SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HOUSECALL MEDICAL RESOURCES, INC.
------------------------------------------------
(Name of Registrant as Specified in its Charter)
--------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than Registrant)
Payment of Filing Fee (Check the appropriate box)
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction
applies: _______________________________________________________
(2) Aggregate number of securities to which transaction
applies: _______________________________________________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth
the amount on which the filing fee is calculated and
state how it was determined): __________________________________
(4) Proposed maximum aggregate value of transaction: _______________
(5) Total fee paid: ________________________________________________
/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration No.:
(3) Filing Party:
(4) Date Filed:<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
1000 Abernathy Road
Building 400, Suite 1825
Atlanta, Georgia 30328
July 2, 1998
TO THE STOCKHOLDERS OF HOUSECALL MEDICAL RESOURCES, INC.:
You are cordially invited to attend a Special Meeting of the
Stockholders of Housecall Medical Resources, Inc. (the "Company")
to be held on July 31, 1998 at 10:00 a.m. local time, at 1000
Abernathy Road, 3rd Floor, Conference Room C, Atlanta, Georgia
30328 (the "Special Meeting"). At the Special Meeting,
stockholders of the Company will be asked to consider and vote
upon the approval and adoption of an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") whereby an
indirect wholly owned subsidiary of Adventist Health System
Sunbelt Healthcare Corporation ("Adventist") shall be merged with
and into the Company, and the Company shall become an indirect
wholly owned subsidiary of Adventist (the "Merger"). Pursuant to
the terms of the Merger Agreement, the stockholders of the
Company other than affiliates of Welsh, Carson, Anderson & Stowe
(the "WCAS Affiliates") will receive cash consideration in the
Merger in an amount equal to $1.50 per share (the "Merger
Price"). The WCAS Affiliates will receive aggregate cash
consideration of $1.00 for all of their outstanding equity
interests in the Company.
After careful consideration, on May 29, 1998, the Board
unanimously determined that the Merger Agreement and the
transactions contemplated thereby are in the best interests of
the stockholders and approved the Merger Agreement with
Adventist. The Board of Directors of the Company has received
the written opinion dated June 1, 1998 of Salomon Smith Barney to
the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the Merger Price to be
received in the Merger by the holders of the Company Common Stock
(other than the WCAS Affiliates, as to which Salomon Smith Barney
was not requested to express an opinion) was fair, from a
financial point of view, to such holders. THE BOARD OF DIRECTORS
BELIEVES THAT ADOPTION OF THE MERGER AGREEMENT IS THE BEST WAY TO
PROTECT AND MAXIMIZE STOCKHOLDER VALUE AND URGES YOU TO VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
Enclosed are the (i) Notice of Special Meeting of
Stockholders, (ii) Proxy Statement, and (iii) Proxy for the
Special Meeting. The Proxy Statement describes the proposed
Merger Agreement and the Merger and provides other information
about the Company. We have included as appendices to the Proxy
Statement a copy of the Company's Annual Report on Form 10-K for
the year ended June 30, 1997, which includes the Company's
audited financial statements for 1997, and a copy of the
Company's Quarterly Reports on Form 10-Q for the three months
ended September 30, 1997, six months ended December 31, 1997 and
nine months ended March 31, 1998. We urge you to read the
enclosed materials carefully.
Whether you plan to attend the Special Meeting in person or
not, we urge you to complete, sign and date the enclosed Proxy
and return it in the enclosed envelope as soon as possible to
ensure that your shares will be voted at the Special Meeting. If
you attend the Special Meeting, you may revoke your Proxy and
vote in person if you wish. The affirmative vote entitled to be
cast by holders of a majority of all of the outstanding shares of
Common Stock of the Company entitled to vote thereon is required
to approve and adopt the Merger Agreement and the transactions
contemplated therein. Consequently, a failure to vote or an
abstention will have the same effect as a vote against the
proposal. As more fully described in the enclosed Proxy
Statement, the WCAS Affiliates collectively own, beneficially and
of record, approximately 51.6% of the outstanding shares of
Common Stock of the Company have executed a voting agreement set
forth in the Merger Agreement pursuant to which each has agreed
to vote their shares in favor of the approval of the Merger
Agreement.
If you have any questions about the Proxy Statement, please
let us hear from you. We look forward to seeing you at the
meeting.
Sincerely,
/s/ Daniel J. Kohl
Daniel J. Kohl
PRESIDENT AND DIRECTOR
2
<PAGE>
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
1000 Abernathy Road
Building 400, Suite 1825
Atlanta, Georgia 30328
___________________________________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held July 31, 1998
___________________________________________________
TO THE STOCKHOLDERS OF HOUSECALL MEDICAL RESOURCES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the
Stockholders of Housecall Medical Resources, Inc. (the "Company")
will be held at 1000 Abernathy Road, 3rd Floor, Conference Room
C, Atlanta, Georgia 30328, on July 31, 1998 at 10:00 a.m., local
time (the "Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
the Amended and Restated Agreement and Plan of Merger,
dated June 17, 1998 (the "Merger Agreement") by and among
Adventist Health System Sunbelt Healthcare Corporation
("Adventist"), Homecare Acquisition Corp. ("Merger Sub"),
the Company, Welsh, Carson, Anderson & Stowe VI, L.P., WCAS
Healthcare Partners, L.P. and WCAS Capital Partners II,
L.P., and to approve the consummation of the transactions
contemplated therein, including the merger of Merger Sub
with and into the Company such that the Company will become
an indirect wholly owned subsidiary of Adventist (the
"Merger"). A copy of the Merger Agreement is attached as
Appendix A to the accompanying Proxy Statement.
2. To transact such other business as may properly come before
the Special Meeting or any adjournment or postponement
thereof.
Only those persons who were holders of record of the Common
Stock of the Company at the close of business on June 30, 1998
are entitled to notice of and to vote at the Special Meeting or
any adjournment or postponement thereof. Your attention is
directed to the accompanying Proxy Statement and its appendices
for more complete information regarding the matters to be acted
upon at the Special Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN
PERSON.
EACH STOCKHOLDER HAS THE RIGHT TO DISSENT FROM THE MERGER
AGREEMENT AND DEMAND PAYMENT OF THE FAIR VALUE OF HIS SHARES IF
THE MERGER IS CONSUMMATED. THE RIGHT OF ANY STOCKHOLDER TO
RECEIVE SUCH PAYMENT IS CONTINGENT UPON STRICT COMPLIANCE WITH
THE REQUIREMENTS OF SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW. THE FULL TEXT OF SECTION 262 IS SET FORTH IN
APPENDIX C TO THE PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. FOR A SUMMARY OF THE REQUIREMENTS OF SECTION 262, SEE
"THE MERGER--DISSENTERS' RIGHTS" IN THE ACCOMPANYING PROXY
STATEMENT.
By Order of the Board of Directors,
Fred Follmer
SECRETARY
IMPORTANT
WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING OR NOT, PLEASE BE
SURE THAT THE ENCLOSED PROXY IS PROPERLY COMPLETED, DATED,
SIGNED, AND RETURNED WITHOUT DELAY IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
Atlanta, Georgia
July 2, 1998
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . 1
Matters to be Considered at the Special Meeting . . . . 1
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . 2
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS . . . . . . . . 2
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Special Meeting . . . . . . . . . . . . . . . . . . 3
The Merger . . . . . . . . . . . . . . . . . . . . . . . 4
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . 10
Date, Time and Place . . . . . . . . . . . . . . . . . 10
Matters to Be Considered . . . . . . . . . . . . . . . 10
Record Date; Shares Outstanding and Entitled to Vote . 10
Votes Required . . . . . . . . . . . . . . . . . . . . 10
Revocability of Proxies . . . . . . . . . . . . . . . . 11
Other Matters; Adjournment . . . . . . . . . . . . . . 11
Proxy Solicitation . . . . . . . . . . . . . . . . . . 11
Delivery of Merger Price . . . . . . . . . . . . . . . 12
Independent Auditors . . . . . . . . . . . . . . . . . 12
PROPOSAL -- THE MERGER . . . . . . . . . . . . . . . . . . 12
General . . . . . . . . . . . . . . . . . . . . . . . . 12
The Merger Price . . . . . . . . . . . . . . . . . . . . 13
Background of the Merger . . . . . . . . . . . . . . . . 13
Reasons for the Merger and Recommendation of
the Board of Directors . . . . . . . . . . . . . . . . 15
Opinion of the Company's Financial Advisor . . . . . . . 16
Summary of the Terms of the Merger Agreement . . . . . . 19
Regulatory Approvals . . . . . . . . . . . . . . . . . . 23
Interest of Certain Persons in the Merger . . . . . . . 23
Operations of the Company if the Merger is
Not Approved . . . . . . . . . . . . . . . . . . . . 24
Dissenters' Rights . . . . . . . . . . . . . . . . . . . 24
Federal Income Tax Consequences of the Merger . . . . . 25
Accounting Treatment of the Merger . . . . . . . . . . . 25
Voting Agreement . . . . . . . . . . . . . . . . . . . . 26
Votes Required to Approve Merger Agreement . . . . . . . 26
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 28
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 29
MARKET FOR COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 30
ADDITIONAL INFORMATION ABOUT THE COMPANY . . . . . . . . . 30
PROPOSALS OF STOCKHOLDERS FOR THE NEXT ANNUAL MEETING . . . 31
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . 31
APPENDICES
Appendix A -- Amended and Restated Merger Agreement
Appendix B -- Opinion of Salomon Smith Barney
Appendix C -- Delaware Statutes Describing Stockholder Dissenters' Rights
Appendix D -- Annual Report on Form 10-K for the fiscal year ended June 30, 1997
Appendix E -- Quarterly Reports on Form 10-Q for the three months ended
September 30, 1997, the six months ended December 31, 1997 and
the nine months ended March 31, 1998
2<PAGE>
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
1000 Abernathy Road
Building 400, Suite 1825
Atlanta, Georgia 30328
PROXY STATEMENT
For The Special Meeting Of Stockholders
To Be Held July 31, 1998
INTRODUCTION
GENERAL
This Proxy Statement is being sent to the holders of shares of
Common Stock, par value $.01 per share (collectively, the
"Stockholders"), of Housecall Medical Resources, Inc. (the
"Company") in connection with the solicitation of proxies by the
Board of Directors of the Company to be voted at the Special
Meeting of Stockholders to be held on July 31, 1998, at 10:00
a.m., local time, at 1000 Abernathy Road, 3rd Floor, Conference
Room C, Atlanta, Georgia 30328, and at any adjournments or
postponements thereof (the "Special Meeting"). The principal
executive offices of the Company are located at 1000 Abernathy
Road, Building 400, Suite 1825, Atlanta, Georgia 30328. The
Company's telephone number is (770) 379-9000. This Proxy
Statement and attached Proxy are first being sent to Stockholders
on or about July 2, 1998.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Stockholders will be asked to
consider and vote upon a proposal to approve and adopt the
Amended and Restated Agreement and Plan of Merger dated June 17,
1998 (the "Merger Agreement"), by and among Adventist Health
System Sunbelt Healthcare Corporation ("Adventist"), Homecare
Acquisition Corp. ("Merger Sub"), the Company and Welsh, Carson,
Anderson & Stowe VI, L.P., WCAS Healthcare Partners, L.P. and
WCAS Capital Partners II, L.P. (collectively, the "WCAS
Entities"), and to approve the consummation of the proposed
merger of Merger Sub with and into the Company such that the
Company shall become an indirect wholly owned subsidiary of
Adventist (the "Merger"). A copy of the Merger Agreement is
attached hereto as Appendix A, and the description of the Merger
contained in this Proxy Statement is qualified in its entirety by
reference to Appendix A. See "THE MERGER."
Upon consummation of the Merger, except as described herein,
each outstanding share of Common Stock will be cancelled and the
holders of such shares of Common Stock, other than the WCAS
Entities and their affiliates (collectively, with the WCAS
Entities, the "WCAS Affiliates"), will be entitled to receive
cash in an amount equal to $1.50 per share. All equity rights
held by the WCAS Affiliates shall be cancelled and the holders
thereof will be entitled to receive cash in an amount equal to
$1.00 in the aggregate.
The Board of Directors knows of no business that will be
presented for consideration at the Special Meeting other than the
matters described in this Proxy Statement. If any other matters
properly come before the Special Meeting, the persons named in
the enclosed form of proxy or their substitutes will vote in
accordance with their best judgment on such matters.
This Proxy Statement and the form of proxy are first being
mailed to Stockholders of the Company on or about July 2, 1998.
The Common Stock is traded on the over-the-counter market. On
June 1, 1998, the last trading day prior to announcement of the
Merger Agreement, the last reported sale price per share of
Company Common Stock was $1 7/32. On June 26, 1998, the last
reported sale price per share of Company Common Stock was $1 1/4.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and in
accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Such information may also be accessed electronically by means of
the Commission's home page on the Internet (http://www.sec.gov).
The Annual Report on Form 10-K for the year ended June 30,
1997, as filed with the Commission on October 9, 1997, has been
included at Appendix D to this Proxy Statement. The Company's
Quarterly Reports on Form 10-Q for the three months ended
September 30, 1997, the six months ended December 31, 1997 and
the nine months ending March 31, 1998, as filed with the
Commission on November 14, 1997, February 17, 1998 and May 20,
1998, respectively, have been included at Appendix E to this
Proxy Statement. Such appendices (excluding any documents
incorporated by reference therein or exhibits thereto) constitute
a part of this Proxy Statement and should be carefully reviewed
for the information contained therein.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Proxy Statement contains statements, particularly in
the text under SUMMARY and THE MERGER that constitute "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Such forward-
looking statements involve both known and unknown risks,
uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be
materially different from any future results, performance, or
achievements expressed or implied by such forward-looking
statements. Such factors include, among other things,
contingencies relating to the consummation of the Merger, the
actual outcome of pending or future litigation against the
Company, its subsidiaries and their respective agents, the impact
of current and future federal and state regulation of home
healthcare, general economic conditions and other factors
mentioned elsewhere in this Proxy Statement ("Cautionary
Statements"). These forward looking statements represent the
judgment of the Company as of the date of this Proxy Statement.
