000
========== ========= ========== ======== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 43
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------- ---------------------------
ELEVEN MONTHS YEAR YEAR
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ (732,000) $ 697,000 $ 199,000
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization...................... 744,000 1,568,000 3,262,000
Amortization of deferred financing costs........... -- -- 433,000
Compensation expense from stock appreciation
rights.......................................... 369,000 -- --
Deferred income taxes.............................. 901,000 489,000 (98,000)
Changes in operating assets and liabilities, net of
businesses:
Accounts receivable............................. (901,000) (750,000) (5,455,000)
Other current assets............................ (459,000) (577,000) 386,000
Accounts payable................................ 1,018,000 1,624,000 (395,000)
Accrued payroll and related expenses............ (654,000) (1,143,000) 912,000
Other accrued liabilities....................... 39,000 792,000 (1,769,000)
Income taxes payable/receivable................. (1,301,000) (1,803,000) 38,000
---------- ----------- -----------
Net cash provided (used) by operating activities..... (976,000) 897,000 (2,487,000)
INVESTING ACTIVITIES
Payments for business acquisitions, net of cash
acquired........................................... -- (42,198,000) (9,178,000)
Additions to property and equipment.................. (53,000) (118,000) (1,039,000)
Other, net........................................... 75,000 (99,000) (1,010,000)
---------- ----------- -----------
Net cash provided (used) by investing activities..... 22,000 (42,415,000) (11,227,000)
FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit
agreement.......................................... 736,000 (793,000) --
Repayment of long-term debt.......................... -- -- (41,731,000)
Proceeds from issuance of long-term debt............. -- 44,576,000 9,171,000
Refinancing of long-term debt........................ -- (5,524,000) (3,713,000)
Redemption of Series A Preferred Stock............... -- -- (19,877,000)
Proceeds from issuance of Series A Preferred Stock
(redeemable)....................................... -- 15,884,000 --
Proceeds from issuance of common stock............... 319,000 8,396,000 60,462,000
Principal payments under capital lease obligations... (560,000) (868,000) (1,064,000)
Deferred financing costs............................. -- (1,804,000) (98,000)
---------- ----------- -----------
Net cash provided by financing activities............ 495,000 59,867,000 3,150,000
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (459,000) 18,349,000 (10,564,000)
Cash and cash equivalents at beginning of year....... 1,078,000 -- 18,349,000
---------- ----------- -----------
Cash and cash equivalents at end of year............. $ 619,000 $ 18,349,000 $ 7,785,000
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid........................................ $ 25,000 $ 856,000 $ 4,341,000
========== =========== ===========
Income taxes paid.................................... $ 523,000 $ 1,463,000 $ 2,294,000
========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 44
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Housecall Medical Resources, Inc. (the "Company") was incorporated in June
1994 and commenced operations on July 1, 1994. The Company provides home health
services including home nursing, infusion therapy, respiratory therapy and
hospice care. The Company also rents, generally on a month-to-month basis, and
sells home medical equipment. In addition, the Company provides management
services -- consisting of clinical and marketing support, computerized billing
and records retention services, staffing and other general administrative
support -- to clients who are home health agencies. At June 30, 1996, the
Company had operations in fourteen states and the District of Columbia.
BASIS OF PRESENTATION AND OWNERSHIP
On July 1, 1994 the Company acquired all of the issued and outstanding
shares of Housecall, Inc. (the "Predecessor") common stock. The Company
accounted for this acquisition as a purchase in accordance with the requirements
of Opinion of the Accounting Principles Board No. 16, "Business Combinations"
(see Note 2). The predecessor's consolidated financial statements do not reflect
any adjustments relating to such acquisition.
A majority of the Company's outstanding common stock is owned by Welsh,
Carson, Anderson & Stowe VI, L.P. and its affiliates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Predecessor and their majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
NET REVENUES AND ESTIMATED SETTLEMENTS WITH THIRD PARTY PAYORS
Services rendered to patients covered by Medicare and Medicaid programs
represented approximately 77%, 70% and 67% of net revenues for the eleven months
ended June 30, 1994 ("1994"), and the years ended June 30, 1995 and 1996,
respectively. Payments for services rendered to patients covered by these
programs are generally less than the billed charges. Provisions for contractual
adjustments are made to reduce the charges to these patients to estimated
receipts based upon the programs' method of payment, generally based on cost
reimbursement determined on a retrospective basis. Final settlements under these
programs are subject to administrative review and audit, and provisions are
currently made for adjustments which may result during the period in which such
adjustments become known. Net revenues are presented net of provisions for
contractual adjustments and other allowances of $13,457,000, $23,331,000 and
$58,407,000 in 1994, 1995, and 1996, respectively, in the accompanying
consolidated statements of operations.
In the ordinary course of business, services are rendered to patients who
are financially unable to pay for the care. The value of these services is not
material to the results of operations.
Management services revenues are recognized at contracted rates as services
are provided. The Company's management services agreements are generally for
terms of three years. The Company is generally compensated based on the number
of visits performed by the managed agencies. Renewal of the agreements is
subject to negotiation at their expiration. Management services revenues were
$2.6 million and $8.1 million in 1995 and 1996, respectively.
F-7
<PAGE> 45
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less are
considered to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the following estimated useful
lives or the term of the lease, if shorter:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------- --------------
<S> <C> <C>
Buildings............................................... -- 30 to 35 years
Furniture............................................... 5 to 7 years 3 to 7 years
Leasehold improvements.................................. 3 to 10 years 5 to 10 years
</TABLE>
EXCESS OF COST OF ACQUIRED BUSINESSES OVER THE FAIR VALUES OF ASSETS ACQUIRED
The excess of cost of acquired businesses over the fair values of assets
acquired (goodwill) is being amortized by the Company over 40 years. Goodwill
was amortized over 25 years by the Predecessor. Accumulated amortization at June
30, 1995 and 1996 was $442,000 and $1,855,000, respectively.
The amortization period of goodwill was determined based on the Company's
assessment of the future cash flows of the Company's acquired home health
businesses. In evaluating anticipated future cash flows, the Company considered
factors such as general home health industry trends, competition, regulatory and
legal issues and other economic factors.
The carrying value of goodwill and other long-lived assets is reviewed
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If this review indicates that the asset will
not be recoverable, as determined based on the undiscounted cash flows of the
operating entity or asset over the remaining amortization period, the carrying
value of the asset will be reduced to its fair value.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement No. 121 in the first quarter of fiscal year
1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
DEFERRED FINANCING COSTS
The costs incurred in connection with negotiating and closing financing
agreements are capitalized and amortized over the terms of the related
agreements. Accumulated amortization of deferred financing costs at June 30,
1995 and 1996 was $59,000 and $423,000, respectively.
PER SHARE DATA
Net loss per common share is calculated using the weighted average number
of common and common equivalent shares, when dilutive, outstanding during the
period. In addition, pursuant to the requirements of the Securities and Exchange
Commission, common stock issued at prices lower than the initial public offering
price and options to purchase common stock granted during the twelve months
preceding January 26, 1996
F-8
<PAGE> 46
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(see Note 5) have been included in the calculation of the shares used in
computing per share information as if they were outstanding for all periods
presented (using the treasury stock method at the initial public offering price
of $16 per share). Net loss per common share calculated in accordance with
generally accepted accounting principles would equal $(.12) and $(.26) for the
years ended June 30, 1995 and 1996, respectively.
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 amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECLASSIFICATIONS
Reclassifications of certain 1994 and 1995 financial statement amounts have
been made to conform to the 1996 presentation.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instruments subject to potential
concentration of credit risk are its trade accounts receivable. At June 30, 1995
and 1996, $9,018,000 and $13,475,000, respectively, of net accounts receivable
were due from Medicare and Medicaid. The concentration of credit risk with
respect to accounts receivable from non-governmental payors is limited due to
the large number of payors and their dispersion across many different insurance
companies, individuals and geographic locations.
2. ACQUISITIONS
On July 1, 1994, the Company acquired all of the outstanding stock of the
Predecessor, a home health company primarily operating in Tennessee and
Virginia, for consideration of approximately $13,010,000 in cash, 330,000 shares
of common stock and 6,600 shares of Series A Preferred Stock. The estimated fair
value of the common stock and Series A Preferred Stock issued in connection with
this transaction was $990,000. A portion of the cash consideration,
approximately $3,325,000, was paid into escrow to secure the indemnification
obligations of the selling shareholders of the Predecessor. As of June 30, 1996,
the Company had made claims against the escrowed amount primarily relating to
Medicare reimbursement liabilities which were not disclosed by the selling
shareholders at the date of acquisition. Any amounts ultimately collected from
the escrowed amount will be reflected as a reduction in the purchase price.
On February 3, 1995, the Company acquired all of the outstanding stock of
Medical Support Services, Inc. ("MSS"), a home health management company
primarily operating in Alabama, for cash consideration of approximately
$4,250,000. A portion of the cash consideration, approximately $300,000, was
paid into escrow to secure the indemnification obligations of the selling
shareholder of MSS. In connection with this transaction, the Company entered
into employment and stock option agreements with the selling shareholder. Under
the stock option agreement, the selling shareholder was granted an option to
purchase 50,000 shares of the Company's common stock at an exercise price of $1
per share (the estimated fair value of the Company's common stock at that date).