All subsequent written and oral forward-looking statements are
expressly qualified in their entirety by the Cautionary
Statements. The Company disclaims, however, any obligation or
intent to update the forward-looking statements.
3
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE HEREIN AND IN THE APPENDICES HERETO.
STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE
APPENDICES ATTACHED HERETO CAREFULLY AND IN THEIR ENTIRETY.
The Special Meeting
Date, Time and Place July 31, 1998 at 10:00 a.m., local time, at
1000 Abernathy Road, 3rd Floor,
Conference Room C, Atlanta, Georgia 30328.
Matters to be Considered To approve and adopt the Amended and Restated
Agreement and Plan of Merger dated June 17,
1998 by and among Adventist, Merger Sub, the
Company and the WCAS Entities (the "Merger
Agreement"), and to approve the consummation
of the transactions contemplated therein and
such other matters as may properly come before
the Special Meeting.
Record Date The close of business on June 30, 1998.
Shares Outstanding and The Company has 10,464,915 shares of Common
Entitled to Vote Stock issued and outstanding and entitled to
vote at the Special Meeting.
Votes Required The affirmative vote of the holders of a
majority of all outstanding shares of Common
Stock, entitled to vote thereon is required to
approve the Merger Agreement and the
transactions contemplated thereby. The WCAS
Affiliates collectively own, beneficially and
of record, 5,395,614 shares of the Company's
Common Stock, representing approximately 51.6%
of the issued and outstanding shares of
Company Common Stock and have entered into a
voting agreement set forth in the Merger
Agreement ensuring that all of their shares
will be voted in favor of the Merger Agreement
and the transactions contemplated therein
assuring approval of the Merger Agreement
under applicable Delaware law.
Shares of Common Stock represented by a
properly executed proxy, if such proxy is
received in time and is not subsequently
revoked, will be voted in accordance with the
instructions indicated on such proxy. IF A
PROXY IS PROPERLY EXECUTED AND RETURNED
WITHOUT INDICATING ANY VOTING INSTRUCTIONS,
SHARES OF COMMON STOCK REPRESENTING SUCH PROXY
WILL BE VOTED FOR APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
Revocability of Proxies Any proxy given may be revoked by the person
giving it at any time prior to its exercise at
the Special Meeting by (i) giving written
notice of revocation, bearing a later date
than the proxy, (ii) properly submitting a
duly executed proxy bearing a later date, or
(iii) voting in person at the Special Meeting.
Other Matters and The Company is not currently aware of any
Adjournment business to be transacted at the Special
Meeting other than as described herein. In
the event other matters are brought before the
meeting or in the event of a proposal to
adjourn the Special Meeting, the proxies will
have discretion to vote or act thereon
according to their judgment.
3<PAGE>
Notwithstanding the foregoing, if an
adjournment is for the purpose of soliciting
additional proxies, shares represented by
proxies voting against approval of the Merger
Agreement will be voted against a proposal to
adjourn the Special Meeting for the purpose of
soliciting additional proxies.
Delivery of Merger Price Promptly after the Effective Time, each record
holder of Company Common Stock will be mailed
a transmittal letter (with instructions) to
use in effecting the surrender and
cancellation of their certificates in exchange
for the Merger Price. Adventist shall not be
obligated to deliver the consideration to
which any former holder of Company Common
Stock is entitled until such holder surrenders
such holder's certificates representing such
holder's shares for exchange. HOLDERS OF
COMPANY COMMON STOCK SHOULD NOT SURRENDER ANY
SHARE CERTIFICATES UNTIL SUCH STOCKHOLDER
RECEIVES THE LETTER OF TRANSMITTAL.
The Merger
Parties to the Merger The Company and its subsidiaries offer home
health care services in the Southeastern
United States. Pursuant to the Merger
Agreement, the parties agreed to merge Merger
Sub with and into the Company such that the
Company will become an indirect wholly owned
subsidiary of Adventist. See "THE MERGER."
Adventist operates 32 hospitals in eight
states and Puerto Rico and 27 nursing home
facilities in nine states. Throughout ten
states, Adventist also currently owns 42 and
manages 18 Medicare-certified home health
offices as well as three private home health
care offices.
The Merger Pursuant to the Merger Agreement, Merger Sub,
a wholly owned subsidiary of Adventist, shall
merge with and into the Company. The Company
shall be the surviving corporation of the
Merger and as a result shall become a wholly
owned subsidiary of Adventist and shall
continue to be governed by the laws of the
State of Delaware (the "Merger").
Merger Price The Merger Agreement provides that at the time
the Merger becomes effective, each outstanding
share of Company Common Stock, other than
shares held by the WCAS Affiliates, shall
cease to be outstanding and shall be converted
into and exchanged for the right to receive
cash in an amount equal to $1.50 per share
(the "Merger Price"). All equity interests
held by the WCAS Affiliates, which include
shares of Company Common Stock and warrants to
acquire shares of Company Common Stock, shall
cease to be outstanding and shall be converted
into and exchanged for the right to receive
cash in an amount equal to $1.00 in the
aggregate.
In addition, the Company has outstanding
options to purchase 81,800 shares of Company
Common Stock which have an exercise price
which is lower than the Merger Price. At the
time the Merger becomes effective, the holders
of such options shall in settlement thereof,
receive for each share of Company Common Stock
subject to such option, an amount in cash
equal to the difference between the Merger
Price and the per share exercise price of such
option. All other equity rights of the
Company, which have an exercise price in
excess of the Merger Price, shall terminate in
accordance with their terms at the time of the
Merger.
4<PAGE>
In connection with the Merger, Adventist will
repay up to $39,500,000 of senior secured debt
of the Company, plus such additional amounts
under the Company's credit agreement as may be
consented to by Adventist and WCAS Capital
Partners II, L.P. ("WCAS CP II"). In
addition, Adventist will pay to WCAS CP II,
one of the WCAS Entities, a portion of its
10.5% $10,525,000 subordinated notes due
June 30, 2001 and June 30, 2002, and the
remainder of such subordinated debt will be
contributed by WCAS CP II to the capital of
the Company. The amount to be paid to WCAS CP
II (the "Debt Payment"), will be reduced by
certain transactional and other expenses and
is currently estimated to be between $500,000
and $2,500,000. See "THE MERGER -- Merger
Price."
Reasons for the Merger In reaching its conclusion that the terms of
the Merger Agreement are in the best interests
of the Company and its Stockholders, the Board
of Directors considered the following factors:
(a) the terms and conditions of the Merger
Agreement, including the Merger Price; (b)
the results of its review of strategic
alternatives over the past eight months and
the prospects of the Company as an independent
company; (c) the concessions of the WCAS
Affiliates in order to consummate the Merger
and provide value to the public stockholders;
(d) the financial condition, assets,
liabilities, businesses and operations of the
Company and its subsidiaries; (e) the trading
value of the Common Stock; (f) recent
legislation decreasing reimbursement rates for
home healthcare and the perceived effect of
this reduction by investors and the investment
community; and (g) the opinion of Salomon
Smith Barney as to the fairness, from a
financial point of view, of the Merger Price.
See "THE MERGER--Reasons for the Merger" and
"-- Recommendation of the Board of Directors."
Recommendation of the Based upon the events leading up to the
Board of Directors definitive Merger Agreement and the terms
of the Merger Agreement (including the
Purchase Price to be paid by Adventist),
the Company's Board of Directors believes the
Merger Agreement and the transactions
contemplated therein are in the best interests
of the Company and its Stockholders. See "THE
MERGER -- Recommendation of the Board of
Directors." THE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREIN AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREIN.
Opinion of the Company's Smith Barney Inc. (now associated with Salomon
Financial Advisor Brothers Inc and collectively with Salomon
Brothers Inc doing business as, and
hereinafter referred to as, "Salomon
Smith Barney") has acted as financial advisor
to the Company in connection with the Merger
and has delivered to the Board of Directors of
the Company a written opinion dated June 1,
1998 to the effect that, as of the date of
such opinion and based upon and subject to
certain matters stated therein, the Merger
Price was fair, from a financial point of
view, to the holders of Company Common Stock
(other than the WCAS Affiliates, as to which
Salomon Smith Barney was not requested to
express an opinion). The full text of the
written opinion of Salomon Smith Barney dated
June 1, 1998, which sets forth the assumptions
made, matters considered and limitations on
the review undertaken, is attached as Appendix
B to this Proxy Statement and should be read
carefully in its entirety. THE OPINION OF
SALOMON SMITH BARNEY IS DIRECTED TO THE BOARD
OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS
OF THE MERGER PRICE FROM A FINANCIAL POINT OF
VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE
MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. See "THE MERGER -- Opinion
of the Company's Financial Advisor."
5
<PAGE>
The Closing The Company anticipates consummating the
Merger within three business days following
the satisfaction or waiver of the conditions
specified in the Merger Agreement (the
"Closing Date"). The Company anticipates that
all such conditions will be satisfied or
waived within a matter of days after the
Special Meeting. The Merger will be
consummated and will become effective on the
date and at the time that a Certificate of
Merger, reflecting the Merger, is filed with
the Secretary of State of the State of
Delaware (the "Effective Time"). "THE MERGER
-- Summary of the Terms of the Merger
Agreement -- The Closing."
The Merger Agreement The Merger Agreement contains various
representations and warranties of the
Company and Adventist. Such representations
and warranties cover such areas as corporate
organizational matters and authorization
issues, and with respect to the Company, the
absence of undisclosed liabilities, material
contracts, litigation, compliance with laws,
taxes, benefit plans, lack of environmental
matters, real property and other areas
discussed in greater detail herein and in
Appendix A hereto. See "THE MERGER --
Summary of the Terms of the Merger Agreement
-- Representations and Warranties."
No Solicitation The Company has agreed that, prior to the
Effective Time or earlier termination
of the Merger Agreement, neither it nor any of
its affiliates will, directly or indirectly,
encourage, solicit, participate in or initiate
discussions or negotiations with, or provide
any information to, any entity concerning any
proposal or offer to acquire all or a
substantial part of the business and
properties of the Company or its subsidiaries
or any capital stock of the Company or its
subsidiaries, whether by merger, tender offer,
exchange offer, sale of assets or similar
transaction (an "Acquisition Proposal"), other
than the Merger, except that the Company may
(i) take and disclose to the Company's
stockholders a position with respect to a
tender or exchange offer by a third party, or
(ii) make such disclosure to the Company's
stockholders as, in the good faith judgment
of the Board, after receiving advice from
outside counsel, is required under applicable
law, provided that the Company may not
withdraw or modify, or propose to withdraw or
modify, its position with respect to the
Merger or approve or recommend any Acquisition
Proposal, or enter into any agreement with
respect to any Acquisition Proposal,
except as follows. Notwithstanding the
foregoing, in the event an unsolicited
entity or group has submitted a bona fide
written proposal which the Board determines in
good faith, after consulting with a nationally
recognized investment banking firm, represents
a superior transaction to the Merger and in
the opinion of the Board of Directors, after
receipt of advice from outside legal counsel
to the Company, the failure to provide such
information or access to engage in such
discussions or negotiations would reasonably
be expected to cause the Board of Directors to
violate its fiduciary duties to the Company's
stockholders under applicable law (a "Superior
Proposal"), the Company may furnish
information to and negotiate and participate
in discussions and negotiations with an
unsolicited entity or group. The Company
has agreed to promptly advise Adventist of the
details surrounding any such alternative
Acquisition Proposal. At any time after two
business days following disclosure to
Adventist of its intent to do so and if the
Company has complied with the foregoing
restrictions, the Company may withdraw or
modify its approval or recommendation of the
Merger and may enter into an agreement with
respect to a Superior Proposal, provided
that the Company pays to Adventist a
termination fee and any amount payable at such
time for reimbursement of expenses. See "--
Termination Fee" and "THE MERGER -- Summary of
the Terms of the Merger Agreement -- No
Solicitation."
6<PAGE>
Conditions The Merger Agreement further provides that the
respective obligations of the Adventist, the
Company and the WCAS Entities to consummate
the Merger are conditioned upon, among other
things, the fulfillment of covenants, the
continued validity of the representations and
warranties made by the parties, the receipt
of governmental and regulatory consents
(including termination or expiration of
the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as
amended, and the rules and regulations
promulgated thereunder), receipt of the
required Stockholder approval, and the absence
of injunctions or restraints preventing
consummation of the Merger. The parties to
the Merger Agreement may waive conditions,
except for any condition which, if not
satisfied, would result in the violation
of any law, and with respect to the Company,
any condition which is for the direct benefit
of the WCAS Entities. This provision would
permit the Board to waive a breach by
Adventist of any of its representations,
warranties, covenants or agreements contained
in the Merger Agreement if, in the exercise
of the Board's discretion, it concludes that
such waiver is in the best interests of the
Company and its Stockholders. See "THE
MERGER -- Summary of the Terms of the Merger
Agreement -- Conditions to Closing."
Termination The Merger Agreement may be terminated at any
time prior to the Closing Date: (a) by mutual
written consent of the Company and Adventist;
(b) by the Company or Adventist if the Merger
shall not have been consummated on or before
August 31, 1998, unless such party has failed
to fulfill an obligation under the Merger
Agreement and such failure is the cause of the
failure to consummate the Merger by such date;
(c) by the Company or Adventist upon any court
or governmental order prohibiting the Merger
becoming final; (d) by the Company if
Adventist or Merger Sub materially breaches
their representations or warranties or fails
to perform their covenants or agreements,
which is not remedied in a timely manner;
(e) by the Company in connection with entering
into a definitive agreement providing for the
implementation of an Acquisition Proposal (as
defined under "THE MERGER -- Summary of the
Terms of the Merger Agreement -- No
Solicitation"); (f) by Adventist if, due to
an occurrence not involving a breach by
Adventist or Merger Sub, it is impossible
to satisfy any of the conditions to the
Merger; (g) by Adventist if the Company
materially breaches its representations or
warranties or fails to perform its covenants
or agreements which would give rise to the
failure to satisfy a condition to closing the
Merger and which is not remedied in a timely
manner; and (h) by Adventist if the Board of
Directors of the Company or any committee
thereof shall have withdrawn or modified its
approval or recommendation of the Merger
of the Merger Agreement, or approved or
recommended any Acquisition Proposal.