On May 31, 1995, the Company acquired all of the outstanding stock of Home
Care Affiliates, Inc. ("HCAI"), a home health company primarily operating in
Florida, Tennessee, Kentucky and Indiana for aggregate consideration of
approximately $27,860,000, of which $25,600,000 was paid in cash with the
remainder to be paid over the next four years. In addition, the Company agreed
to grant to two of the selling shareholders the right to purchase up to 200,000
shares of the Company's common stock for $4 per share (the estimated fair value
of the Company's common stock at that date). The selling shareholders exercised
these purchase rights in August 1995, and purchased an aggregate of 200,000
shares of common stock for cash consideration of $800,000. After completing the
HCAI acquisition, the Company evaluated the collectibility
F-9
<PAGE> 47
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of accounts receivable of HCAI, and using its regular systematic approach,
concluded that it would record a $1 million charge to bad debt expense as of
June 30, 1995, which amount is reflected in the Company's financial statements
for the year then ended.
On July 10, 1995, the Company acquired all of the outstanding stock of
Biomedical Home Care, Inc. ("Biomedical"), an infusion therapy services company
primarily operating in Florida and North Carolina, for consideration of
approximately $9,000,000 in cash, including transaction costs and bonuses paid
to Biomedical employees, and a subordinated note of $1,000,000.
On June 30, 1996, the Company acquired the primary operating assets of R.
N. Registry, Inc. ("R.N. Registry"), a home health agency operating in eleven
counties in Indiana, for consideration of approximately $225,000 in cash and
$283,000 in assumed liabilities.
Each of the above acquisitions was accounted for as a purchase transaction
and, accordingly, the various assets acquired and liabilities assumed have been
recorded at their respective fair values as of the dates of acquisition. The
results of operations of the acquired businesses have been included in the
accompanying consolidated statements of operations since their respective
purchase dates.
The following unaudited pro forma information for the year ended June 30,
1995 is presented as if MSS, HCAI, Biomedical and R.N. Registry had been
acquired on July 1, 1994 and such information for the year ended June 30, 1996
is presented as if R.N. Registry had been acquired on July 1, 1995. This
information does not purport to be indicative of the results that would have
actually been obtained if the acquisitions had occurred on such dates.
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net revenues.................................................... $186,262,000 $206,228,000
Net (loss) income............................................... (194,000) 82,000
Net loss attributable to common stockholders.................... (2,404,000) (1,924,000)
Net loss per common share....................................... $ (0.37) $ (0.26)
</TABLE>
3. LONG-TERM DEBT
At June 30, 1995 and 1996, long-term debt consisted of:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Revolving credit and term loan agreement.................. $35,000,000 $ 4,000,000
Subordinated notes payable................................ 9,577,000 9,645,000
Other..................................................... 757,000 626,000
----------- -----------
45,334,000 14,271,000
Current portion........................................... 4,116,000 4,085,000
----------- -----------
$41,218,000 $10,186,000
=========== ===========
</TABLE>
In May 1995, the Company entered into a Credit Agreement (the "Agreement")
with a bank. The Agreement provides for a $30,000,000 term loan facility ("Term
Loan A"), a $13,000,000 term loan facility ("Term Loan B") and a revolving
credit facility of $12,000,000. In April 1996, the Company's borrowings under
Term Loan A were repaid with proceeds from the Company's initial public
offering, and the Term Loan A facility is no longer available for borrowings by
the Company. The repayment terms for Term Loan B borrowings will be negotiated
with the bank at the time borrowings are made against the Term Loan B facility.
The outstanding balance under the revolving credit facility is due on May 31,
2000.
Borrowings outstanding under the Agreement bear interest, at the Company's
option, at either the bank's prime rate (8.25% at June 30, 1996) plus 1.5% or an
adjusted eurodollar rate, as defined by the Agreement
F-10
<PAGE> 48
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5.625% at June 30, 1996) plus 2.75%. Commitment fees of 1/2% are payable
quarterly on the unused portion of funds available under the agreement. As of
June 30, 1996, the Company had borrowings of $4,000,000 under the revolving
credit facility.
The Company has obtained a waiver for compliance with certain covenants of
the NationsBank Credit Facility at June 30, 1996. Due to the uncertainty of the
Company obtaining additional waivers in fiscal 1997, if needed, the $4,000,000
outstanding under the revolving credit facility has been classified as current
portion of long-term debt.
On August 31, 1995, the Company entered into interest rate swap
transactions with two banks under which the Company effectively fixed the
interest rate on $30,000,000 of its borrowings under the Agreement at
approximately 8.5% for the period from September 5, 1995 to March 5, 1997.
The Agreement requires prepayment of the borrowings for the amount of any
excess cash flows, as defined, and for the net proceeds from asset sales, the
issuance of stock for cash under certain circumstances or the issuance of any
additional debt.
The Agreement contains numerous restrictive covenants, which limit, among
other things: future borrowings; payment of dividends on any class of the
Company's capital stock; loans to subsidiaries, affiliates or third parties and
certain investments. The Agreement also requires the maintenance of specified
levels of cash flows, interest coverage and net worth.
The subordinated notes (held by an affiliate of Welsh, Carson, Anderson &
Stowe VI, L.P. -- see Note 1) have a face value of $10,000,000 and a stated
interest rate of 10.5%. The notes were issued at a discount of $454,000 and have
an effective interest rate of approximately 12.5%. The notes are due in two
equal installments on June 30, 2001 and June 30, 2002. The notes are subordinate
to all obligations of the Company to banks or other financial institutions for
borrowed money. The Company has obtained a waiver through July 1, 1997 for
compliance with one of the covenants of the subordinated notes.
The aggregate annual maturities of long-term debt at June 30, 1996 are:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
----------------------------------------------------------------
<S> <C>
1997............................................................ $ 4,085,000
1998............................................................ 49,000
1999............................................................ 31,000
2000............................................................ 34,000
2001............................................................ 4,859,000
Thereafter...................................................... 5,213,000
-----------
$14,271,000
===========
</TABLE>
4. LEASE COMMITMENTS
CAPITAL LEASES
The Company leases equipment under capital leases. During 1995 and 1996,
the Company entered into capital lease obligations with original principal
amounts of approximately $817,000 and $225,000, respectively. At June 30, 1995
and 1996 property under capital leases consist of:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Building...................................................... $ -- $ 662,000
Furniture and equipment....................................... 1,676,000 1,389,000
---------- ----------
Accumulated amortization...................................... 822,000 811,000
---------- ----------
$ 854,000 $1,240,000
========== ==========
</TABLE>
F-11
<PAGE> 49
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate future minimum lease payments under capital leases are:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
-------------------------------------------------------------
<S> <C>
1997......................................................... $ 836,000
1998......................................................... 413,000
1999......................................................... 308,000
2000......................................................... 308,000
2001......................................................... 308,000
Thereafter................................................... 615,000
----------
Total future minimum lease payments................ 2,788,000
Less amount representing interest............................ 593,000
----------
Present value of future minimum lease payments at June 30,
1996....................................................... $2,195,000
==========
</TABLE>
OPERATING LEASES
The Company leases equipment and office facilities under operating leases
expiring through 2002. At June 30, 1996, the future minimum rentals under these
operating leases are:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
------------------------------------------------------------
<S> <C>
1997........................................................ $ 5,042,000
1998........................................................ 3,893,000
1999........................................................ 2,470,000
2000........................................................ 1,353,000
2001........................................................ 809,000
Thereafter.................................................. 6,000
-----------
$13,573,000
===========
</TABLE>
Rental expense under operating leases amounted to approximately $1,347,000,
$1,953,000, and $6,347,000 for 1994, 1995 and 1996, respectively.
5. COMMON STOCK AND SERIES A PREFERRED STOCK
In July 1994, the Company issued 5,124,150 shares of common stock and
93,400 shares of Series A Preferred Stock for aggregate net proceeds of
$14,086,000 in cash. In June 1995, the Company issued 424,750 shares of common
stock and 67,960 shares of Series A Preferred Stock for aggregate consideration
of $10,194,000 in cash.
The Series A Preferred Stock was recorded at $100 per share, its fair value
at the issuance dates, less issuance costs of $252,000. The carrying amount of
the Series A Preferred Stock was periodically increased for unpaid dividends
which were payable upon redemption and accretion related to issuance costs.
The preferred stockholders were entitled to cumulative dividends of $13 per
share, payable annually, if declared. The Series A Preferred Stock was
redeemable by the Company at any time. The redemption price was equal to $100
per share plus cumulative unpaid dividends.
In April 1996, the Company completed an initial public offering for the
sale of 4,140,000 shares of common stock. Net proceeds from the offering were
approximately $59,662,000. The net proceeds were used in part to repay a portion
of the Company's outstanding indebtedness under the NationsBank Credit facility,
the $1 million subordinated note issued in connection with the acquisition of
Biomedical, and to redeem the Series A Preferred Stock. The difference between
the carrying value of the Series A Preferred Stock and its
F-12
<PAGE> 50
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption value, approximately $205,000, was recorded as additional accretion
to Preferred Stock resulting in a corresponding reduction in income attributable
to common stockholders for the Company's fiscal 1996 fourth quarter results.
6. COMMITMENTS AND CONTINGENCIES
At June 30, 1996, the Company maintained general and professional liability
insurance with independent insurance carriers primarily on a claims-made basis.
Beginning August 1, 1996, the Company purchased professional liability insurance
with terms which are on an occurrence basis. The policy expires on August 1,
1997. Should this policy not be renewed or replaced with equivalent insurance,
claims based on occurrences during the term of the policy, but asserted
subsequently, would be insured. Additionally, the Company's risk management
system has procedures for identifying and reporting claims on a timely basis.
Based on the claims history to date and the risk management system, management
believes any incurred but not reported claims at June 30, 1996, would not be
material to the Company's financial position or its results of operations.
The Company is a party to a number of legal actions arising in the ordinary
course of its business. In management's opinion, after consultation with legal
counsel, settlement of these actions, will not have a material adverse effect on
the Company's consolidated financial position, liquidity or results of
operations.
On August 30, 1996, two lawsuits were filed by certain persons who seek to
represent a class of shareholders who purchased shares of the Company's common
stock in the April 1996 public offering or in the subsequent aftermarket. The
individual plaintiffs in both cases allege that they were induced to purchase
the Company's stock on the basis of misrepresentations about the Company and its
prospects. Both complaints assert claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933. Both complaints name as the defendants the Company, its
directors and certain of its officers, and the lead underwriters associated with
the public offering. The Company intends to vigorously defend these lawsuits.
7. INCOME TAXES
The components of the provision (credit) for income taxes for 1994, 1995
and 1996 consist of:
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- ----------
<S> <C> <C> <C>
Current:
Federal........................................ $ 561,000 $185,000 $1,400,000
State.......................................... 98,000 35,000 123,000
--------- -------- ---------
Total current.......................... 659,000 220,000 1,523,000
Deferred:
Federal........................................ (901,000) 411,000 (529,000)
State.......................................... -- 78,000 (99,000)
--------- -------- ---------
Total deferred......................... (901,000) 489,000 (628,000)
--------- -------- ---------
$(242,000) $709,000 $ 895,000
========= ======== =========
</TABLE>
F-13
<PAGE> 51
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities at June 30, 1995 and 1996 are:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets
Amortization............................................. $ 236,000 $ --
Nondeductible accruals and allowances.................... 2,180,000 3,223,000
Deferred revenue......................................... 153,000 --
---------- -----------
Total deferred tax assets........................ 2,569,000 3,223,000
Deferred tax liabilities
Amortization............................................. -- (381,000)
Depreciation............................................. (208,000) (414,000)
Other.................................................... (241,000) (210,000)
---------- -----------
Total deferred tax liabilities................... (449,000) (1,005,000)
---------- -----------
Net deferred income taxes.................................. $2,120,000 $ 2,218,000
========== ===========
</TABLE>
A reconciliation of the provision (credit) for income taxes to the federal
statutory rate of 34% for 1994, 1995 and 1996 is:
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit).... $(331,000) $478,000 $372,000
State income taxes, net of federal benefit........ (36,000) 65,000 44,000
Non-deductible amortization of intangible
assets.......................................... 18,000 150,000 393,000
Other............................................. 4,000 16,000 86,000
Valuation allowance............................... 103,000 -- --
--------- -------- --------
Provision (credit) for income taxes............... $(242,000) $709,000 $895,000
========= ======== ========
</TABLE>
8. RETIREMENT PLANS
On August 1, 1989, the Predecessor established the Housecall, Inc. Employee
Stock Ownership Plan (ESOP). The Plan was a defined contribution plan covering
substantially all employees of the Predecessor. Contributions to the Plan were
determined by each subsidiary employer. A portion of the contributions were
generally used by the plan to purchase stock of the Predecessor. Contributions
to the plan for 1994 amounted to $729,000. Effective July 1, 1994, the ESOP sold
all of its shares of the Predecessor's common stock to the Company.
Substantially all of the Company's employees participate in various defined
contribution benefit plans. Company contributions to the plans are generally at
the discretion of the Company. The Company made contributions of $163,000 and
$883,000 to these benefit plans for 1995 and 1996, respectively.
9. STOCK OPTION PLANS
The Company has adopted three stock option and restricted stock purchase
plans. Under the plans, an aggregate of 1,717,702 shares have been reserved for
issuance to employees, officers and directors of the Company. The Board of
Directors, or a committee thereof, has the sole authority to grant the options
including the determination of the exercise price, the vesting period, the
exercise period and the number of
F-14
<PAGE> 52
HOUSECALL MEDICAL RESOURCES, INC.
AND HOUSECALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options granted. The plans provide for the granting of both non-qualified stock
options and incentive stock options. A summary of activity under the plans for
1995 and 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance, July 1, 1994
Granted.................................................... 1,157,220 $ 1 - 4
Canceled................................................... (23,000) 1 - 4
--------- -----
Balance, June 30, 1995....................................... 1,134,220 1 - 4
Granted.................................................... 428,625 8 - 13
Canceled................................................... (42,425) 1 - 13
--------- -----
Balance, June 30, 1996....................................... 1,520,420 $ 1 - 13
========= =====
</TABLE>
The stock options granted under the plans during 1995 and 1996 have been at
exercise prices equal to or greater than the fair market value of the Company's
common stock at the date of grant, as determined by Company's Board of
Directors. No compensation expense was recognized for the options granted in
1995 and 1996. Options under the incentive plan generally will vest over a
five-year period. Options to purchase 272,702 shares were granted under a
performance plan. One-half of these options vested at the date of grant, and the
remaining options vest over a period of five years.
Options under the 1996 plan generally vest over a five year period, with
20% vesting one year from the date of grant.
Options for the purchase of 203,464 and 361,369 shares of common stock were
exercisable at June 30, 1995 and 1996, respectively.
F-15
<PAGE> 53
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
HOUSECALL MEDICAL RESOURCES, INC.
JUNE 30, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ---------------------------------- ------------------- ---------------------------------- ---------- -------------
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO OTHER BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- - ---------------------------------- ------------------- ---------------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1996:
Deducted from Assets Accounts:
Allowance for Doubtful
Accounts.................... $ 2,510,000 $6,074,000 -- $5,664,000(1) $ 2,920,000
========== ========== ========== ==========
Year Ended June 30, 1995:
Deducted from Assets Accounts:
Allowance for Doubtful
Accounts.................... $ 1,619,000 $3,395,000 -- $2,504,000(1) $ 2,510,000
========== ========== ========== ==========
Year Ended June 30, 1994:
Deducted from Assets Accounts:
Allowance for Doubtful
Accounts.................... $ 288,000 $1,435,000 -- $ 104,000(1) $ 1,619,000
========== ========== ========== ==========
</TABLE>
- - ---------------
(1) Uncollectible accounts written off, net of recoveries
S-1
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Atlanta, State of Georgia, on the 27th day of September, 1996.
HOUSECALL MEDICAL RESOURCES, INC.
(Registrant)
By: /s/ GEORGE D. SHAUNNESSY
-----------------------------------
George D. Shaunnessy
Title: President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
Know all men by these presents, that each person whose signature appears
below constitutes and appoints George D. Shaunnessy or Peter J. Bibb, or either
of them, as attorney-in-fact with each having the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on Form
10-K and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or is
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in the capacities set forth and on the 27th day of September, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- - --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ GEORGE D. SHAUNNESSY President, Chief Executive Officer, and
- - --------------------------------------------- Director
George D. Shaunnessy (Principal Executive Officer)
/s/ PETER J. BIBB Vice President, Chief Financial Officer, and
- - --------------------------------------------- Secretary (Principal Financial and Accounting
Peter J. Bibb Officer)
/s/ JAMES B. HOOVER Chairman of the Board
- - ---------------------------------------------
James B. Hoover
/s/ HOWARD R. DEUTSCH Director
- - ---------------------------------------------
Howard R. Deutsch
/s/ JAMES E. DALTON, JR. Director
- - ---------------------------------------------
James E. Dalton, Jr.
/s/ ANDREW M. PAUL Director
- - ---------------------------------------------
Andrew M. Paul
/s/ R. DALE ROSS Director
- - ---------------------------------------------
R. Dale Ross
</TABLE>
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- --------------------------------------------------------------------------------
<C> <S> <C>
10.13(b) -- Amendment No. 1 to Credit Agreement.
10.23 -- Employment Agreement, dated as of May 31, 1995, by and between Home Care
Affiliates, Inc. and J. Paul Gordon.
11 -- Statement regarding computation of earnings per share.
21 -- Subsidiaries of the Registrant.
23 -- Consent of Ernst & Young LLP.