In the event of termination of the Merger
Agreement by any party as provided above, the
Merger Agreement will become void, and there
will be no liability or obligation on the part
of the Company, Adventist, other than under
certain specified provisions of the Merger
Agreement, which include the payment of a fee
to Adventist under certain circumstances. See
"THE MERGER -- Summary of the Terms of the
Merger Agreement -- Termination" and "THE
MERGER -- Summary of the Terms of the Merger
Agreement -- Termination Fees."
7<PAGE>
Termination Fee If (i) the Company terminates the Merger
Agreement in connection with entering
into a definitive agreement for a Superior
Proposal in accordance with the provisions of
the Merger Agreement, (ii) Adventist
terminates the Merger Agreement because the
Board of Directors of the Company has
withdrawn or modified its approval of the
Merger or approved or recommended any
Acquisition Proposal or (iii) Adventist
terminates the Merger Agreement for the
failure of the Company to fulfill an
obligation under the Merger Agreement and
prior thereto there shall have been announced
another Acquisition Proposal, the Company
will be obligated to pay to Adventist a
termination fee of $1.0 million. See "THE
MERGER -- Summary of the Terms of the
Merger Agreement -- Termination Fees."
Interest of Certain Certain members of the Company's management
Persons in the Merger and the Board may be deemed to have interests
in the Merger in addition to their interests
as Stockholders generally. Certain members of
the Company's management team will be
entitled to receive accelerated payments,
employment positions and retention bonuses
with Adventist or severance payments pursuant
to their existing employment agreements with
the Company upon the consummation of the
Merger.
It is a condition to consummation of the
Merger that Adventist shall have entered
into employment agreements with Daniel Kohl,
President and Chief Executive Officer of the
Company, Fred Follmer, Vice President and
Chief Financial Officer of the Company, and
Shaun Mahoney, Vice President - Support
Services of the Company, unless Adventist
does not offer to such employees compensation
at least equal to their current compensation
level. In connection with the Merger, it is
currently anticipated that certain officers
and other key employees of the Company will
receive retention bonuses in the aggregate
amount of approximately $2.0 million from
Adventist which amounts are not out of the
proceeds of the Merger. In addition, in
connection with the Merger, Mr. Kohl is
expected to receive twelve months severance,
Mr. Follmer, nine months and Mr. Mahoney, six
months, which amounts are currently estimated
to aggregate approximately $442,500.
James B. Hoover and Andrew M. Paul, directors
of the Company, are general partners of the
general partner and affiliates of Welsh,
Carson, Anderson & Stowe and the WCAS
Affiliates. The WCAS Affiliates will receive
$1.00 in the aggregate at the Closing in
exchange for all of their outstanding shares
of Common Stock of the Company and warrants
to acquire shares of Company Common Stock.
In addition, the WCAS Affiliates collectively
own approximately 51.6% of the outstanding
shares of Common Stock of the Company and
have agreed to vote all of such shares
in favor of the Merger. At the Closing,
Adventist will pay to WCAS CP II, one of
the WCAS Entities, a portion of its 10.5%
$10,525,000 subordinated notes due June 30,
2001 and June 30, 2002, in an amount equal to
$5,943,147.50 less certain transactional and
other expenses of the Company (the "Debt
Payment"), and the remainder of such
subordinated debt will be contributed to the
capital of the Company. After subtraction
of such expenses, the amount of the Debt
Payment is currently estimated to be between
$500,000 and $2,500,000. See "THE MERGER --
Interest of Certain Persons in the Merger."
8<PAGE>
Conduct of Business The Merger Agreement contains certain
Pending the Merger covenants made by the Company relating to
the conduct of its businesses through the
Closing Date. Such covenants cover such
areas, among others, as the continued
operation of the business of the Company and
its subsidiaries in the ordinary course of
business, the preservation of the organization
of the Company and its assets, and certain
prohibitions against the incurrence of
financial obligations of the Company and its
subsidiaries and the modification of
contracts. See "THE MERGER -- -- Conduct
of Business Pending the Merger."
Operations of the If for any reason the Merger is not
Company if the Merger consummated, the Board will evaluate other
is Not Consummated strategic alternatives and continue to oversee
the implementation of remedial action to
improve the Company's operations. The Board
believes that it will be difficult to identify
another strategic partner prepared to
negotiate a transaction on more favorable
terms than those contained in the Merger
Agreement.
Dissenters' Rights Under Delaware law, Stockholders have the
right to dissent from the Merger and
demand payment of the fair value of their
shares in the event the Merger is consummated.
To exercise such right, a Stockholder opposing
the Merger would be required to file with the
Company a written notice of his intent to
demand payment for his shares, would not be
able to vote any of his shares in favor of
the proposed transaction and would otherwise
be required to follow the procedures specified
in Section 262 of the Delaware General
Corporation Law. See "THE MERGER --
Dissenters' Rights" and Appendix C.
Certain Federal Income Each Stockholder will recognize a gain or loss
Tax Consequences on the Merger equal to the amount realized by
the such Stockholder from the sale less the
Stockholder's adjusted basis in the shares of
Company Common Stock sold. The amount
realized will equal the sum of money received
by the Stockholder in consideration for the
Company Common Stock. See "THE MERGER --
Certain Federal Income Tax Consequences."
9
<PAGE>
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on July 31, 1998, at 10:00
a.m., Eastern Standard Time, at 1000 Abernathy Road, 3rd Floor,
Conference Room C, Atlanta, Georgia 30328.
MATTERS TO BE CONSIDERED
At the Special Meeting, the Stockholders will be asked to
consider and vote upon a proposal to approve and adopt the
Amended and Restated Agreement and Plan of Merger dated June 17,
1998 (the "Merger Agreement"), by and among Adventist, Merger
Sub, the Company and the WCAS Entities, and to approve the
consummation of the transactions contemplated therein, including
the merger of Merger Sub with and into the Company such that the
Company shall become an indirect wholly owned subsidiary of
Adventist (the "Merger"). A copy of the Merger Agreement is
attached hereto as Appendix A, and the description of the Merger
contained in this Proxy Statement is qualified in its entirety by
reference to Appendix A. See "THE MERGER."
The Board of Directors knows of no business that will be
presented for consideration at the Special Meeting other than the
matters described in this Proxy Statement. If any other matters
properly come before the Special Meeting, the persons named in
the enclosed form of proxy or their substitutes will vote in
accordance with their best judgment on such matters.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The Board of Directors of the Company has fixed the close of
business on June 30, 1998 as the record date (the "Record Date")
for the determination of holders of shares of Common Stock
entitled to notice of and to vote on each matter submitted to a
vote at the Special Meeting and any adjournment(s) or
postponement(s) thereof. On the Record Date, the Company had
outstanding 10,464,915 shares of $.01 par value Common Stock,
entitled to one vote per share.
The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Common Stock of the Company
entitled to vote is necessary to constitute a quorum at the
Special Meeting. Shares represented by proxies will be counted
as shares present for purposes of establishing a quorum. Shares
represented by proxies that are marked "abstain" also will be
counted as shares present for purposes of establishing a quorum.
If a quorum is not present at the Special Meeting, or if the
Company determines that additional time is needed for the
solicitation of proxies to approve the Merger, the Company may
adjourn or postpone the Special Meeting.
VOTES REQUIRED
If Stockholders specify in the accompanying proxy a choice
with respect to any matter to be acted upon, the shares
represented by such proxies will be voted as specified.
If a quorum is present at the Special Meeting, approval of
the Merger Agreement and approval of the Merger requires the
affirmative vote of the holders of a majority of all outstanding
shares of Common Stock entitled to vote thereon. Proxies which
indicate abstentions will have the same effect as votes against
the Merger Agreement and the transactions contemplated therein
and against the proposal to adjourn or postpone the Special
Meeting. IF NO INSTRUCTIONS ARE INDICATED IN THE PROXIES
RETURNED TO THE COMPANY, SUCH PROXIES WILL BE VOTED FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT AND CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREIN.
10<PAGE>
As more fully described herein, the WCAS Affiliates own,
beneficially and of record, in the aggregate 5,395,614
outstanding shares of Common Stock of the Company, representing
approximately 51.6% of the issued and outstanding shares of
Common Stock, and have executed a voting agreement pursuant to
which each has agreed to vote their shares in favor of the
approval of the Merger Agreement and the Merger. Accordingly,
over 51.6% of the votes entitled to be cast by the holders of
Common Stock will be voted in favor of the Merger Agreement and
the transactions contemplated therein assuring approval of the
Merger Agreement under applicable Delaware law.
With respect to all matters to be voted on by the
Stockholders, holders of shares of Common Stock are entitled to
one vote per share.
At the Special Meeting, broker "non-votes" may occur. A
broker "non-vote" occurs when a nominee holding shares for a
beneficial owner votes on one proposal, but does not vote on
another proposal because the nominee does not have discretionary
voting power and has not received instructions from the
beneficial owner. Broker "non-votes" will be treated as votes
against the relevant proposals. Broker "non-votes" will be
counted as present for purposes of determining the existence of a
quorum.
STOCKHOLDERS HAVE THE RIGHT TO DISSENT FROM APPROVAL OF THE
MERGER AND OBTAIN PAYMENT OF THE FAIR VALUE OF THEIR SHARES OF
COMMON STOCK BY FOLLOWING THE PROCEDURES DESCRIBED IN SECTION 262
OF THE DELAWARE GENERAL CORPORATION LAW. SEE APPENDIX C HERETO
AND "THE MERGER -- Dissenters' Rights."
REVOCABILITY OF PROXIES
A Stockholder who signs and returns a proxy may revoke it at
any time before it is voted by taking one of the following three
actions: (i) giving written notice of revocation to Fred Follmer,
Secretary of the Company; (ii) executing and delivering a proxy
with a later date; or (iii) voting in person at the Special
Meeting.
Votes cast by proxy or in person at the Special Meeting will
be tabulated by one or more inspectors of election appointed at
the Special Meeting, who also will determine whether a quorum is
present for the transaction of business. The expense of
preparing, printing, and mailing proxy materials to Stockholders
of the Company will be borne by the Company.
OTHER MATTERS; ADJOURNMENTS
The Board of Directors of the Company is not currently aware
of any business to be transacted at the Special Meeting other
than as described herein. If, however, other matters are
properly brought before the Special Meeting, or any adjournments
or postponements thereof, the persons appointed as proxies will
have discretion to vote or act thereon according to their
judgment. Such adjournments may be for the purpose of soliciting
additional proxies. Shares represented by proxies voting against
approval of the Merger Agreement and the transactions
contemplated thereby, will be voted against a proposal to adjourn
the Special Meeting for the purpose of soliciting additional
proxies. The Company does not currently intend to seek an
adjournment of the Special Meeting.
PROXY SOLICITATION
The Company will bear the costs of solicitation of proxies
for the Special Meeting. In addition to solicitation by mail,
directors, officers and regular employees of the Company may
solicit proxies from Stockholders by telephone, telegram,
personal interview or otherwise. Such directors, officers and
employees will not receive additional compensation but may be
reimbursed for out-of-pocket expenses in connection with such
solicitation. Brokers, nominees, fiduciaries and other
custodians have been requested to forward soliciting material to
the beneficial owners of Common Stock held of record by them, and
such custodians will be reimbursed for their reasonable expense.
11
<PAGE>
DELIVERY OF MERGER PRICE
Promptly after the Effective Time, each record holder of
Company Common Stock will be mailed a transmittal letter (with
instructions) to use in effecting the surrender and cancellation
of their certificates in exchange for the Merger Price.
Adventist shall not be obligated to deliver the consideration to
which any former holder of Company Common Stock is entitled until
such holder surrenders such holder's certificates representing
such holder's shares for exchange. HOLDERS OF COMPANY COMMON
STOCK SHOULD NOT SURRENDER ANY SHARE CERTIFICATES UNTIL SUCH
STOCKHOLDER RECEIVES THE LETTER OF TRANSMITTAL.
INDEPENDENT AUDITORS
The Company has been advised that representatives of Ernst &
Young LLP, the Company's independent auditors for 1997 ("E&Y"),
will attend the Special Meeting, make a statement if they have
the desire to do so and will be available to respond to
appropriate questions.
PROPOSAL
THE MERGER
THIS SECTION OF THE PROXY STATEMENT DESCRIBES CERTAIN
ASPECTS OF THE PROPOSED MERGER. TO THE EXTENT THAT THE
DESCRIPTION RELATES TO THE MERGER AGREEMENT, THE FOLLOWING
DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, WHICH IS
ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. ALL STOCKHOLDERS ARE URGED TO
READ THE MERGER AGREEMENT, AS WELL AS OTHER APPENDICES IN THEIR
ENTIRETY.
GENERAL
Stockholders are being asked to consider and vote upon a
proposal to approve and adopt the Amended and Restated Agreement
and Plan of Merger dated June 17, 1998 (the "Merger Agreement"),
by and among Adventist Health Systems Sunbelt Healthcare
Corporation ("Adventist"), Homecare Acquisition Corp. ("Merger
Sub"), the Company and Welsh, Carson, Anderson & Stowe VI, L.P.,
WCAS Healthcare Partners, L.P. and WCAS Capital Partners II, L.P.
(collectively, the "WCAS Entities"), and to approve the
consummation of the transactions contemplated therein, including
the proposed merger of Merger Sub with and into the Company, with
the result that the Company shall become a wholly owned
subsidiary of Adventist (the "Merger"). A copy of the Merger
Agreement is attached hereto as Appendix A. There is no present
affiliation between the Company and Adventist, except for
affiliations arising by reason of the transactions contemplated
by the Merger Agreement. The Merger Agreement and other
agreements contemplated therein were the product of arms' length
negotiations between the Company and Adventist. Adventist
operates 32 hospitals in eight states and Puerto Rico and 27
nursing home facilities in nine states. Throughout ten states,
Adventist also currently owns 42 and manages 18 Medicare-
certified home health offices as well as three private home
health care offices. The principal executive offices of
Adventist are located near Orlando, Florida.
Pursuant to the Merger Agreement, Merger Sub, an indirect
wholly owned subsidiary of Adventist, shall merge with and into
the Company. The Company shall be the surviving corporation of
the Merger and as a result shall become an indirect wholly owned
subsidiary of Adventist and shall continue to be governed by the
laws of the State of Delaware (the "Merger").