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
Exhibit 10.12(b)
AMENDMENT NO. 1 TO CREDIT AGREEMENT
THIS AMENDMENT AGREEMENT (this "Amendment"), dated as of September 30,
1995, among HOUSECALL MEDIAL RESOURCES, INC., a Delaware corporation (the
"Borrower"), the various banks and lending institutions parties hereto (each a
"Bank" and collectively, the "Banks"), and NATIONSBANK, N.A., a national
banking association, as agent for the Banks (in such capacity, the "Agent");
W I T N E S S E T H:
WHEREAS, pursuant to that certain Credit Agreement, dated as of July 31,
1995 (the "Existing Credit Agreement"), among the parties hereto, the Banks
have agreed to make loans to the Borrower; and
WHEREAS, the Borrower, the Banks and the Agent desire to make certain
amendments to the Existing Credit Agreement;
NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including its
preamble and recitals, have the following meanings (such meanings to be equally
applicable to the singular and plural forms thereof):
"Amended Credit Agreement" means the Existing Credit Agreement as amended
hereby.
"Amendment No. 1 Effective Date" is defined in Subpart 3.1.
SUBPART 1.2. Other Definitions. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including its
preamble and recitals, have the meanings provided in the Amended Credit
Agreement.
PART II
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 1
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Part II. Except as so amended, the Existing Credit Agreement, the
Notes and the other Credit Documents shall continue in full force and effect.
<PAGE> 2
SUBPART 2.1. Amendments to the Introduction. The first paragraph of the
Existing Credit Agreement is amended to read in its entirety as follows:
THIS AGREEMENT, dated as of July 31, 1995 and amended as of
September 30, 1995, by and among HOUSECALL MEDICAL
RESOURCES, INC., a Delaware corporation (the "Borrower"),
the various banks and lending institutions on the signature
pages hereto (each a "Bank" and collectively, the "Banks")
and NATIONSBANK, N.A., a national banking association, as
Agent for the Banks hereunder (hereinafter in such capacity
referred to as the "Agent").
SUBPART 2.2. Amendments to Article I. Article I of the Existing Credit
Agreement is hereby amended by inserting, in the alphabetically appropriate
place, the following definitions:
"Amendment No. 1" means Amendment No. 1 to Credit Agreement, dated as of
September 30, 1995, among the Borrower, the Agent and the Banks, amending this
Credit Agreement as then in effect.
Article I of the existing Credit Agreement is hereby further amended by
amending in its entirety the definition of Consolidated Net Worth so that such
definition now reads as follows:
"Consolidated Net Worth" means, at any time, consolidated
stockholders' equity and preferred stock of the Borrower and its
Consolidated Subsidiaries determined as of such time in accordance with
generally accepted accounting principles applied on a consistent basis,
with no upward adjustments due to a revaluation of assets.
SUBPART 2.3 Amendments to Section 5.24. Section 5.24 is amended in its
entirety so that such Section now reads as follows:
SECTION 5.24 Consolidated Net Worth. The Borrower shall maintain
Consolidated Net Worth at all times of at least $24,400,000.00; provided,
however, such amount shall be increased at the end of each fiscal year
(commencing with the fiscal year ending June 30, 1996) by an amount equal
to 75% of consolidated net income (minus extraordinary gains) of the
Borrower and its Consolidated Subsidiaries for such fiscal year (but in
no event decreased by losses for such fiscal year); provided further,
such amount shall be increased by an amount equal to 100% of the net
proceeds received by the Borrower on account any equity raised by or
contributed to the Borrower, such increases to be effective as of the
date of the receipt by the Borrower of such proceeds.
- 2 -
<PAGE> 3
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1. Amendment No. 1 Effective Date. This Amendment shall be and
become effective on such date (the "Amendment No. 1 Effective Date") when all
of the conditions set forth in this Subpart 3.1 shall have been satisfied, and
thereafter, this Amendment shall be known, and may be referred to, as
"Amendment No. 1."
SUBPART 3.1.1. Execution of Counterparts. The Agent shall have received
counterparts of this Amendment, each of which shall have been duly executed on
behalf of the Borrower, the Agent and each Bank.
SUBPART 3.1.2. Consent. The Agent shall have received, from each person
listed on the signature pages of the Consent attached hereto as Appendix A, an
executed copy of such Consent.
SUBPART 3.1.3. Legal Details, Etc. All documents executed or submitted
pursuant hereto shall be satisfactory in form and substance to the Agent and its
counsel. The Agent and its counsel shall have received all information, and
such counterpart originals or such certified or other copies of such originals,
as the Agent or its counsel may reasonably request, and all legal matters
incident to the transactions contemplated by this Amendment shall be
satisfactory to the Agent and its counsel. In addition, the Agent shall have
received such other agreements, documents or instruments as it may from time to
time reasonably request.
PART IV
MISCELLANEOUS
SUBPART 4.1 Cross-References. Reference in this Amendment to any Part or
Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment.
SUBPART 4.2 Instrument Pursuant to Existing Credit Agreement. This
Amendment is a document executed pursuant to the Existing Credit Agreement and
shall (unless otherwise expressly indicated therein) be construed, administered
and applied in accordance with the terms and provisions of the Existing Credit
Agreement.
SUBPART 4.3 Notes and Credit Documents. The Borrower hereby confirms
and agrees that the Notes and the other Credit Documents are, and shall
continue to be, in full force and effect, and hereby ratifies and confirms in
all respects its obligations thereunder, except that, upon the effectiveness
of, and on and after the date of, this Amendment, all references in each Note
and each Credit Document to the "Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Existing Credit Agreement shall mean the
Amended Credit
- 3 -
<PAGE> 4
Agreement.
SUBPART 4.4 Counterparts, Effectiveness, Etc. This Amendment may be
executed by the parties hereto in several counterparts, each of which shall be
deemed to be an original and all of which shall constitute together but one and
the same agreement.
SUBPART 4.5 Governing Law; Entire Agreement. THIS AMENDMENT SHALL BE
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THERE
OF.
SUBPART 4.6 Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns
SUBPART 4.7 Representations and Warranties. This Borrower represents
and warrants to the Agent and the Banks that (i) the representations and
warranties made in Article IV of the Existing Credit Agreement are true and
correct on and as of the Amendment No. 1 Effective Date as though made on such
date, (ii) no Default or Event of Default has occurred and remains uncured as
of the Amendment No. 1 Effective Date, (iii) the Borrower is in full compliance
with the terms and provisions of the Amended Credit Agreement, and (iv) all
financial reports and information submitted to the Agent or the Banks since the
date of the Existing Credit Agreement accurately state and reflect the
financial condition of the Borrower.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
HOUSECALL MEDICAL RESOURCES,
INC., a Delaware corporation
By
-----------------------
Title
--------------------
NATIONSBANK, N.A.,
in its capacity as Agent and
in its individual capacity as a
Bank
By
-----------------------
Title
--------------------
TORONTO DOMINION (TEXAS), INC.
By
-----------------------
Title
--------------------
AMSOUTH BANK OF ALABAMA
By
-----------------------
Title
--------------------
- 5 -
<PAGE> 6
CONSENT
This Consent (this "Consent"), dated as of September 30, 1995, is
delivered in connection with Amendment No. 1 to Credit Agreement, dated as of
the date hereof ("Amendment No. 1"), among HOUSECALL MEDICAL RESOURCES, INC., a
Delaware corporation, the various banks and lending institutions parties
thereto (the "Banks") and NATIONSBANK, N.A., as Agent (the "Agent"). Unless
otherwise defined, terms used herein have the meanings provided in the Existing
Credit Agreement (as defined in Amendment No. 1) as amended by Amendment No. 1
(such agreement, as so amended, being the "Amended Credit Agreement".)
The undersigned hereby confirm and agree that the Financing Documents to
which they are parties are, and shall continue to be, in full force and effect,
and hereby ratify and confirm in all respects their obligations thereunder,
except that, upon the effectiveness of, and on and after the date of, this
Amendment, all references in each Financing Document to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Existing
Credit Agreement shall mean the Amended Credit Agreement.
This Consent may be executed by the parties hereto in counterparts, each
of which shall be deed to be an original and all of which shall constitute
together but one and the same instrument.
SBS ACQUISITION CORP.
By
-----------------------
Title
--------------------
MEDICAL SUPPORT SERVICES OF
TENNESSEE, INC.
By
-----------------------
Title
--------------------
SUPPORT MEDICAL SERVICES OF
ALABAMA, INC.
By
-----------------------
Title
--------------------
- 6 -
<PAGE> 7
SUPPORT MEDICAL SERVICES OF
MISSISSIPPI, INC.
By
------------------------------
Title
---------------------------
HOUSECALL, INC.
By
------------------------------
Title
---------------------------
HOUSECALL SUPPORT SERVICES, INC.
By
------------------------------
Title
---------------------------
HHC, INC.
By
------------------------------
Title
---------------------------
APPALACHIAN HEALTH CARE SERVICES,
INC.
By
------------------------------
Title
---------------------------
NURSECALL, INC.
By
-----------------------------
Title
--------------------------
HOME CARE AFFILIATES, INC.
By
------------------------------
Title
----------------------------
- 7 -
<PAGE> 8
RESCARE - SIC MANAGEMENT, INC.
By
--------------------------------
Title
-----------------------------
RESCARE HOME HEALTH, INC.
By
--------------------------------
Title
-----------------------------
RESCARE-SCS MANAGEMENT, INC.
By
--------------------------------
Title
-----------------------------
RESCARE SUPPORTIVE SERVICES, INC.
By
--------------------------------
Title
-----------------------------
RESCARE INFUSION ALTERNATIVES, INC.
By
--------------------------------
Title
-----------------------------
RESCARE MANAGEMENT SERVICES, INC.
By
--------------------------------
Title
-----------------------------
RESCARE HOME MEDICAL EQUIPMENT,
INC.
By
--------------------------------
Title
-----------------------------
- 8 -
<PAGE> 9
BIOMEDICAL HOME CARE, INC.
By
------------------------------
Title
---------------------------
HOUSECALL OF SOUTHEAST TENNESSEE,
INC.
By
------------------------------
Title
---------------------------
- 9 -
<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of May 31, 1995, by and between
HOME CARE AFFILIATES, INC., a Tennessee corporation (the "Company"), and J.
Paul Gordon (the "Employee").
W I T N E S S E T H:
WHEREAS in connection with the execution and delivery of this
Agreement, the employment agreement dated as of January 1, 1991 (the "Prior
Employment Agreement"), between the Company and the Employee is being
terminated and shall cease to be of any further force and effect as of the date
hereof;
WHEREAS, the Company and the Employee entered into that
certain Termination of Employment Agreements, of even date herewith (the
"Termination of Employment Agreements"), which provides, among other things,
for (i) the payment of a pro rata portion of the bonus to which the Employee is
entitled under Section 3(d) and (ii) the termination of the prior Employment
Agreement;
WHEREAS the Company desires to enter into this new agreement
with the Employee governing the employment of the Employee by the Company for
the period provided in this Agreement, and the Employee is willing to accept
such employment with the Company on a full-time basis, all in accordance with
the terms and conditions set forth below;
NOW, THEREFORE, for and in consideration of the premises
hereof and the mutual covenants contained herein, the parties hereto hereby
covenant and agree as follows:
1. Employment. (a) The Company hereby employs the
Employee, and the Employee hereby accepts such employment with the Company, for
the period set forth in Section 2 hereof, all upon the terms and conditions
hereinafter set forth.
(b) The Employee affirms and represents that, except as
specifically provided in that certain Noncompetition and Confidentiality
Agreement, of even date herewith, between the Employee, Res-Care, Inc. and J.
Paul Gordon (a true and complete copy of which, as executed by the parties
thereto, having been delivered to Housecall Medical Resources, Inc.
("Housecall") and its counsel, he is under no obligation to any former employer
or other party which is in any way inconsistent with, or which imposes any
restriction upon, the Employee's acceptance of employment hereunder with the
Company, the employment of the Employee by the Company, or the Employee's
undertakings under this Agreement.
<PAGE> 2
2. Term of Employment. (a) Unless earlier terminated
as provided in this Agreement, the term of the Employee's employment under this
Agreement shall be for a period beginning on May 31, 1995 and ending on May 31,
1998; thereafter, this Agreement, and all terms and provisions hereof, shall be
automatically extended from year-to-year unless terminated by either party on
not less than ninety (90) days' written notice prior to the expiration of the
initial three (3)-year term or any renewal term (such period from the date
hereof until the later of May 31, 1998 or the date of the expiration of the
final renewal term (or, if the Employee's employment hereunder is earlier
terminated as provided herein, such shorter period) being hereinafter called
the "Employment Term").
(b) In the event that the Employee continues in the
full-time employ of the Company after the end of the Employment Term (it being
expressly understood and agreed that the Company does not now, nor hereafter
shall have, any obligation to continue the Employee in its employ whether or
not on a full-time basis, after said Employment Term ends), then the Employee's
continued employment by the Company shall, notwithstanding anything to the
contrary expressed or implied herein, be terminable by the Company at will.
3. Duties. (a) The Employee shall be employed as Chief
Executive Officer of the Company, shall faithfully and competently perform such
duties as are specified in the By-laws of the Company or such other duties as
the Board of Directors of the Company shall from time to time determine, which
may include, but not be limited to, providing advice and assistance as
requested with respect to (i) strategic planning and development for the
Company; (ii) the identification and negotiation of business acquisitions and
opportunities; (iii) the monitoring and analysis of major industry developments
of importance to the Company; (iv) the development and maintenance of industry
relations, to include serving as a representative on the Board of Directors of
the Home Health Services and Staffing Association, and interacting with
appropriate state and federal home health associations with respect to matters
of importance to the Company; (v) special projects, to include those pertaining
to the consolidation of Tennessee operations, business unit consolidations,
cost allocation methodologies, the integration of the Company's operations with
Medical Support Services, Inc., a sister corporation of the Company, and profit
maximization; and (vi) the marketing of management services. The Employee
shall perform his duties principally at the offices of the Company in
Louisville, Kentucky, with such travel to such other locations from time to
time as the Board of Directors of the Company may reasonably prescribe; it
being understood and agreed by the Company that the Employee shall not be
required to relocate from Louisville, Kentucky without the Employee's consent
and, further,
2
<PAGE> 3
that the Employee's refusal to consent to be relocated from Louisville,
Kentucky shall not constitute "cause" for termination within the meaning of
clause (iv) of Section 7(a) hereof. Except as may otherwise be approved in
advance by the Board of Directors of the Company, and except during vacation
periods and reasonable periods of absence due to sickness, personal injury or
other disability, the Employee shall devote his full time throughout the
Employment Term to the services required of hire hereunder. The Employee shall
render his services exclusively to the Company and its subsidiaries during the
Employment Term and shall use his best efforts, judgment and energy to improve
and advance the business and interests of the Company and its subsidiaries in a
manner consistent with the duties of his position.
(b) The company acknowledges (i) that the Employee owns
stock in the entities described in Annex I hereto and (ii) that Section 3(a)
above shall not be deemed to prohibit such stock ownership as long as the
Employee otherwise complies with the covenants and obligations set forth
therein. In addition, the passive and personal ownership of (A) any securities
issued by the government of the United States of America or any instrumentality
thereof or (B) one percent (1%) or less of a corporation's stock or debt
obligations or of any mutual fund which is (i) traded on a national securities
exchange or (ii) quoted by an interdealer quotation system of a national
securities association registered with the U.S. Securities and Exchange
Commission (i.e., NASDAQ) shall not be prohibited hereunder and shall not be
required to be disclosed on Annex I.
4. Salary and Bonus. (a) Salary. As compensation for
the complete and satisfactory performance by the Employee of the services to be
performed by the Employee hereunder during the Employment Term, the Company
shall pay the Employee a base salary at the annual rate of One Hundred Fifty
Thousand Dollars ($150,000) (said annual amount, together with any increases
thereto as may be determined from time to time by the Board of Directors of the
Company in its sole discretion, being hereinafter referred to as "Salary"). In
no event shall the Employee's Salary be less than $150,000. Any Salary payable
hereunder shall be paid in regular intervals in accordance with the Company's
payroll practices from time to time in effect.
(b) Bonus. The Employee shall be eligible to receive
bonus compensation from the Company in respect of each fiscal year (or portion
thereof) occurring during the Employment Term in amounts equal to up to 33-1/3%
of the Employee's Salary for such fiscal year, in each case as may be
determined by the Board of Directors of the Company in its sole discretion on
the basis of performance-based criteria to be established from time to time by
the Board of Directors in its sole discretion.
3
<PAGE> 4
Nothing contained herein and no action taken in respect of any
bonus (or otherwise in respect of this Section 4(b)) shall create or be
construed to create a trust of any kind. All bonuses that may become payable
shall be paid within thirty (30) days after the date that Housecall has
received from its independent certified public accountants their report on the
audited consolidated financial statements of Housecall for the fiscal year in
respect of which any such bonus shall have been determined.
(c) Withholding, Etc. The payment of any Salary and
bonus hereunder shall be subject to applicable withholding and payroll taxes,
and such other deductions as may be required under the Company's employee
benefit plans.
5. Benefits. During the Employment Term, the Employee
shall:
(a) be eligible to participate in stock option plans,
employee fringe benefits and pension and/or profit sharing plans that
may be provided by the Company for its executive employees in
accordance with the provisions of any such plans, as the same may be
in effect from time to time;
(b) be eligible to participate in any medical and health
plans or other employee welfare benefit plans that may be provided by
the Company for its executive employees in accordance with the
provisions of any such plans, as the same may be in effect from time
to time;
(c) be entitled to annual paid vacation in accordance
with the Company policy that may be applicable to executive employees
from time to time;
(d) be entitled to sick leave, sick pay and disability
benefits in accordance with any Company policy that may be applicable
to executive employees from time to time;
(e) be entitled to reimbursement for all reasonable and
necessary out-of-pocket business expenses incurred by the Employee in
the performance of his duties hereunder in accordance with the
Company's policies applicable thereto (including, without limitation,
for the purchase of a cellular telephone and the monthly charges
incurred for the use thereof);
(f) be entitled to a monthly expense allowance of $500 to
be used by the Employee to cover reasonable automobile expenses
incurred by the Employee in fulfillment of his duties and
responsibilities hereunder.
4
<PAGE> 5
In the event that the Company requests the Employee to
relocate from Louisville, Kentucky and the Employee consents to such
relocation, the Employee shall be entitled to be reimbursed for those normal
and reasonable moving expenses as may be mutually agreed upon by the Company
and the Employee.