12<PAGE>
Only if the Merger Agreement and the transactions
contemplated therein are approved at the Special Meeting and all
conditions to consummation of the Merger are either satisfied or
waived will the Merger proceed.
THE MERGER PRICE
The Merger Agreement provides that at the time the Merger
becomes effective, each outstanding share of Company Common
Stock, other than shares held by the WCAS Affiliates, shall cease
to be outstanding and shall be converted into and exchanged for
the right to receive cash in an amount equal to $1.50 per share
(the "Merger Price"). All equity interests held by the WCAS
Entities and their affiliates (collectively, with the WCAS
Entities, the "WCAS Affiliates"), which include shares of Company
Common Stock and warrants to purchase shares of Company Common
Stock, shall cease to be outstanding and shall be converted into
and exchanged for the right to receive cash in an amount equal to
$1.00 in the aggregate.
In addition, the Company has outstanding options to purchase
81,800 shares of Company Common Stock which have an exercise
price which is lower than the Merger Price. At the time the
Merger becomes effective, the holders of such options shall in
settlement thereof, receive for each share of Company Common
Stock subject to such option, an amount in cash equal to the
difference between the Merger Price and the per share exercise
price of such option. All other equity rights of the Company,
which have an exercise price in excess of the Merger Price, shall
terminate in accordance with their terms at the time of the
Merger.
In connection with the Merger, Adventist will repay up to
$39,500,000 of senior secured debt of the Company, plus such
additional amounts under the Company's credit agreement as may be
consented to by Adventist and WCAS Capital Partners II, L.P.
("WCAS CP II"). In addition, Adventist will pay to WCAS CP II,
one of the WCAS Entities, a portion of its 10.5% $10,525,000
subordinated notes due June 30, 2001 and June 30, 2002, and the
remainder of such subordinated debt will be contributed to the
capital of the Company. The amount to be paid to WCAS CP II (the
"Debt Payment"), will be reduced by certain transactional and
other expenses and is currently estimated to be between $500,000
and $2,500,000.
BACKGROUND OF THE MERGER
In October 1997, the Board of Directors, in response to the
loss of trading value of the Company Common Stock over the
previous six months and other challenges facing the Company began
exploring strategic alternatives, including the sale of the
Company, to maximize shareholder value. On October 2, 1997, the
Company retained Salomon Smith Barney as its financial advisor in
the course of the Company's strategic review process. On
December 22, 1997, the Board also retained a law firm to provide
legal advice as to these matters.
In October and November 1997, approximately 21 potential
buyers were approached, following which management presentations
and a due diligence data room were prepared. On November 7,
1997, the Board met to review the status of the sale process.
On November 21, 1997, three companies (the "Initial
Bidders"), all of which were strategic buyers, including
Adventist, submitted preliminary indications of interest.
On December 5, 1997, one of the Initial Bidders withdrew
from the sale process due to concerns over anticipated changes in
government reimbursement policies for home healthcare providers.
During the weeks of December 8 and December 15, 1997, the
Company conducted management presentations and scheduled data
room visits with Adventist and the other remaining Initial
Bidder. On December 15, 1997, the Company announced the
delisting of the shares of Company Common Stock from the Nasdaq
National Market and that it had retained Salomon Smith Barney to
assist the Company in exploring strategic alternatives. In early
January 1998, the other remaining Initial Bidder withdrew from
the sale process stating that it could not complete its due
diligence.
13<PAGE>
Between January 21 and 23, 1998, three additional
indications of interest were received, all from strategic buyers
(the "Additional Buyers"). On January 27, 1998, Adventist
revised its initial offer.
During early February 1998, 16 additional potential buyers
were contacted and a revised offer was submitted by Adventist.
Discussions continued with the Initial Bidders and the Additional
Bidders. By February 25, 1998, one of the Additional Bidders
withdrew because of its inability to obtain financial resources
to complete the transaction.
During the remainder of February and through March 1998, the
Company's management held additional meetings and discussions
with several potential acquirors.
By April 6, 1998, the Company had received revised offers
from two Additional Buyers and Adventist, all subject to
additional due diligence. After reviewing the offers, the
Company determined that the revised offers from the Additional
Bidders raised significant financing, structural and timing
concerns and decided to pursue negotiations with Adventist.
A letter of intent was signed and additional due diligence
was entered into beginning the week of April 13, 1998 with
Adventist which continued for 30 days. During this process,
Adventist representatives visited various Company office
locations and reviewed financials, compliance, clinical, MIS,
reimbursement and operations of the Company.
On April 29, 1998, members of the Company's senior
management gave a presentation to the senior management team of
Adventist to discuss the strategic fit of the two companies and
the Company's strategies and priorities.
On May 6, 1998, the Board of Directors of the Company met
with senior management and Salomon Smith Barney and discussed the
status of negotiations and the principal terms of the proposed
transaction. At such meeting, the Board of Directors instructed
senior management and its financial and legal advisors to pursue
the negotiation of a definitive agreement with Adventist.
Between May 6, 1998 and June 1, 1998, the Company and
Adventist held several discussions regarding valuation and price
considerations and other terms and conditions of a potential
business combination. On May 19, 1998, management from both the
Company and Adventist met to negotiate a definitive agreement.
On the afternoon of May 29, 1998, the Board of Directors of
the Company held a telephonic meeting at which management
reported that an agreement had been reached, subject to approval
of the Board of Directors of the Company. The legal advisors
reported on the status of the negotiations and the few remaining
open issues in the Merger Agreement. Salomon Smith Barney
reviewed with the Board of Directors the financial analyses
performed by Salomon Smith Barney in connection with its
evaluation of the Merger Price and rendered to the Board of
Directors an oral opinion (which opinion was subsequently
confirmed by delivery of a written opinion, dated June 1, 1998 to
the effect that, as of the date of such opinion and based upon
and subject to certain matters stated therein, the Merger Price
was fair, from a financial point of view, to the holders of
Company Common Stock (other than the WCAS Affiliates, as to which
Salomon Smith Barney was not requested to express an opinion).
The Board of Directors also discussed the potential benefits and
risks of the transaction, as well as the status of the Company
and the potential risks of not entering into a transaction. At
the conclusion of the meeting, the Board of Directors unanimously
approved the Merger Agreement.
On June 1, 1998, the Merger Agreement was executed. On June 2,
1998, the parties issued a joint press release announcing the
Merger.
14<PAGE>
REASONS FOR THE MERGER AND RECOMMENDATION OF THE BOARD OF
DIRECTORS
At the meeting of the Board of Directors held on May 29,
1998, after consultation with the Company's management and legal
and financial advisors and counsel for the WCAS Affiliates, the
Board of Directors approved the Merger Agreement and the
transactions contemplated therein, authorized the execution,
delivery and performance of the Merger Agreement and adopted a
resolution recommending to the Stockholders the approval of the
Merger Agreement and the consummation of the Merger.
In reaching its conclusion that the terms of the Merger
Agreement are in the best interests of the Company and its
Stockholders, the Board of Directors considered the following
factors:
(a) the terms and conditions of the Merger Agreement,
including the consideration payable in the Merger which
will be paid in cash in an amount equal to $1.50 per
share to the holders of Company Common Stock, other
than the WCAS Affiliates;
(b) the results of its review of strategic
alternatives over the past eight months, negotiations
with other potential purchasers during such period and
management's view as to the potential for other third
parties to acquire the Company, and the prospects of
the Company as an independent company;
(c) the fact that in order to promote consummation of
the Merger and to provide value to the public
Stockholders, the WCAS Affiliates agreed to accept
$1.00 in the aggregate for all equity interests held by
such WCAS Affiliates, agreed to receive a portion of
the amounts owed to them under their subordinated debt,
and agreed to use the amount paid to them on such
subordinated debt to pay certain of the Company's
expenses related to the Merger and to indemnify
Adventist from certain actions;
(d) the financial condition, assets, liabilities,
businesses and operations of the Company and its
subsidiaries, both on a historical and prospective
basis;
(e) the trading value of the Common Stock;
(f) recent legislation decreasing reimbursement rates
for home healthcare and the perceived effect of this
reduction by investors and the investment community;
and
(g) Salomon Smith Barney's presentation to the Board
of Directors on May 29, 1998 and Salomon Smith Barney's
written opinion dated June 1, 1998 to the effect that,
as of such date and based upon and subject to certain
matters stated in such opinion, the Merger Price to be
received in the Merger by the holders of Company Common
Stock (other than the WCAS Affiliates, as to which
Salomon Smith Barney was not requested to express an
opinion) was fair from a financial point of view to
such holders.
The foregoing discussion sets forth the material factors and
information considered and given weight by the Board of Directors
of the Company. In view of the variety of factors considered in
connection with its evaluation of the Merger, the Board did not
find it necessary or practicable to and did not assign relative
weights to or otherwise quantify the specific factors considered
in reaching its determination. In addition, different members of
the Board may have given different weight to different factors.
The Board also identified certain risks related to the Merger,
including the possibility that the Merger might not be
consummated and the effect of public announcement of the Merger
on the Company's sales and operating results and its ability to
attract and retain key management and other personnel. The Board
also considered other alternatives available to the Company in
light of all the other information available to it and concluded
that the Merger Agreement and the transactions contemplated
therein provided the greatest opportunity to maximize value to
the Stockholders.
15
<PAGE>
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS APPROVE AND ADOPT THE MERGER AGREEMENT AND
APPROVE THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Salomon Smith Barney was retained by the Company to act as
its financial advisor in connection with the proposed Merger. In
connection with such engagement, the Company requested that
Salomon Smith Barney evaluate the fairness, from a financial
point of view, to the holders of Company Common Stock (other than
the WCAS Affiliates) of the consideration to be received by such
holders in the Merger. On May 29, 1998, at a meeting of the
Board of Directors held to evaluate the proposed Merger, Salomon
Smith Barney delivered an oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated
June 1, 1998, the date of execution of the Merger Agreement) to
the Board of Directors to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated
therein, the Merger Price was fair, from a financial point of
view, to the holders of Company Common Stock (other than the WCAS
Affiliates, as to which Salomon Smith Barney was not requested to
express an opinion).
In arriving at its opinion, Salomon Smith Barney reviewed
the Merger Agreement and held discussions with certain senior
officers, directors and other representatives and advisors of the
Company concerning the business, operations and prospects of the
Company. Salomon Smith Barney examined certain publicly
available business and financial information relating to the
Company as well as certain financial forecasts and other
information and data for the Company which were provided to or
otherwise discussed with Salomon Smith Barney by the management
of the Company. Salomon Smith Barney reviewed the financial
terms of the Merger as set forth in the Merger Agreement in
relation to, among other things: current and historical market
prices and trading volumes of the Company Common Stock; the
historical and projected earnings and other operating data of the
Company; and the capitalization and financial condition of the
Company, including the near-term liquidity needs of, and capital
resources available to, the Company. Salomon Smith Barney
considered, to the extent publicly available, the financial terms
of other transactions recently effected which Salomon Smith
Barney considered relevant in evaluating the Merger and analyzed
certain financial, stock market and other publicly available
information relating to the businesses of other companies whose
operations Salomon Smith Barney considered relevant in evaluating
those of the Company. In connection with its engagement, Salomon
Smith Barney was requested to approach, and held discussions
with, third parties to solicit indications of interest in a
possible acquisition of the Company. In addition to the
foregoing, Salomon Smith Barney conducted such other analyses and
examinations and considered such other financial, economic and
market criteria as Salomon Smith Barney deemed appropriate in
arriving at its opinion.
In rendering its opinion, Salomon Smith Barney assumed and
relied, without independent verification, upon the accuracy and
completeness of all financial and other information and data
publicly available or furnished to or otherwise reviewed by or
discussed with Salomon Smith Barney. With respect to financial
forecasts and other information and data provided to or otherwise
reviewed by or discussed with Salomon Smith Barney, the
management of the Company advised Salomon Smith Barney that such
forecasts and other information and data were reasonably prepared
reflecting the best currently available estimates and judgments
of the management of the Company as to the future financial
performance of the Company. Salomon Smith Barney did not make
and was not provided with an independent evaluation or appraisal
of the assets or liabilities (contingent or otherwise) of the
Company nor did Salomon Smith Barney make any physical inspection
of the properties or assets of the Company. Salomon Smith Barney
expressed no view as to, and its opinion does not address, the
relative merits of the Merger as compared to any alternative
business strategies that might exist for the Company or the
effect of any other transaction in which the Company might
engage. Salomon Smith Barney's opinion was necessarily based
upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Salomon
Smith Barney as of the date of its opinion. Although Salomon
Smith Barney evaluated the Merger Price from a financial point of
view, Salomon Smith Barney was not asked to and did not recommend
the specific consideration payable in the Merger, which was
determined through negotiation between the Company and Adventist.
No other limitations were imposed by the Company on Salomon Smith
Barney with respect to the investigations made or procedures
followed by Salomon Smith Barney in rendering its opinion.
16<PAGE>
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON SMITH BARNEY
DATED JUNE 1, 1998, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS
ATTACHED HERETO AS APPENDIX B AND SHOULD BE READ CAREFULLY AND IN
ITS ENTIRETY. THE OPINION OF SALOMON SMITH BARNEY IS DIRECTED TO
THE BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS OF THE
MERGER PRICE FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY
OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF
THE OPINION OF SALOMON SMITH BARNEY SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
In preparing its opinion, Salomon Smith Barney performed a
variety of financial and comparative analyses, including those
described below. The summary of such analyses does not purport
to be a complete description of the analyses underlying Salomon
Smith Barney's opinion. The preparation of a fairness opinion is
a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analyses
and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, Salomon Smith
Barney believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying such analyses and
opinion. In its analyses, Salomon Smith Barney made numerous
assumptions with respect to the Company, industry performance,
general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the
Company. The estimates contained in such analyses and the
valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition,
analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial
uncertainty. Salomon Smith Barney's opinion and analyses were
only one of many factors considered by the Board of Directors in
its evaluation of the Merger and should not be viewed as
determinative of the views of the Company's Board of Directors or
management with respect to the Merger Price or the proposed
Merger.