The benefits to which the Employee's entitled under the
Company's plans and policies as provided in this Section 5 shall be no less
favorable in any material respect in terms of coverage and economic value than
the benefits to which the Employee was entitled under the plans and policies
applicable to the Employee immediately prior to the termination of the Prior
Employment Agreement.
For the purposes of determining the entitlement of the
Employee to any and all benefits and entitlements under this Section 5 and the
Employee's accrual rates for any such benefits and entitlements, the Employee
shall (i) be credited with all of his prior years (and any portion thereof) of
employment with the Company, and (ii) be entitled to retain benefits which have
accrued to him under the Prior Employment Agreement.
6. Inventions and Confidential Information. The
Employee hereby covenants, agrees and acknowledges as follows:
(a) The Company is engaged in a continuous program of
research, design, development, production, marketing and servicing
with respect to its businesses and that as part of the Employee's
employment by the Company the Employee is (or may be) expected to make
new contributions and inventions of value to the Company.
(b) The Employee's employment hereunder creates a
relationship of confidence and trust between the Employee and the
company with respect to certain information pertaining to the business
of the Company and its Affiliates (as hereinafter defined) or
pertaining to the business of any client or customer of the Company or
its Affiliates which may be made known to the Employee by the Company
or any of its Affiliates or by any client or customer of the Company
or any of its Affiliates or learned by the Employee during the period
of his employment hereunder by the Company.
(c) The Company possesses and will continue to possess
information that has been created, discovered or developed by, or
otherwise become known to it (including, without limitation,
information created, discovered or developed by, or made known to, the
Employee during the period of his employment or arising out of his
employment hereunder) or in which property rights have been or may be
assigned or otherwise conveyed to the Company, which information has
5
<PAGE> 6
commercial value in the business in which the Company is engaged and
is treated by the Company as confidential.
(d) Any and all inventions, products, discoveries,
improvements, processes, manufacturing, marketing and service methods
or techniques, formulae, designs, styles, specifications, data bases,
computer programs (whether in source code or object code), know-how,
strategies and data, whether or not patentable or registrable under
copyright or similar statutes, made, developed or created by the
Employee (whether at the request or suggestion of the Company, any of
its Affiliates, or otherwise, whether alone or in conjunction with
others, and whether during regular hours of work or otherwise) during
the period of his employment hereunder by the Company which pertain to
the business, products, or processes of the Company or any of its
Affiliates (collectively, hereinafter referred to as "Inventions"),
shall be the Company's exclusive property, and the Employee will
promptly execute and/or deliver to an appropriate executive officer of
the Company, upon request and without any additional compensation
therefor, all papers, drawings, models, data, documents and other
material in his possession pertaining to any Inventions made,
developed or created by him as aforesaid. For the purposes of this
Agreement, the term "Affiliate" or "Affiliates" shall mean any
corporation or other entity (i) which, after the date hereof, owns the
Company in whole or in part, or which controls the Company directly or
indirectly, whether through common control or otherwise, (ii) which is
owned by the Company in whole or in part, or which is controlled,
directly or indirectly, by the Company or (iii) which, after the date
hereof, is under the common control, directly or indirectly, of the
Company and any person or entity; provided, however, that
notwithstanding anything to the contrary expressed or implied in
clauses (i) through (iii) above, the term "Affiliate" shall not
include Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI") or any
corporation or other entity which would be deemed to be an Affiliate
pursuant to clause (i), (ii) or (iii) above solely because such
corporation or other entity is an affiliate of WCAS VI.
(e) The Employee will keep confidential (subject to the
provisions of Section 6(f) below) and will hold for the Company's sole
benefit any Invention which is to be the exclusive property of the
Company under this Section 6 for which no patent, copyright, trademark
or other right or protection is issued.
(f) The Employee also agrees that he will not without the
prior written consent of an appropriate executive officer of the
Company (i) use for his benefit or disclose at any time during his
employment hereunder by the Company,
6
<PAGE> 7
or thereafter, except to the extent required by the performance by him
of his duties as an employee of the Company or as required by law, any
information obtained or developed by him while in the employ of the
Company hereunder with respect to any Inventions or with respect to
any customers, clients, suppliers, products, employees, financial
affairs, or methods of design, distribution, marketing, service,
procurement or manufacture of the Company or any of its Affiliates, or
any confidential matter, or (ii) take with him upon leaving the employ
of the Company any document or paper relating to any of the foregoing
or any physical property of the Company or any of its Affiliates;
provided however, that the foregoing restrictions shall not apply to
information that (i) was independently developed, received, discovered
or created by the Employee prior to the date hereof, (b) was or is
disclosed to the Employee by a third party having the right to
disclose such information; or (c) is in, or becomes a part of, the
public domain through no fault of the Employee.
(g) The Employee acknowledges and agrees that a remedy at
law for any breach or threatened breach of the provisions of this
Section 6 would be inadequate and, therefore, agrees that the Company
and its Affiliates shall be entitled to injunctive relief in addition
to any other available rights and remedies in case of any such breach
or threatened breach; provided, however, that nothing contained herein
shall be construed as prohibiting the Company or any of its Affiliates
from pursuing any other rights and remedies available for any such
breach or threatened breach.
(h) The Employee agrees that upon termination of his
employment by the Company for any reason, the Employee shall, upon
request, forthwith return to the Company all documents and other
property in his possession belonging to the Company or any of its
Affiliates.
(i) Without limiting the generality of Section 10 hereof,
the Employee hereby expressly agrees that the foregoing provisions of
this Section 6 shall be binding upon the Employee's heirs, successors
and legal representatives.
7. Termination. (a) The Employee's employment
hereunder shall be terminated upon the occurrence of any of the following:
(i) death of the Employee;
7
<PAGE> 8
(ii) termination of the Employee's employment hereunder by
the Employee at any time for any reason whatsoever (including, without
limitation, resignation or retirement);
(iii) termination of the Employee's employment hereunder by
the Company because of the Employee's inability to perform his duties
on account of disability or incapacity for a period of one hundred
eighty (180) or more days, whether or not consecutive, occurring
within any period of twelve (12) consecutive months;
(iv) termination of the Employee's employment hereunder by
the Company at any time "for cause," such termination to take effect
immediately upon written notice from the Company to the Employee
specifying the cause for termination and the basis therefor; and
(v) termination of the Employee's employment hereunder by
the company at any time on not less than 90 days' advance written
notice, other than termination by reason of disability or incapacity
as contemplated by clause (iii) above or termination by the Company
"for cause" as contemplated by clause (iv) above.
(vi) termination of the Employee's employment hereunder by
either party by giving written notice to the other party of his or its
intention to do so at least ninety (90) days prior to the expiration
date of the initial three (3)-year term or any additional one (1)-year
term as the case may be.
The following actions, failures or events by or affecting the
Employee shall constitute "cause" for termination within the meaning of clause
(iv) above: (1) conviction of having committed a felony, (2) acts of dishonesty
or moral turpitude which are materially detrimental to the Company and/or its
Affiliates, (3) acts or omissions which the Employee knew or should have
reasonably known were likely to materially damage the business of the Company
and/or any Affiliate of the Company, (4) failure by the Employee to obey the
reasonable and lawful orders of the Board of Directors or (5) gross negligence
by the Employee in the performance of, or willful disregard by the Employee of,
his material obligations hereunder.
(b) In the event that the Employee's employment is
terminated by the Company pursuant to Section 7(a)(v) above, the Company shall
pay to the Employee, as severance pay or liquidated damages or both, the lesser
of (i) an amount equal to 100% of the Employee's annual Salary under Section 4,
or (ii) the amount of Salary which the Employee would have otherwise been
entitled to receive pursuant to Section 4 hereof following the date of
termination (had the Employee's employment not been so
8
<PAGE> 9
terminated) (such amount being referred to herein as the "Severance Payments"
and such period being herein referred to as the "Severance Period").
(c) Any Severance Payment to which the Employee may be
entitled under this Section 7 shall be paid in full by the Company to the
Employee or his estate or legal representatives within thirty (30) calendar
days following the effective date of the Employee's termination.
(d) In the event that the Employee's employment is
terminated for any reason whatsoever (including, without limitation,
termination of the Employee's employment by the Company for "cause"), the
Employee shall be entitled to continued coverage under the Company"s group
health insurance plan (or that of Housecall Medical Resources, Inc. and its
affiliates if the Company's group health insurance plan is no longer available)
for family coverage until the Employee reaches the age at which he would be
eligible for coverage under the Medicare program (or any successor such
governmental program). Such continued group health insurance plan coverage (i)
shall be on terms no less favorable to the Employee than those that would be
available to the Employee if he were eligible for coverage under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") as of the date
hereof and (ii) shall not be conditioned on the expiration of any waiting
period or the absence of any preexisting condition. The provisions of this
Section 7(d) shall survive any termination or expiration of this Agreement.
(e) Notwithstanding anything to the contrary expressed or
implied herein, except as required by applicable law and except as set forth in
Sections 7(b) through (d) above, the Company (and its Affiliates) shall not be
obligated to make any payments to the Employee or on his behalf of whatever
kind or nature by reason of the Employee's cessation of employment (including,
without limitation, by reason of termination of the Employee's employment by
the Company for "cause"), other than (i) such amounts, if any, of his Salary
and bonus as shall have accrued and remained unpaid as of the date of said
cessation and (ii) such other amounts which may be then otherwise payable to
the Employee from the Company's benefits plans, expense account or
reimbursement policies, if any.