SELECTED COMPANY ANALYSIS. Using publicly available
information, Salomon Smith Barney analyzed, among other things,
the trading multiples of the Company and 15 selected publicly
traded companies in the home healthcare industry, consisting of
(i) Home Care Services - Small Capitalization Companies:
Caretenders Health Corp., HealthCor Holdings, Inc., Home Health
Corporation of America, Inc., In Home Health, Inc., NuMED Home
Health Care, Inc., and Staff Builders, Inc. (the "Small Cap
Companies"); (ii) Home Care Services - Large Capitalization
Companies: American HomePatient, Inc., Apria Healthcare Group,
Inc., Coram Healthcare Corporation, Lincare Holdings, Inc.,
Pediatric Services of America, Inc., and Transworld Healthcare
Inc. (the "Large Cap Companies"); and (iii) Home Care Staffing
Companies: Interim Services Inc., Olsten Corporation, and
Personnel Group of America, Inc. (the "Home Care Staffing
Companies" and, together with the Small Cap Companies and Large
Cap Companies, the "Selected Companies"). With respect to the
Selected Companies, Salomon Smith Barney focused primarily on the
Small Cap Companies, which Salomon Smith Barney considered to be
most comparable to the Company. Salomon Smith Barney compared,
among other things, adjusted market values (fully diluted market
value, plus outstanding debt, less cash) as percentages or
multiples of latest 12 months ("LTM") revenues, LTM earnings
before interest, taxes, depreciation and amortization ("EBITDA"),
and latest month annualized as of March 31, 1998 EBITDA ("LMA
EBITDA"). All percentages or multiples were based on closing
stock prices as of May 27, 1998. Applying a range of selected
percentages or multiples for the Small Cap Companies of LTM
revenues, LTM EBITDA and LMA EBITDA of 15% to 35%, 5.5x to 6.5x
and 5.0x to 6.0x, respectively, to corresponding financial data
for the Company resulted in a selected equity reference range for
the Company of approximately $0.50 to $1.00 per share, as
compared to the Merger Price of $1.50 per share.
SELECTED MERGER AND ACQUISITION TRANSACTIONS ANALYSIS.
Using publicly available information, Salomon Smith Barney
reviewed, among other things, the implied transaction multiples
paid or proposed to be paid in 10 selected transactions in the
home healthcare industry, consisting of (acquiror/target):
Integrated Health Services, Inc./RoTech Medical Corp.; Apria
Healthcare Group, Inc./Vitas Healthcare Corporation; Olsten
Corporation/Quantum Health Resources, Inc.; Homedco Group,
Inc./Abbey Healthcare Group, Inc.; Coram Healthcare
Corporation/Home infusion business of Caremark International
Inc.; W.R. Grace & Co./Home Nutritional Services, Inc.; Caremark
International Inc./Critical Care America, Inc.; Abbey Healthcare
Group, Inc./Total Pharmaceutical Care, Inc.; Olsten
Corporation/Lifetime Corporation; and W.R. Grace & Co./Home
Intensive Care, Inc. (collectively, the "Selected Transactions").
Salomon Smith Barney compared, among other things, transaction
values as percentages or multiples of LTM revenues, LTM EBITDA
and LMA EBITDA. All percentages or multiples were based on
financial information available at the time of such transaction.
Applying a range of selected percentages or multiples for the
Selected Transactions of LTM revenues, LTM EBITDA and LMA EBITDA
of 25% to 50%, 9.0x to 11.5x and 8.5x to 11.0x, respectively, to
corresponding financial data for the Company resulted in a
selected equity reference range for the Company of approximately
$0.50 to $1.50 per share, as compared to the Merger Price of
$1.50 per share.
17<PAGE>
No company, transaction or business used in the "Selected
Company Analysis" or "Selected Merger and Acquisition
Transactions Analysis" as a comparison is identical to the
Company or the Merger. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it
involves complex considerations and judgments concerning
differences in financial and operating characteristics and other
factors that could affect the acquisition, public trading or
other values of the Selected Companies, the Selected Transactions
or the business segment, company or transaction to which they are
being compared.
DISCOUNTED CASH FLOW ANALYSIS. Salomon Smith Barney
performed a discounted cash flow analysis of the projected free
cash flow of the Company for fiscal years 1998 through 2002,
based on internal estimates of the management of the Company.
The stand-alone discounted cash flow analysis of the Company was
determined by (i) adding (x) the present value of projected free
cash flows over the five-year period from 1998 to 2002 and (y)
the present value of the estimated terminal value in year 2002
and (ii) subtracting the current net debt of the Company. The
range of estimated terminal values for the Company at the end of
the five-year period was calculated by applying terminal value
multiples of 5.5x to 6.5x to the Company's projected 2002 EBITDA.
The cash flows and terminal values of the Company were discounted
to present value using discount rates ranging from 12% to 14%.
Utilizing such terminal multiples and discount rates, this
analysis resulted in an equity reference range for the Company of
approximately $0.29 to $1.51 per share, as compared to the Merger
Price of $1.50 per share.
LIQUIDATION ANALYSIS. Given the financially distressed
condition of the Company, Salomon Smith Barney analyzed the
potential residual value available for distribution after
satisfaction of the Company's outstanding obligations with
respect to its bank facilities, the subordinated debt held by the
WCAS Affiliates and certain employee retention and other costs,
based on estimates provided by the management of the Company.
Based on such estimates and after payment of such amounts, this
analysis indicated a negative residual equity value per share for
the Company, as compared to the Merger Price of $1.50 per share.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its
opinion, Salomon Smith Barney considered certain other factors
and conducted certain other comparative analyses, including,
among other things, a review of (i) indications of interest
received from, and discussions with, third parties other than
Adventist; (ii) historical and projected financial results of the
Company; (iii) the history of trading prices and volume for the
Company Common Stock; (iv) the stockholder profile of the
Company; and (v) selected published analysts' reports on the
Company.
Pursuant to the terms of Salomon Smith Barney's engagement,
the Company has agreed to pay Salomon Smith Barney for its
services in connection with the Merger an aggregate financial
advisory fee of $750,000. The Company has also agreed to
reimburse Salomon Smith Barney for certain legal expenses and to
indemnify Salomon Smith Barney and related persons against
certain liabilities, including liabilities under the federal
securities laws, arising out of Salomon Smith Barney's
engagement.
Salomon Smith Barney has advised the Company that, in the
ordinary course of business, Salomon Smith Barney and its
affiliates may actively trade or hold the securities of the
Company for their own account or for the account of customers
and, accordingly, may at any time hold a long or short position
in such securities. Salomon Smith Barney has in the past
provided investment banking services to certain affiliates of the
Company, including WCAS, unrelated to the proposed Merger, for
which services Salomon Smith Barney has received compensation.
In addition, Salomon Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain
relationships with the Company, Adventist and their respective
affiliates.
18<PAGE>
Salomon Smith Barney is an internationally recognized
investment banking firm and was selected by the Company based on
its experience and expertise. Salomon Smith Barney regularly
engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of
listed and unlisted securities, private placements and valuations
for estate, corporate and other purposes.
SUMMARY OF THE TERMS OF THE MERGER AGREEMENT
ALTHOUGH THE COMPANY BELIEVES THAT THE FOLLOWING SUMMARY OF
CERTAIN PROVISIONS OF THE MERGER AGREEMENT DESCRIBES THE MATERIAL
TERMS AND CONDITIONS OF THE MERGER AGREEMENT, SUCH SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A
COPY OF WHICH IS ATTACHED HERETO AS APPENDIX A AND IS
INCORPORATED HEREIN BY REFERENCE. TERMS WHICH ARE NOT OTHERWISE
DEFINED IN THIS SUMMARY HAVE THE MEANING SET FORTH IN THE MERGER
AGREEMENT.
THE CLOSING. The closing of the Merger (the "Closing") will
take place on the third business day following the satisfaction
or waiver of the conditions to closing set forth in the Merger
Agreement or at such other time as the parties may mutually
agree. The Company anticipates that all such conditions will be
satisfied or waived within a matter of days after the Special
Meeting. The Merger will be consummated and will become
effective on the date and at the time that a Certificate of
Merger, reflecting the Merger, is filed with the Secretary of
State of the State of Delaware (the "Effective Time"). Both the
Company and Adventist have the right to terminate the Merger
Agreement if the Closing does not occur on or prior to August 31,
1998, unless the party seeking termination failed to perform
covenants and agreements which prevented the Closing.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement
contains various representations and warranties of the Company,
its subsidiaries and Adventist. These include representations
and warranties by the Company relating to, among other things:
(a) organization and similar corporate matters of the Company and
its subsidiaries; (b) authorization, execution, delivery,
performance and enforceability of the Merger Agreement and the
ancillary agreements thereto; (c) the outstanding capital stock
of the Company; (d) the Company's financial statements; (e) the
Company's provision of certain corporate documents to Adventist,
including documents filed with the Commission,; (f) absence of
undisclosed liabilities; (g) material contracts related to the
business of the Company and its subsidiaries; (h) title to and
condition of the assets owned by the Company; (i) litigation; (j)
compliance with laws; (k) benefit plans; (l) labor relations; (m)
reports filed with regulatory authorities, (n) compliance with
Medicare, Medicaid and other third-party payor requirements, (o)
compliance with the fraud and abuse and related health care anti-
kickback laws, (p) brokers and advisors; (q) environmental
matters; (r) taxes; and (s) intellectual property.
Adventist's representations and warranties include those
relating to, among other things: (a) Adventist's organization and
similar corporate matters; (b) authorization, execution,
delivery, performance and enforceability of the Merger Agreement
and the ancillary agreements thereto; (c) sufficiency of funds to
consummate the Merger; and (d) organization and similar corporate
matters related to, and authorization, execution, delivery,
performance and enforceability of the Merger Agreement by, Merger
Sub.
CERTAIN COVENANTS. Pursuant to the terms of the Merger
Agreement, the Company, its subsidiaries and Adventist have made
certain covenants including, among others, that from the date of
the Merger Agreement through the Closing, except as permitted by
or contemplated in the Merger Agreement, the Company and its
subsidiaries shall carry on its business in the ordinary course,
preserve intact its business organization and assets and maintain
its rights and franchises and take no action which would
materially and adversely affect the ability of any party to the
Merger Agreement to obtain any consents required for the
consummation of the Merger or materially and adversely affect the
ability of any party to perform its covenants and agreements
under the Merger Agreement. In addition, except (a) as permitted
by or contemplated in the Merger Agreement and (b) as otherwise
consented to in writing by Adventist, the Company and its
subsidiaries have agreed not to: (i) amend the Certificate of
Incorporation, bylaws or other governing instrument of the
Company or its subsidiaries; (ii) incur any additional debt
obligation or other obligation for borrowed money, or suffer the
imposition of any lien, except that on a consolidated basis, the
Company may borrow up to $500,000 under its credit facility for
any purpose and may borrow up to an aggregate of $2,000,000
(including the $500,000 referred to above) for operations
shortfalls caused by overpayments in Periodic Interim Payments
made under the Medicare and Medicaid programs for the quarter
ended March 31, 1998, which are withheld from Periodic Interim
Payments made after the date of the Merger Agreement, and may
borrow additional amounts agreed to by Adventist and WCAS Capital
Partners II, L.P.; (iii) repurchase, redeem or otherwise acquire
or exchange any shares or securities convertible into any shares
of the capital stock of the Company or its subsidiaries or
declare or pay any dividend or make any other distribution in
respect of the Company's capital stock; (iv) except pursuant to
the exercise of disclosed stock options or warrants existing as
of the date of the Merger Agreement, issue, sell, pledge,
encumber, authorize the issuance of or permit to become
outstanding any additional securities of the Company or its
19<PAGE>
subsidiaries; (v) adjust, split, combine or reclassify any
capital stock of the Company or its subsidiaries or issue or
authorize the issuance of any other securities in respect of or
in substitution for shares of Company Common Stock, or sell,
lease, mortgage or otherwise dispose of or otherwise encumber any
shares of capital stock of any subsidiary of the Company or any
asset having a book value in excess of $100,000 other than in the
ordinary course of business for reasonable and adequate
consideration; (vi) purchase securities or make any material
investment in any entity other than a wholly owned subsidiary;
(vii) except as disclosed to Adventist, grant any increase in
compensation or benefits to employees or officers of the Company
or its subsidiaries, pay any severance or termination pay or any
bonus or enter into or amend any severance agreements or grant
any material increases in directors' fees; (viii) enter into or
amend any employment contract with any person having a salary in
excess of $75,000 per year that the Company or its subsidiaries
do not have the unconditional right to terminate without any
liability; (ix) adopt any new employee benefits plans or make any
material change to any existing employee benefit plan; (x) make
any significant change in tax or accounting methods or systems of
internal accounting controls; (xi) commence any litigation other
than in accordance with past practice or settle any litigation
for material money damages or having material restrictions on the
operations of the Company or any subsidiary; (xii) except in the
ordinary course of business, enter into, amend or terminate any
material contract or waive, release, compromise or assign any
material claim.
NO SOLICITATION. Pursuant to the terms of the Merger
Agreement, prior to the Effective Time or earlier termination of
the Merger Agreement, neither the Company nor any of its
affiliates will, directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or
provide any information to, any entity concerning any proposal or
offer to acquire all or a substantial part of the business and
properties of the Company or its subsidiaries or any capital
stock of the Company or its subsidiaries, whether by merger,
tender offer, exchange offer, sale of assets or similar
transaction (an "Acquisition Proposal"), other than the Merger,
except that the Company may (i) take and disclose to the
Company's stockholders a position with respect to a tender or
exchange offer by a third party, or (ii) make such disclosure to
the Company's stockholders as, in the good faith judgment of the
Board, after receiving advice from outside counsel, is required
under applicable law, provided that the Company may not withdraw
or modify, or propose to withdraw or modify, its position with
respect to the Merger or approve or recommend any Acquisition
Proposal, or enter into any agreement with respect to any
Acquisition Proposal, except as follows. Notwithstanding the
foregoing, in the event an unsolicited entity or group has
submitted a bona fide written proposal which the Board determines
in good faith, after consulting with a nationally recognized
investment banking firm, represents a superior transaction to the
Merger and in the opinion of the Board of Directors, after
receipt of advice from outside legal counsel to the Company, the
failure to provide such information or access to engage in such
discussions or negotiations would reasonably be expected to cause
the Board of Directors to violate its fiduciary duties to the
Company's stockholders under applicable law (a "Superior
Proposal"), the Company may furnish information to and negotiate
and participate in discussions and negotiations with an
unsolicited entity or group. The Company has agreed to promptly
advise Adventist of the details surrounding any such alternative
Acquisition Proposal. At any time after two business days
following disclosure to Adventist of its intent to do so and if
the Company has complied with the foregoing restrictions, the
Company may withdraw or modify its approval or recommendation of
the Merger and may enter into an agreement with respect to a
Superior Proposal, provided that the Company pays to Adventist a
termination fee and any amount payable at such time for
reimbursement of expenses. See "-- Termination Fee."
20<PAGE>
CONDITIONS TO CLOSING. The respective obligations of the
parties to consummate the Merger are subject to the satisfaction
or waiver of the closing conditions as specifically set forth in
the Merger Agreement. Such conditions to Adventist's obligation
to close include, among others, (a) there shall not have occurred
any events, which, individually or in the aggregate, would have a
material adverse impact on (i) the financial position, or
business or prospects of the Company and its subsidiaries, (ii)
the ability of the Company to perform its obligations under the
Merger Agreement or (iii) the market for the Company's products
and services, excluding certain enumerated changes; (b) the
representations and warranties of the Company and its
subsidiaries contained in the Merger Agreement are true and
correct on and as of the Closing Date except for inaccuracies
which would not in the aggregate have a material adverse effect
on the Company; (c) the Company, the WCAS Affiliates and their
respective affiliates shall have performed all obligations and
complied with all covenants and agreements required by the Merger
Agreement to be performed or complied with other than a failure
which would not have a material adverse effect on the Company;
(d) holders of not more than 20% of the outstanding Common Stock
shall have exercise their dissenters' rights pursuant to the
Delaware General Corporation Law; (e) each holder of a right to
acquire shares of Common Stock which does not automatically
convert in the Merger into a right to receive the Merger Price
less the exercise price of such right, shall have agreed to
automatically convert such right or to terminate such right; (f)
the receipt of an opinion of counsel for the Company; (g) no
material litigation shall be pending other than stockholder
litigation against the Company existing on the date of the Merger
Agreement; (h) certain employees shall have agreed to employment
arrangements with the Company satisfactory to Adventist; and [(i)
Adventist shall have determined that there is in full force and
effect adequate insurance for the Company]; (j) the Company's
indebtedness under its bank line of credit shall not exceed
$39,500,000, unless otherwise consented to by Adventist and WCAS
Capital Partners II, L.P.; (k) the Company shall have obtained by
July 31, 1998 an extension of the policy period on the current
directors and officers liability insurance policies through
December 31, 2000; (l) the stockholders of the Company shall have
adopted the Merger Agreement and the transactions contemplated
thereby; (m) governmental and regulatory consents and approvals
of the transactions contemplated by the Merger Agreement shall
have been obtained and the waiting period applicable to the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), shall have expired or been
terminated; (n) the receipt of consent or certain waivers of
third parties relating to assigned and assumed agreements and
contracts shall have been obtained; (o) no temporary orders,
preliminary injunctions or other orders preventing the
consummation of the transactions contemplated in the Merger
Agreement shall be in effect or threatened; (n) the indebtedness
under the Company's credit agreement shall have been paid in full
or refinanced by Adventist and the equity rights related thereto
shall have been terminated; (p) the letters of credit supporting
the Company's workers compensation arrangements shall have been
assumed, replaced or otherwise rendered unnecessary; and (q) the
Subordinated Debt owed to WCAS Capital Partners II, L.P. shall
have been extinguished.
Conditions to the Company's and its subsidiaries' obligation
to close include, (a) the representations and warranties of
Adventist and Merger Sub contained in the Merger Agreement are
true and correct on and as of the Closing Date except for
inaccuracies which would not in the aggregate have a material
adverse effect on Adventist; (b) Adventist and Merger Sub shall
have performed all obligations and complied with all covenants
and agreements required by the Merger Agreement to be performed
or complied with other than a failure which would not have a
material adverse effect on Adventist; (c) the stockholders of the
Company shall have adopted the Merger Agreement and the
transactions contemplated thereby; (d) governmental and
regulatory consents and approvals of the transactions
contemplated by the Merger Agreement shall have been obtained and
the waiting period applicable to the Merger under the HSR Act,
shall have expired or been terminated; (e) the receipt of consent
or certain waivers of third parties relating to assigned and
assumed agreements and contracts shall have been obtained; (f) no
temporary orders, preliminary injunctions or other orders
preventing the consummation of the transactions contemplated in
the Merger Agreement shall be in effect or threatened; (g) the
indebtedness under the Company's credit agreement shall have been
paid in full or refinanced by Adventist and the equity rights
related thereto shall have been terminated; (h) the letters of
credit supporting the Company's workers compensation arrangements
shall have been assumed, replaced or otherwise rendered
unnecessary; and (i) the Subordinated Debt owed to WCAS Capital
Partners II, L.P. shall have been extinguished.
21
<PAGE>
The Merger Agreement provides that both the Company and
Adventist may waive any conditions precedent to their respective
obligations to close the Merger, except for any condition which,
if not satisfied, would result in the violation of any law, and
with respect to the Company, any condition which is for the
direct benefit of certain of the WCAS Entities. This provision
grants the Board the contractual authority to waive a condition
precedent to closing in the discharge of its fiduciary duties to
the Company and the Stockholders. Any such determination will be
made after consideration of the nature of the condition and the
facts and circumstances surrounding its inability to be
satisfied, as well as an evaluation of the alternatives available
to the Company if the condition is not waived. This provision
would permit the Board, after consultation with its advisors if
the Board deems appropriate, to waive, among other things, a
breach by Adventist or Merger Sub of any of their
representations, warranties, covenants or agreements contained in
the Merger Agreement if, in the exercise of the Board's
discretion, it is concluded that such waiver is in the best
interests of the Company and the Stockholders. Permitted
waivers, if exercised, do not require additional stockholder
approval.
No assurances can be provided as to when, or if, all of the
conditions precedent to the Merger can or will be satisfied or
waived by the party permitted to do so. The Merger Agreement
provides that either party has the right to terminate such
agreement if the Merger has not closed on or prior to August 31,
1998, unless such failure of consummation shall be due to the
failure of the party seeking such termination to perform or
observe in all material respects the covenants and agreements to
be performed or observed by such party.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement
may be terminated at any time prior to the Closing Date:
(a) by mutual written consent of the Company and Adventist;
(b) by the Company or Adventist, if the Closing shall not
have occurred on or prior to August 31, 1998, unless the
party seeking such termination has failed to fulfill any
obligation under the Merger Agreement and such failure has
been the cause of, or resulted in, the failure of Company or
Adventist, as the case may be, to consummate the Merger on
or prior to such date;
(c) by the Company or Adventist, if a governmental entity
shall have issued an order, decree or ruling or taken any
other action (which order, decree, ruling or other action
the parties are to use their reasonable efforts to lift),
which permanently restrains, enjoins or otherwise prohibits
the acceptance for payment of, or payment for, Company
Common Stock pursuant to the Merger and such order, decree,
ruling or other action has become final and non-appealable;
(d) by the Company if Adventist or Merger Sub has breached
in any material respect any of their respective
representations, warranties, covenants or other agreements
contained in the Merger Agreement, which breach cannot be or
has not been cured, in all material respects, within 30 days
after the giving of written notice to Adventist or Merger
Sub, as applicable;
(e) by the Company in connecting with entering into a
definitive agreement for a Superior Proposal, provided that
the Company has complied with all of the provisions of the
Merger Agreement related to a Superior Proposal, including
the advice of counsel and notice provisions thereof;
(f) by Adventist, if, due to an occurrence, not involving a
breach of Adventist or Merger Sub of their obligations under
the Merger Agreement, it is impossible to satisfy any of the
conditions precedent to closing the Merger; or
(g) by Adventist if prior to the Merger, the Company has
breached in any material respect any representation,
warranty, covenant or other agreement contained in the
Merger Agreement, which breach (i) would give rise to the
failure to satisfy certain conditions precedent to Closing
and (ii) cannot be or has not been cured, in all material
respects, within 30 days after the giving of written notice
to the Company;
(h) by Adventist, if the Board of Directors of the Company
or any committee thereof shall have withdrawn or modified in
a manner adverse to Adventist or Merger Sub its approval or
recommendation of the Merger or the Merger Agreement, or
approved or recommended any Acquisition Proposal.
22<PAGE>
The Merger Agreement provides that it will become void and have
no effect, except as to certain enumerated provisions, if
terminated as set forth above.
TERMINATION FEE. If (i) the Company terminates the Merger
Agreement in connection with entering into a definitive agreement
for a Superior Proposal in accordance with the provisions of the
Merger Agreement, (ii) Adventist terminates the Merger Agreement
because the Board of Directors of the Company has withdrawn or
modified its approval of the Merger or approved or recommended
any Acquisition Proposal or (iii) Adventist terminates the Merger
Agreement for the failure of the Company to fulfill an obligation
under the Merger Agreement and prior thereto there shall have
been announced another Acquisition Proposal, the Company will be
obligated to pay to Adventist a termination fee of $1.0 million.
EXPENSES. The Merger Agreement provides that the parties
thereto shall bear their respective expenses incurred in
connection with the preparation, execution and performance of the
Merger Agreement and the consummation of the transactions
contemplated therein, including, without limitation, the
preparation of this Proxy Statement. Such expenses include
printing costs and the fees and expenses of its agents,
representatives, legal counsel, financial advisors, actuaries and
accountants. The Debt Payment shall be reduced by the amount of
the Company's fees and expenses. The Company estimates that its
fees and expenses will total approximately $450,000.
REGULATORY APPROVALS
Under the terms of the Merger Agreement, the obligations of
the Company and Adventist to consummate the transactions
contemplated therein are subject to filings with, and receipt of
all consents, approvals, permits and authorizations required to
be obtained prior to the Closing Date from, any court or
governmental regulatory authority or agency needed for Adventist
to conduct the business of the Company and its subsidiaries in
substantially the manner conducted prior to the Closing.
Furthermore, such consents, approvals, permits and authorizations
must be subject to no conditions that would materially impair
Adventist's management of the business after the Merger or the
future profitability of such business.
Under the HSR Act and the rules promulgated thereunder by
the Federal Trade Commission (the "FTC"), the Merger may not be
consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust
Division of the Department of Justice (the "Antitrust Division")
and the applicable waiting period has expired or been terminated.
The Company and Adventist are in the process of preparing
notification and report forms under the HSR Act with the FTC and
the Antitrust Division.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Certain members of the Company's management and the Board
identified below may be deemed to have interests in the Merger in
addition to their interests as Stockholders generally. In each
case, the Board was aware of these conflicts of interest or
potential conflicts, and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated
thereby.
It is a condition to consummation of the Merger that
Adventist shall have entered into employment agreements with
Daniel Kohl, President and Chief Executive Officer of the
Company, Fred Follmer, Vice President and Chief Financial Officer
of the Company, and Shaun Mahoney, Vice President - Support
Services of the Company, unless Adventist does not offer to such
employees compensation at least equal to their current
compensation level. In connection with the Merger, it is
currently anticipated that certain officers and other key
employees of the Company will receive retention bonuses in the
aggregate amount of approximately $2.0 million from Adventist
which amounts are not out of the proceeds of the Merger. In
addition, in connection with the Merger, Mr. Kohl is expected to
receive twelve months severance, Mr. Follmer, nine months and Mr.
Mahoney, six months, which amounts are currently estimated to
aggregate approximately $442,500.
23<PAGE>
James B. Hoover and Andrew M. Paul, directors of the
Company, are general partners of the general partner and
affiliates of Welsh, Carson, Anderson & Stowe and the WCAS
Affiliates. The WCAS Affiliates will receive $1.00 in the
aggregate at the Closing in exchange for all of their outstanding
shares of Common Stock of the Company and warrants to acquire
shares of Company Common Stock. In addition, the WCAS Affiliates
collectively own approximately 51.6% of the outstanding shares of
Common Stock of the Company and have agreed to vote all of such
shares in favor of the Merger. At the Closing, Adventist will
pay to WCAS CP II, one of the WCAS Entities, a portion of its
10.5% $10,525,000 subordinated notes due June 30, 2001 and June 30,
2002, in an amount equal to $5,943,147.50 less certain
transactional and other expenses of the Company (the "Debt
Payment"), and the remainder of such subordinated debt will be
contributed to the capital of the Company. After subtraction of
such expenses, the amount of the Debt Payment is currently
estimated to be between $500,000 and $2,500,000.
OPERATIONS OF THE COMPANY IF MERGER IS NOT APPROVED
In the event the Company fails to receive Stockholder
approval for the Merger or if for any other reason the Merger
fails to close, the Board of Directors will once again evaluate
all appropriate alternatives to maximize stockholder value. The
following alternatives appear most viable at this time:
(a) Evaluate other strategic alternatives,
including attempts to identify another strategic
partner or purchaser of the Company or its assets; or
(b) Continue to operate the Company in the
ordinary course of business while continuing to
implement remedial action to correct the adverse
developments experienced by the Company.
Given the developments experienced by the Company and the
fact that the Company has already solicited proposals from a
number of potential qualified buyers, the Board believes it will
be difficult to identify another strategic partner prepared to
negotiate a transaction on more favorable terms than those
contained in the Merger Agreement. Notwithstanding the
foregoing, if the Merger fails to close, the Board of Directors
will explore and evaluate all alternatives available to the
Company in its continuing effort to maximize stockholder value.