(f) No interest shall accrue on or be paid with respect
to any portion of any payments hereunder.
8. Non-Assignability. (a) Neither this Agreement nor
any right or interest hereunder shall be assignable by the Employee, his
beneficiaries, or legal representatives without the company's prior written
consent; provided, however, that nothing in this Section 8(a) shall preclude
the Employee from designating
9
<PAGE> 10
a beneficiary to receive any benefit or Severance Payment payable hereunder
upon his death or incapacity. Notwithstanding the foregoing, this Agreement
and any right or interest of the Company hereunder shall be assignable by the
Company to any of its direct or indirect subsidiaries without the consent of
the Employee, provided, however, that in the event of such an assignment
without the consent of the Employee, the Company shall remain liable for the
performance of its obligations hereunder, including but not limited to payment
of all amounts payable to the Employee hereunder.
(b) Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
9. Competition, etc. During the Employee's employment
by the Company and during the one (1) year period following the termination of
the Employee's employment hereunder for any reason whatsoever:
(a) the Employee will not make any statement or perform
any act that would reasonably be expected to have an adverse effect on
the Company or any of its Affiliates in its and their relationship and
dealings with existing customers or clients, or solicit or encourage
any other employee of the Company or any of its Affiliates to do any
act that would reasonably be expected to have an adverse effect on
interest of the Company or any of its Affiliate's interests or which
would result in violation of any provision of this Agreement;
(b) the Employee will not discuss with any existing
customers or clients of the Company or any of its Affiliates the
present or future availability of services or products of a business,
if the Employee has or expects to acquire a proprietary interest in
such business or is or expects to be an employee, officer or director
of such business, where such services or products are competitive in
the Geographical Area (as hereinafter defined) with services or
products which the Company or any of its Affiliates provides;
(c) the Employee will not make any statement or do any
act intended to cause any existing customers or clients of the Company
or any of its Affiliates to make use of the services or purchase the
products of any competitive business in which the Employee has or
expects to acquire a proprietary interest or in which the Employee is
or expects
10
<PAGE> 11
to be made an employee, Officer or director, if such services or
products are competitive in the Geographical Area with services or
products sold or provided by the Company or any of its Affiliates to
any existing customer or client;
(d) the Employee will not directly or indirectly (as a
director, officer, employee, manager, consultant, independent
contractor, advisor or otherwise) engage in competition with, or own
any interest in, perform any services for, participate in or be
connected with any business or organization which engages in
competition in the Geographical Area with the Company or any of its
Affiliates. For the purposes of this Section 9, the terms
"Geographical Area" shall be all States in which the Company and its
Affiliates conduct the businesses' described in this Section 9 during,
and as of the termination of, the Employee's employment hereunder;
provided, however, that the provisions of this Section 9(d) shall not
be deemed to prohibit the Employee's passive and personal ownership of
not more than one percent (1%) of a corporation's stock which is (i)
traded on a national securities exchange or (ii) quoted by an
interdealer quotation system of a national securities association
registered with the U.S. Securities and Exchange Commission (i.e.,
NASDAQ);
(e) the Employee will not directly or indirectly solicit
for employment, or advise or recommend to any other business in which
the Employee has or expects to acquire a proprietary interest or in
which business the Employee is or expects to be an employee, officer
or director, that they employ or solicit for employment, any employee
of the Company or any of its Affiliates; and
(f) the Employee will not directly or indirectly hire,
engage, send any work to, place orders with, or in any manner be
associated with any supplier, contractor, subcontractor or other
person or firm which rendered manufacturing or other services, or sold
any products, to the Company or any of its Affiliates if such action
by him would have a material adverse effect on the business, assets or
financial condition of the Company or any of its Affiliates.
For purposes of this Section 9, a person or entity (including,
without limitation, the Employee) shall be deemed to be a competitor of the
Company or any of its Affiliates, or a person or entity (including, without
limitation, the Employee) shall be deemed to be engaging in competition with
the Company or any of its Affiliates, only if such person or entity in any way
conducts, operates, carries out or engages in (i) the business of providing
private duty nursing, respiratory therapy, hospice,
11
<PAGE> 12
infusion therapy and/or Medicare home health services in the Geographical Area,
(ii) the business of selling and/or leasing durable medical equipment to home
care patients in the Geographical Area, or (iii) such other business or
businesses as the Company may in the future conduct in the Geographical Area
during the term of the Employee's employment hereunder as such business or
businesses are conducted by the Company; provided, however, that this clause
(iii) shall not be construed to require the Employee to divest any interest in,
or terminate any relationship with, any business or organization if, at the
time of Employee's acquisition of such interest or commencement of such
relationship during the term of this Agreement, such interest or relationship
was permitted hereunder.
The Company acknowledges that this Section 9 shall not be
deemed to prohibit the Employee from owning stock in the entities described in
Annex I hereto or not more than one percent (1%) of a corporations stock which
is (i) traded on a national securities exchange or (ii) quoted by an
interdealer quotation system of a national securities association registered
with the U.S. Securities and Exchange Commission (i.e., NASDAQ);
In connection with the foregoing provisions of this Section 9,
the Employee represents that his experience, capabilities and circumstances are
such that such provisions will not prevent him from earning a livelihood. The
Employee further agrees that the limitations set forth in this Section 9
(including, without limitation, any time or territorial limitations) are
reasonable and properly required for the adequate protection of the businesses
of the Company and its Affiliates. It is understood and agreed that the
covenants made by the Employee in this Section 9 (and in Section 6 hereof)
shall survive the expiration or termination of this Agreement.
For purposes of this Section 9, proprietary interest in a
business is ownership, whether through direct or indirect stock holdings or
otherwise, of one percent (1%) or more of such business. The Employee shall be
deemed to expect to acquire a proprietary interest in a business or to be made
an officer or director of such business if such possibility has been discussed
with any officer, director, employee, agent, or promoter of such business.
The Employee acknowledges and agrees that a remedy at law for
any breach or threatened breach of the provisions of this Section 9 would be
inadequate and, therefore, agrees that the Company and any of its Affiliates
shall be entitled to injunctive relief in addition to any other available
rights and remedies in cases of any such breach or threatened breach; provided,
however, that nothing contained herein shall be construed as prohibiting the
company or any of its Affiliates from pursuing any other
12
<PAGE> 13
rights and remedies available for any such breach or threatened breach.
10. Binding Effect. Without limiting or diminishing the
effect of Section 8 hereof, this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, successors, legal
representatives and assigns.
11. Notices. Any notice required or permitted to be
given under this Agreement shall be sufficient if in writing and either
delivered in person or sent by first class certified or registered mail,
postage prepaid, if to the Company, at the Company's principal place of
business, and if to the Employee, at his home address most recently filed with
the Company, or to such other address or addresses as either party shall have
designated in writing to the other party hereto.
12. Law Governing. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Kentucky.
13. Severability. The Employee agrees that in the event
that any court of competent jurisdiction shall finally hold that any provision
of Section 6 or 9 hereof is void or constitutes an unreasonable restriction
against the Employee, the provisions of such Section 6 or 9 shall not be
rendered void but shall apply with respect to such extent as such court may
judicially determine constitutes a reasonable restriction under the
circumstances. If any part of this Agreement other than Section 6 or 9 is held
by a court of competent jurisdiction to be invalid, illegal or incapable of
being enforced in whole or in part by reason of any rule of law or public
policy, such part shall be deemed to be severed from the remainder of this
Agreement for the purpose only of the particular legal proceedings in question
and all other covenants and provisions of this Agreement shall in every other
respect continue in full force and effect and no covenant or provision shall be
deemed dependent upon any other covenant or provision.
14. Waiver. Failure to insist upon strict compliance
with any of the terms, covenants or conditions hereof shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.
13
<PAGE> 14
15. Entire Agreement; Modifications. This Agreement
constitutes the entire and final expression of the agreement or the parties
with respect to the subject matter hereof and supersedes all prior agreements,
oral and written, between the parties hereto with respect to the subject matter
hereof. In this connection, the Employee hereby acknowledges and agrees that
the Prior Employment Agreement is terminated in all respects, on the terms set
forth in the Termination of Employment Agreement, in the form annexed hereto as
Exhibit I and, accordingly, the Prior employment Agreement shall be of no
further force and effect. This Agreement may be modified or amended only by an
instrument in writing signed by both parties hereto.
16. Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
14
<PAGE> 15
IN WITNESS WHEREOF, the Company and the Employee have duly
executed and delivered this Agreement as of the day and year first above
written.
HOME CARE AFFILIATES, INC.
By /s/ J. Paul Gordon
------------------------------------
Name J. Paul Gordon
Title: Chief Executive Officer
/s/ J. Paul Gordon
------------------------------------
J. Paul Gordon
15
<PAGE> 16
GUARANTY BY HOUSECALL MEDICAL RESOURCES, INC.