DISSENTERS' RIGHTS
The proposed Merger is a transaction which entitles
Stockholders of the Company who comply with the provisions of
Section 262 of the Delaware General Corporation Law (the
"Dissenters Statute") to dissent from the Merger and to receive
payment of the fair value of their shares of Company Common Stock
as of the Effective Time, excluding any appreciation or
depreciation in anticipation of the Merger. The Notice of
Special Meeting of the Company states that holders of Company
Common Stock are entitled to assert dissenters' rights under the
Dissenters Statute and that the Dissenters Statute is set forth
as Appendix C to this Proxy Statement. The following summary
does not purport to be a complete statement of dissenters' rights
under Section 262 of the Delaware General Corporation Law.
Following consummation of the Merger, a Stockholder of
record on the Record Date who has followed the procedures set
forth under Section 262 will be entitled to an appraisal by the
Delaware Court of Chancery of the fair value of such
Stockholder's securities. Persons who are beneficial owners of
shares of Company Common Stock, but whose securities are held of
record by another person, such as a broker, bank or nominee,
should timely instruct the record holder to follow the procedures
outlined below if such persons desire to seek appraisal with
respect to any or all of their securities. Failure to take any
necessary steps may result in the termination or waiver of
appraisal rights under Section 262.
Holders of the Company's Common Stock who do not vote for
approval of the Merger Agreement and who follow other procedures
summarized below will have the right to dissent from and obtain
payment in cash of the fair value of their shares in the event of
the consummation of the Merger. The following is a summary of
the procedures which must be followed by any holder of Company
Common Stock who wishes to dissent and demand payment for such
holder's shares in the event of consummation of the Merger.
24<PAGE>
To exercise the right of dissent, a Stockholder (i) must
deliver to the Company, before the vote is taken at the Special
Meeting, a written notice of such Stockholder's intent to demand
payment for such Stockholder's shares if the Merger is effected,
and (ii) must not vote such Stockholder's shares (in person or by
proxy) in favor of the Merger Agreement. Neither a vote against
the Merger Agreement nor a specification in a proxy to vote
against the Merger Agreement will in and of itself constitute the
necessary notice of intent to dissent to the Merger Agreement.
Moreover, by voting in favor of the Merger Agreement, or by
returning the enclosed proxy without instructing the proxyholders
to vote against the Merger Agreement, a Stockholder waives the
right to dissent under the Dissenters Statute.
Any written objection to the Merger satisfying the
requirements of clause (i) above should be addressed as follows:
Housecall Medical Resources, Inc., 1000 Abernathy Road, Building
400, Suite 1825, Atlanta, Georgia 30328, Attention: Fred
Follmer, Secretary. All such communications should be signed by
or on behalf of the dissenting Stockholder in the form in which
such Stockholder's shares are registered on the records of the
Company, except that a beneficial owner may assert dissenters'
rights as to shares held on such Stockholders' behalf only if
such beneficial holder submits to the Company the record
Stockholder's written consent to the dissent by the time such
beneficial holder asserts his rights.
The foregoing is a summary of the material rights of a
dissenting Stockholder, but it is qualified in its entirety by
reference to Delaware General Corporation Law Section 262, a copy
of which is attached hereto as Appendix C. No further notice of
the events giving rise to dissenters' rights or any steps
associated therewith will be furnished to Stockholders, except as
indicated above or otherwise required by law. Because exercise
of dissenter's rights requires strict adherence to the statutory
provisions referred to above, each Stockholder who may desire to
exercise such rights should adhere to the provisions of such laws
and consult with such Stockholder's legal and financial advisors.
Any dissenting Stockholder who perfects his right to be paid
the value of his shares will recognize taxable gain or loss upon
receipt of cash for such shares for federal income tax purposes.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary of the federal income tax consequences
of the Merger by the Company is included for general information
purposes only. This summary is not intended to be tax advice to
any person, nor is it binding upon the Internal Revenue Service.
In addition, no information is provided herein with respect to
the tax consequences of the Merger under applicable foreign,
state or local laws. Each Stockholder is urged to consult his
own tax advisor as to the specific federal income tax
consequences to such Stockholder, based on such Stockholder's own
particular status and circumstances, and also as to any state,
local, foreign or other tax consequences arising out of the sale
to him.
Each Stockholder will recognize a gain or loss on the Merger
equal to the amount realized by such Stockholder from the sale
less the Stockholder's adjusted basis in the shares of Company
Common Stock sold. The amount realized will equal the sum of
money received by the Stockholder in consideration for the
Company Common Stock.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a "purchase" under
generally accepted accounting principles. Accordingly, the
Company's results of operations will be included in Adventist's
consolidated financial statements from and after the Effective
Time. For purposes of preparing Adventist's consolidated
financial statements, Adventist will establish a new accounting
basis for the Company's assets and liabilities based upon the
estimated fair values thereof and Adventist's purchase price,
including the costs of the Merger. A final determination of
required purchase accounting adjustments and the fair value of
the assets and liabilities of the Company has not yet been made.
25<PAGE>
Voting Agreement
Pursuant to the Merger Agreement, the WCAS Affiliates
entered into a voting agreement with Adventist. Such
stockholders include Welsh, Carson, Anderson & Stowe VI, L.P.,
WCAS Healthcare Partners, L.P. and WCAS Capital Partners II,
L.P.. The WCAS Affiliates are the beneficial owners of 51.6% of
the outstanding shares of Common Stock. Under the terms of the
voting agreement, these stockholders agreed, among other things,
to vote all of their shares held beneficially or of record (i) in
favor of the Merger, the Merger Agreement, and the approval of
the terms thereof and each of the actions contemplated therein
and (ii) against any Acquisition Proposal and against any action
or agreement that would impede, frustrate, prevent or nullify the
Merger Agreement, or result in a breach in any respect of any
covenant, representation or warranty or any other obligation or
agreement of Company contained in the Merger Agreement or which
would result in any of the conditions set forth in the Merger
Agreement not being satisfied. In addition, such stockholders
irrevocably appointed Adventist and certain of its officers as
the attorney-in-fact and proxy of such stockholders with full
power of substitution, to vote, and otherwise act with respect to
the shares that such stockholders are entitled to vote at any
meeting of the Company's stockholders. This execution and
delivery of the voting agreement was a condition to the
willingness of Adventist to enter into the Merger Agreement.
VOTES REQUIRED TO APPROVE MERGER AGREEMENT
If a quorum is present at the Special Meeting, approval of
the Merger Agreement and the Merger requires the affirmative vote
of the holders of a majority of all outstanding shares of Common
Stock entitled to vote thereon.
As discussed above, the WCAS Affiliates own, beneficially or
of record, in the aggregate 5,396,614 shares of Common Stock of
the Company, representing 51.6% of the issued and outstanding
Common Stock of the Company, and have executed a voting agreement
pursuant to which each has agreed, until the Effective Time or
the day following termination of the Merger Agreement in
accordance with its terms, to vote their shares in favor of the
approval of the Merger Agreement and the Merger. See "THE MERGER
- -- Voting Agreement." Accordingly, over 51.6% of the votes
entitled to be cast by the holders of Common Stock will be voted
in favor of the Merger Agreement and the transactions
contemplated therein assuring approval of the Merger Agreement
under applicable Delaware law.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER.
26<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(in thousands except for per share data)
Predecessor Company
------------------- --------------------------------------------------
Twelve Eleven
Months Months Nine Months
Ended Ended Year Ended June 30, Ended
July 31, June 30, March 31,
------------------- ---------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue .............................. $31,753 $49,883 $84,219 $205,389 $192,065 $143,010 $ 135,182
Operating expenses:
Patient care ........................ 15,010 27,314 42,879 95,688 85,225 64,303 54,257
General and administrative 15,973 21,237 34,069 94,940 100,925 74,878 74,590
Provision for doubtful
accounts .......................... 474 1,435 3,395 6,074 5,498 3,645 3,228
Depreciation and amortization ........ 363 744 1,568 3,262 3,529 2,468 3,364
---------------------------------------------------------------------------
Total operating expenses ....... 31,820 50,730 81,911 199,964 195,177 145,294 135,439
---------------------------------------------------------------------------
Income (loss) from operations ............ (67) (847) 2,308 5,425 (3,112) (2,284) (257)
Interest expense (net) ................... -- 127 902 4,331 2,699 1,676 4,309
---------------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item ........... (67) (974) 1,406 1,094 (5,811) (3,960) (4,566)
---------------------------------------------------------------------------
Provision (benefit) for
income taxes (1) ....................... 71 (242) 709 895 (1,743) (1,188) (1,372)
---------------------------------------------------------------------------
Income (loss) before
extraordinary item ................... $(138) $(732) 697 199 (4,068) (2,772) (3,194)
==================---------------------------------------------------------
Extraordinary loss from early
extinguishment of
debt, net of $554,000 income
tax benefit ........................... - - (902) (902) -
-----------------------------------------------------
Net income ............................ 697 199 (4,970) (3,674) (3,194)
-----------------------------------------------------
Cumulative dividends and accretion on
Series A Preferred Stock
(redeemable) ......................... (1,327) (2,006) - - -
-----------------------------------------------------
Net loss attributable to
common stockholders ................... $ (630) $(1,807) $(4,970) (3,674) $ (3,194)
=====================================================
Net income per share ....................
Income (loss) before
extraordinary items .................. $ (0.10) $ (0.24) $(0.40) $(0.27) $ (0.31)
Extraordinary item ...................... - - (0.09) (0.09) -
-----------------------------------------------------
$ (0.10) $ (0.24) $(0.49) $(0.36) $ (0.31)
======================================================
Weighted average common and
common equivalent shares ...............
outstanding . . . . . . 6,238,000 7,425,000 10,236,000 10,220,000 10,384,000
</TABLE>
27<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------- March 31,
1995 1996 1997 1998
---- ---- ---- ----
<S> <S> <S> <S> <S>
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . $18,349 $ 7,785 $ 2,074 $ 77
Total assets . . . . . . . . . . . . . . . . . . . 92,403 103,945 130,766 125,170
Long-term debt . . . . . . . . . . . . . . . . . . 41,480 11,720 45,267 39,591
Total stockholders'
equity . . . . . . . . . . . . . . . . . . . . . 8,096 66,751 61,847 58,822
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Consolidated financial statements, footnotes and
supplementary schedules for the Company are included in this
Proxy Statement in the Company's Annual Report on Form 10-K for
the year ended June 30, 1997 (attached as Appendix D to this
Proxy Statement) (on pages F-1 to F-18), and in the Company's
Quarterly Reports on Form 10-Q for the three months ended
September 30, 1997, the six months ended December 31, 1997 and
the nine months ending March 31, 1998 (attached as Appendix E to
this Proxy Statement) (under the heading "PART I - FINANCIAL
INFORMATION - ITEM 1. - FINANCIAL STATEMENTS"). The discussion
and analysis of such financial statements by the Company's
management is also found in such reports under the heading "PART
I, ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" in the Company's Annual
Report on Form 10-K for the year ended June 30, 1997, and under
the heading "PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the
Company's Quarterly Reports on Form 10-Q for the three months
ended September 30, 1997, the six months ended December 31, 1997
and the nine months ended March 31, 1998.
BUSINESS
For a discussion of the Company's business, properties and
legal proceedings, see the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 (attached as Appendix D to this
Proxy Statement) under the headings "PART I, ITEM 1 - BUSINESS,"
"PART I, ITEM 2 - PROPERTIES," and "PART I, ITEM 3 - LEGAL
PROCEEDINGS."
36<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common
Stock of the Company held beneficially, directly or indirectly,
as of the Record Date by (a) any person who is known by the
Company to be the beneficial owner of more than five percent (5%)
of the outstanding shares of Common Stock; (b) each director of
the Company, (c) the Company's Chief Executive Officer ("CEO")
and the Company's four most highly compensated executive officers
other than the CEO who were serving as executive officers on June
30, 1997, whose total salary and bonus for 1997 exceeded $100,000
(collectively, the "Named Executive Officers"); and (d) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount of Beneficial Ownership <F1>
NAME OF BENEFICIAL OWNER NUMBER PERCENT
<S> <C> <C>
Welsh, Carson, Anderson & Stowe, VI, L.P. <F2>. . . . .. . 4,651,614 44.45
Daniel J. Kohl <F3> . . . . . . . . . . . . . . . . . .. . 65,000 *
George D. Shaunnessy <F4> . . . . . . . . . . . . . . .. . 11,900 *
Peter J. Bibb <F4>. . . . . . . . . . . . . . . . . . .. . 48,632 *
Harold W. Small <F4>. . . . . . . . . . . . . . . . . .. . 79,782 *
Thomas F. Luthringer <F4> . . . . . . . . . . . . . . .. . 87,335 *
James E. Dalton <F5>. . . . . . . . . . . . . . . . . .. . 10,000 *
Howard R. Deutsch <F5>. . . . . . . . . . . . . . . . .. . 16,250 *
James B. Hoover <F6>. . . . . . . . . . . . . . . . . .. . 5,128,848 49.01
Andrew M. Paul <F7> . . . . . . . . . . . . . . . . . .. . 5,123,211 48.96
R. Dale Ross <F5> . . . . . . . . . . . . . . . . . . .. . 12,087 *
All Directors and Executive Officers
as a Group (8 persons) <F8>. . . . . . . . . . . . . .. . 5,267,732 50.34
</TABLE>
____________________
*Less than 1%
[FN]
<F1> The percentages shown are based on 10,464,915 shares of the
Common Stock outstanding on June 1, 1998, plus, as to each person
and group listed, the number of shares of Common Stock deemed
owned by such holder pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), assuming
the exercise of options held by such holder that are exercisable
within 60 days of June 1, 1998.
<F2> Does not include an aggregate of 134,485 shares owned
individually by the general partners of the general partner of
Welsh, Carson, Anderson & Stowe, V.I., L.P. ("Welsh Carson").
Each general partner of Welsh Carson may be deemed to
beneficially own all the shares owned by Welsh Carson. It also
does not include an aggregate of 609,515 shares held by other
affiliates of Welsh Carson. The address of Welsh Carson is 320
Park Avenue, Suite 2500, New York, New York 10022.
<F3> Mr. Kohl became President and Chief Executive Officer on
March 11, 1997 and a Director on April 9, 1997.
<F4> Persons are no longer executive officers of the Company as of
June 1, 1998.
<F5> Includes 10,000 shares of Common Stock subject to presently
exercisable stock options.