Housecall Medical Resources, Inc. ("Housecall") hereby
guarantees the full and timely performance of all of the Company's payment and
other duties and obligations under that certain Employment Agreement, dated as
of May 31, 1995 (the "Employment Agreement"), by and between Home Care
Affiliates, Inc., a Tennessee corporation (the "Company"), and J. Paul Gordon
("Employee") (to which Employment Agreement this Guaranty is appended),
notwithstanding any assignment of the Employment Agreement as provided under
Section 8 above or any transfer of control of the Company or any sale of all or
substantially all of its assets. Notwithstanding anything to the contrary
expressed or implied in the Employment Agreement or this Guaranty, if any
person or entity, or any affiliate thereof, who is the transferee of control of
the Company or of all or substantially all of the assets of the Company agrees
in writing with the Employee to assume all of Housecall's obligations under
this Guaranty and also if, in the exercise of the reasonable commercial
judgment of the Employee (as confirmed in a writing signed by the Employee),
the financial condition and business prospects of such transferee are no less
favorable than those of Housecall at the time of such transfer of control or
such transfer of assets, Housecall shall be relieved of all of its obligations
under this Guaranty once such transfer of control or transfer of assets is
consummated.
Housecall Medical Resources, Inc.
By: /s/ Harold Small
------------------------------------
Name: Harold Small
Title: Chief Operating Officer
/s/ J. Paul Gordon
------------------------------------
J. Paul Gordon
16
<PAGE> 17
Annex I
Notwithstanding the provisions Of this Agreement to the
contrary, Employee shall not hereby be prohibited from holding an equity
interest in, providing financing to, or otherwise having any direct or indirect
financial interest in, that certain "start-up" company named Managed Therapy
Resources, Inc., an Indiana incorporated contract therapy company which is
partially owned by Employee's brother-in-law, Savas G. Mallos, and which
currently provides occupational, speech, and physical therapy services in
California and Indiana, and which also contemplates providing respiratory
therapy services.
17
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1996
------- -------
<S> <C> <C>
PRIMARY:
Weighted average common shares outstanding 5,457 7,058
Net effect of dilutive stock options and warrants -
based on the treasury stock method using period end
market price -- --
Adjustment for stock and options issued within
one year of January 29, 1996 in accordance
with SAB 83 826 367
------- -------
Weighted average common shares and equivalents
outstanding 6,283 7,425
======= =======
Net loss attributable to common stockholders $ (630) $(1,807)
======= =======
Per share amount $ (0.10) $ (0.24)
======= =======
FULLY DILUTED:
Weighted average common shares outstanding 5,457 7,058
Net effect of dilutive stock options and warrants -
based on the treasury stock method using period end
market price -- --
Adjustment for stock and options issued
within one year of January 29, 1996 in accordance
with SAB 83 826 410
------- -------
Weighted average common shares and equivalents
outstanding 6,283 7,468
======= =======
Net loss attributable to common stockholders $ (630) $(1,807)
======= =======
Per share amount $ (0.10) $ (0.24)
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
HOUSECALL MEDICAL RESOURCES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
NAME OF STATE OF
SUBSIDIARY INCORPORATION D/B/A
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
1. BIOMEDICAL HOME CARE, INC. North Carolina Housecall Infusion Services (AZ) (FL)
(KY) (NC) (TN)
- - ---------------------------------------------------------------------------------------------
2. HHC, INC. Tennessee Housecall Home Healthcare
(VA)
Housecall Health Care
(Use only DC, VA, TN)
- - ---------------------------------------------------------------------------------------------
3. HOUSECALL ASSET Delaware None
MANAGEMENT, INC.
- - ---------------------------------------------------------------------------------------------
4. HOUSECALL CONTRACT Delaware None
MANAGEMENT, INC.
- - ---------------------------------------------------------------------------------------------
5. HOUSECALL HOME HEALTH OF Indiana None
INDIANA, L.L.C.
- - ---------------------------------------------------------------------------------------------
6. HOUSECALL HOME HEALTH, INC. Tennessee Housecall Home Healthcare
(FL) (IN)
- - ---------------------------------------------------------------------------------------------
7. HOUSECALL INFUSION Florida Housecall Infusion Services
ALTERNATIVES, INC. (FL)
- - ---------------------------------------------------------------------------------------------
8. HOUSECALL INVESTMENT, INC. Delaware None
- - ---------------------------------------------------------------------------------------------
9. HOUSECALL LICENSING, INC. Delaware None
- - ---------------------------------------------------------------------------------------------
10. HOUSECALL MANAGEMENT Housecall Management Services
SERVICES, INC. Kentucky (KY)
- - ---------------------------------------------------------------------------------------------
11. HOUSECALL MANAGEMENT, INC. Delaware None
- - ---------------------------------------------------------------------------------------------
12. HOUSECALL MANAGEMENT, L.P. Georgia None
- - ---------------------------------------------------------------------------------------------
13. HOUSECALL MEDICAL Housecall Medical Equipment
EQUIPMENT, INC. Florida (FL) (KY)
- - ---------------------------------------------------------------------------------------------
14. HOUSECALL MEDICAL SERVICES, Tennessee Home Care Affiliates of Kentucky,
INC. Inc. (KY)
- - ---------------------------------------------------------------------------------------------
15. HOUSECALL OF SOUTHEAST Georgia Housecall Home Healthcare
TENNESSEE, INC. Chattanooga
(TN - Use Only)
- - ---------------------------------------------------------------------------------------------
16. HOUSECALL PHARMACEUTICAL Georgia None
MANAGEMENT, INC.
- - ---------------------------------------------------------------------------------------------
17. HOUSECALL STAFF LEASING, Georgia None
INC.
- - ---------------------------------------------------------------------------------------------
</TABLE>
-1-
<PAGE> 2
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
NAME OF STATE OF
SUBSIDIARY INCORPORATION D/B/A
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
18. HOUSECALL SUPPORT SERVICES, Tennessee Housecall Home Healthcare
INC. (released in VA)
Housecall Hospice
(TN) (VA)
- - ---------------------------------------------------------------------------------------------
19. HOUSECALL SUPPORTIVE Indiana None
SERVICES OF INDIANA, L.L.C.
- - ---------------------------------------------------------------------------------------------
20. HOUSECALL SUPPORTIVE Florida Housecall Home Healthcare
SERVICES, INC. (FL) (GA)
Housecall Hospice
(FL) (GA) (IN) (KY)
- - ---------------------------------------------------------------------------------------------
21. HOUSECALL, INC. Tennessee Housecall Home Healthcare
(TN)
- - ---------------------------------------------------------------------------------------------
22. HOUSECALL-SCS MANAGEMENT, Florida Housecall Home Healthcare
INC. (FL)
- - ---------------------------------------------------------------------------------------------
23. HOUSECALL-SIC MANAGEMENT, Florida Housecall Home Healthcare
INC. (FL)
- - ---------------------------------------------------------------------------------------------
24. MEDICAL SUPPORT SERVICES OF Tennessee Housecall Management Services
TENNESSEE, INC. (IL) (TN) (TX)
- - ---------------------------------------------------------------------------------------------
25. SUPPORT MEDICAL SERVICES OF Delaware None
ALABAMA, INC.
- - ---------------------------------------------------------------------------------------------
26. SUPPORT MEDICAL SERVICES OF Delaware Housecall Management Services
FLORIDA, INC. (FL)
- - ---------------------------------------------------------------------------------------------
27. SUPPORT MEDICAL SERVICES OF Delaware None
MISSISSIPPI, INC.
- - ---------------------------------------------------------------------------------------------
28. SUPPORT MEDICAL SERVICES OF Delaware None
TENNESSEE, INC.
- - ---------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-07257) pertaining to the Housecall Medical Resources, Inc.
and its Subsidiaries 1996 Stock Option and Restricted Stock Purchase Plan;
Housecall Medical Resources, Inc. and its Subsidiaries (1994) Stock Option and
Restricted Stock Purchase Plan; and Housecall Medical Resources, Inc. and its
Subsidiaries Performance Stock Option and Restricted Stock Purchase Plan of our
report dated September 12, 1996, with respect to the consolidated financial
statements and schedules of Housecall Medical Resources, Inc. and its
Subsidiaries included in the Annual Report (Form 10-K) for the year ended June
30, 1996.
/s/ Ernst & Young LLP
Atlanta, Georgia
September 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOUSECALL MEDICAL RESOURCES, INC. FOR THE YEAR ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 7,785,000
<SECURITIES> 0
<RECEIVABLES> 30,213,000
<ALLOWANCES> 2,920,000
<INVENTORY> 0
<CURRENT-ASSETS> 41,228,000
<PP&E> 7,096,000
<DEPRECIATION> 1,927,000
<TOTAL-ASSETS> 103,945,000
<CURRENT-LIABILITIES> 22,582,000
<BONDS> 10,186,000
0
0
<COMMON> 102,000
<OTHER-SE> 66,649,000
<TOTAL-LIABILITY-AND-EQUITY> 103,945,000
<SALES> 205,389,000
<TOTAL-REVENUES> 205,389,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 193,890,000
<LOSS-PROVISION> 6,074,000
<INTEREST-EXPENSE> 4,679,000
<INCOME-PRETAX> 1,094,000
<INCOME-TAX> 895,000
<INCOME-CONTINUING> 199,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,000
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