<F6> The number of shares beneficially owned consists of 23,184
shares held directly by Mr. Hoover, 4,651,614 shares held by
Welsh Carson and 454,050 shares held by an affiliate of Welsh
Carson. Mr. Hoover is a general partner of the general partner
of Welsh Carson and an affiliate of Welsh Carson and, as such,
shares voting and investment power with respect to the shares
owned by such entities. Does not include 155,465 shares held by
another affiliate of Welsh Carson. The address of Mr. Hoover is
320 Park Avenue, Suite 2500, New York, New York 10022.
<F7> The number of shares beneficially owned consists of 17,547
shares held directly by Mr. Paul, 4,651,614 shares held by Welsh
Carson and 454,050 shares held by an affiliate of Welsh Carson.
Mr. Paul is a general partner of the general partner of Welsh
Carson and an affiliate of Welsh Carson and, as such, shares
voting and investment power with respect to the shares owned by
such entities. Does not include 155,465 shares held by an
affiliate of Welsh Carson. The address of Mr. Paul is 320 Park
Avenue, Suite 2500, New York, New York 10022.
29<PAGE>
<F8> Includes 106,000 shares of Common Stock subject to presently
exercisable stock options and 5,105,664 shares deemed
beneficially owned by Messrs. Hoover and Paul as general partners
of the general partner of Welsh Carson and an affiliate of Welsh
Carson.
</FN>
MARKET FOR COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was traded on The Nasdaq Stock
Market following its initial public offering on April 4, 1996
under the symbol "HSCL". The Company's Common Stock was delisted
on December 15, 1997, and currently trades in the over-the-
counter market.
The table below sets forth on a quarterly basis for the
period from April 4, 1996 through the fourth quarter of the 1998
fiscal year the high and low sales prices of the Company's Common
Stock.
Common Stock Prices
High Low
Fiscal Year Ended June 30, 1996
Fourth Quarter . . . . . . . . . . . . . . .. $23 1/8 $16 1/2
Fiscal Year Ended June 30, 1997
First Quarter . . . . . . . . . . . . . . .. $20 1/2 $ 5
Second Quarter . . . . . . . . . . . . . . .. 6 1/4 4
Third Quarter . . . . . . . . . . . . . . .. 6 3/4 4 5/8
Fourth Quarter . . . . . . . . . . . . . . .. 5 1/16 3 3/8
Fiscal Year Ended June 30, 1998
First Quarter . . . . . . . . . . . . . . .. $ 4 1/2 $ 3 9/16
Second Quarter . . . . . . . . . . . . . . .. 4 3/8 0 7/8
Third Quarter . . . . . . . . . . . . . . .. 12 1/64 0 3/4
Fourth Quarter (through June 30, 1998) . . .. 15 5/64 0 49/64
As of June 1, 1998, there were 97 record holders of Common
Stock. On June 1, 1998, the last full trading day prior to the
public announcement of the Merger Agreement and the Merger, the
closing price in the over-the-counter market for the Common Stock
was $1 7/32 per share.
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.
ADDITIONAL INFORMATION ABOUT THE COMPANY
Additional information about the Company, including audited
financial statements for the fiscal year ended June 30, 1997, and
for the three months ended September 30, 1997, the six months
ended December 31, 1997 and the nine months ending March 31,
1998, can be found at Appendices D and E which are incorporated
herein by reference. Stockholders are encouraged to read these
appendices and all financial information contained therein.
30
<PAGE>
PROPOSALS OF STOCKHOLDERS FOR THE NEXT ANNUAL MEETING
The Company will hold a 1998 annual meeting only if the Merger
is not consummated before the time of such meeting. In the event
that such a meeting is held, any proposals of stockholders
intended to be presented at the 1998 annual meeting of
stockholders must be duly submitted to the Company at its
principal office on or prior to July 8, 1998, as provided in the
1997 Annual Meeting Proxy Statement of the Company.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All reports filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement and prior to the Special Meeting referenced
herein shall be deemed incorporated by reference herein and to be
a part hereof from the date of filing of such reports and
documents. Any statement contained herein or deemed to be
incorporated herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a
statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Proxy
Statement. The Company will not update this Proxy Statement for
events occurring subsequent to the date on the cover page hereof.
31<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ADVENTIST HEALTH SYSTEM SUNBELT
HEALTHCARE CORPORATION,
HOMECARE ACQUISITION CORP.,
HOUSECALL MEDICAL RESOURCES, INC.,
WELSH, CARSON, ANDERSON & STOWE VI, L.P.,
WCAS HEALTHCARE PARTNERS, L.P.,
AND
WCAS CAPITAL PARTNERS II, L.P.
Dated as of June 17, 1998<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. THE ACQUISITION ..................................... 1
1.1. The Acquisition .......................................... 1
1.2. The Merger ................................................ 1
1.3. Effective Time ............................................ 1
1.4. Closing ................................................... 2
1.5. Directors and Officers of the Surviving Corporation ....... 2
1.6. Company Actions .......................................... 2
1.7. Stockholders' Meeting ..................................... 2
ARTICLE 2. MANNER OF CONVERTING SHARES .......................... 3
2.1. Conversion of Shares ...................................... 3
2.2. Shares Held by Company or Parent ......................... 3
2.3. Dissenting Stockholders .................................. 3
2.4. Payment in Respect of Equity Rights ...................... 4
ARTICLE 3. EXCHANGE OF SHARES .................................. 4
3.1. Exchange Procedures ..................................... 4
3.2. Rights of Former Company Stockholders ................... 5
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF COMPANY AND THE
WELSH CARSON ENTITIES ................................ 5
4.1. Organization, Standing, and Power ....................... 5
4.2. Authority of Company; No Breach By Agreement ............ 5
4.3. Capital Stock .......................................... 6
4.4. Company Subsidiaries ................................... 6
4.5. SEC Filings; Financial Statements ....................... 7
4.6. Absence of Undisclosed Liabilities ...................... 7
4.7. Absence of Certain Changes or Events .................... 8
4.8. Tax Matters ............................................. 8
4.9. Assets ................................................. 9
4.10. Intellectual Property ................................... 10
4.11. Environmental Matters ................................... 10
4.12. Compliance with Laws .................................... 10
4.13. Labor Relations ......................................... 11
4.14. Employee Benefit Plans .................................. 11<PAGE>
4.15. Material Contracts ...................................... 13
4.16. Legal Proceedings ....................................... 13
4.17. Reports ................................................. 13
4.18. Information in Proxy Statement .......................... 13
4.19. Insurance ............................................... 14
4.20. Medicare, Medicaid and Other Third-Party Payors ......... 14
4.21. Fraud and Abuse ......................................... 14
4.22. Statements True and Correct ............................. 15
4.23. Brokers and Finders ..................................... 15
4.24. Opinion of Financial Advisor............................. 15
4.25. Ownership of Shares...................................... 15
4.26. Power; Binding Agreement ................................ 16
4.27. No Conflicts ............................................ 16
4.28. No Liens ................................................ 16
4.29. No Finder's Fees ....................................... 16
4.30. Reliance by Parent ...................................... 16
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PARENT .............. 17
5.1. Organization, Standing, and Power ....................... 17
5.2. Authority; No Breach By Agreement ....................... 17
5.3. Information in Proxy Statement ......................... 17
5.4. Sufficient Funds ....................................... 17
5.5. Authority of Purchaser ................................. 18
ARTICLE 6. CONDUCT OF BUSINESS PENDING CONSUMMATION .............. 18
6.1. Affirmative Covenants of Company ........................ 18
6.2. Negative Covenants of Company ........................... 18
6.3. Covenants of Parent .................................... 20
6.4. Adverse Changes in Condition ........................... 20
6.5. Reports ................................................ 20
ARTICLE 7. ADDITIONAL AGREEMENTS ................................ 20
7.1. Purchaser Compliance ................................... 20
7.2. Applications; Antitrust Notification .................... 20
7.3. Agreement as to Efforts to Consummate ................... 20
7.4. Investigation and Confidentiality ....................... 21
7.5. Press Releases .......................................... 21
ii
<PAGE>
7.6. No Solicitation ......................................... 21
7.7. Debt Payment ............................................ 22
7.8. Additional Agreements of the Welsh Carson Entities....... 22
7.9. Retention Bonuses and Severance Payments................. 25
7.10. Directors and Officers Indemnification .................. 25
ARTICLE 8. CONDITIONS PRECEDENT TO THE MERGER ..................... 26
8.1. Conditions to Obligations of Each Party ................ 26
8.2. Conditions to Obligations of Parent and Purchaser ...... 26
8.3. Conditions to Obligations of Company and the Welsh
Carson Entities ........................................ 28
ARTICLE 9. TERMINATION ......................................... 28
9.1. Termination ........................................... 28
9.2. Effect of Termination .................................. 29
9.3. Non-Survival of Representations and Covenants
Following Consummation of Merger ....................... 29
ARTICLE 10. MISCELLANEOUS ....................................... 29
10.1. Definitions ............................................ 29
10.2. Expenses ............................................... 35
10.3. Entire Agreement ....................................... 35
10.4. Amendments ............................................ 35
10.5. Waivers ................................................ 36
10.6. Assignment ............................................ 36
10.7. Notices ................................................ 36
10.8. Governing Law .......................................... 37
10.9. Counterparts ........................................... 37
10.10. Captions; Articles and Sections ....................... 37
10.11. Interpretations ....................................... 37
10.12. Enforcement of Agreement................................ 38
10.13. Severability ........................................... 38
iii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this
"Agreement") is made and entered into as of June 17, 1998, by and
among ADVENTIST HEALTH SYSTEM SUNBELT HEALTHCARE CORPORATION
("Parent"), a Florida not for profit corporation; HOMECARE
ACQUISITION CORP. ("Purchaser"), a Delaware corporation;
HOUSECALL MEDICAL RESOURCES, INC. ("Company"), a Delaware
corporation; WELSH, CARSON, ANDERSON & STOWE VI, L.P. ("WCAS
VI"), a Delaware limited partnership; WCAS HEALTHCARE PARTNERS,
L.P. ("WCAS HP"), a Delaware limited partnership; and WCAS
CAPITAL PARTNERS II, L.P. ("WCAS CP II" and collectively with
WCAS VI and WCAS HP, the "Welsh Carson Entities"), a Delaware
limited partnership.
WHEREAS, the parties hereto entered into an Agreement and
Plan of Merger dated June 1, 1998 and for the purpose of
clarifying certain provisions thereof are hereby entering into
this Agreement;
WHEREAS, the Board of Directors of each of Parent, Purchaser
and Company has approved, and deems it advisable and in the best
interests of its respective stockholders to consummate, the
acquisition of Company by Parent upon the terms and subject to
the conditions set forth herein;
WHEREAS, certain terms used in this Agreement are defined in
Section 10.1 of this Agreement;
NOW, THEREFORE, in consideration of the above and the mutual
warranties, representations, covenants, and agreements set forth
herein, the parties agree as follows:
ARTICLE 1.
THE ACQUISITION
---------------
1.1. The Acquisition. It is the intention of Parent to
acquire the assets of Company and Company Subsidiaries in
accordance with all applicable provisions of Medicare law
governing asset acquisitions. Because Company's common stock is
publicly traded and because Company desires to consummate a stock
transaction rather than an asset transaction, Parent has decided
to acquire the assets of Company and the Company Subsidiaries in
a two step transaction. First, Parent will acquire the stock of
Company through a merger of Purchaser with and into Company,
pursuant to which Company is the surviving corporation. As a
second step, the assets of Company and certain of the Company
Subsidiaries will be transferred to one or more corporations
wholly-owned indirectly by Parent. The first step of this two
step transaction is the subject of this Agreement.
1.2. The Merger. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time, Company and
Purchaser shall consummate a merger (the "Merger") pursuant to
which (i) Purchaser shall be merged with and into Company and the
separate corporate existence of Purchaser shall cease,
(ii) Company shall be the Surviving Corporation in the Merger and
shall continue to be governed by the laws of the State of
Delaware, and (iii) the separate corporate existence of Company
with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger, except as set
forth in this Section 1.2. Pursuant to the Merger, (x) the
Certificate of Incorporation of Purchaser, as in effect
immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation,
and (y) the Bylaws of Purchaser, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by law, by the
Certificate of Incorporation of the Surviving Corporation or by
such Bylaws. The Merger shall have the effects specified in the
DGCL.
1.3. Effective Time. Parent, Purchaser and Company will
cause a Certificate of Merger to be executed and filed on the
Closing Date (or on such other date as Parent and Company may
agree) with the Secretary of State of Delaware as provided in the
DGCL. The Merger shall become effective on the date and at the
time that the Certificate of Merger is duly filed and becomes
effective with such Secretary of State or such time as is agreed
upon by the parties and specified in the Certificate of Merger,
and such time is hereinafter referred to as the "Effective Time."
<PAGE>
1.4. Closing. The closing of the Merger (the "Closing")
shall take place at 10:00 a.m. within three business days after
satisfaction or waiver of all of the conditions set forth in
Article 8 hereof, or such other date as may be agreed to by the
parties in writing (the "Closing Date"), at such location as may
be mutually agreed upon by the Parties.
1.5. Directors and Officers of the Surviving Corporation.
The directors and officers of Purchaser at the Effective Time
shall, from and after the Effective Time, be the directors and
officers, respectively, of the Surviving Corporation until their
successors shall have been duly elected or appointed or qualified
or until their earlier death, resignation or removal in
accordance with the Certificate of Incorporation and the Bylaws
of the Surviving Corporation. The directors and officers of
Company shall resign effective as of the Effective Time.
1.6. Company Actions. Company hereby approves of and
consents to the Merger and represents and warrants that its Board
of Directors, at a meeting duly called and held, has
(i) determined that each of this Agreement and the Merger are
fair to and in the best interests of the stockholders of Company,
(ii) adopted this Agreement and the transactions contemplated
hereby, including the Merger, and (iii) resolved to recommend
that the stockholders of Company adopt this Agreement and the
Merger; provided, that such recommendation may be withdrawn,
modified or amended if, in the opinion of the Board of Directors,
after receipt of advice from outside legal counsel, failure to
withdraw, modify or amend such recommendation would result in the
Board of Directors violating its fiduciary duties to Company's
stockholders under applicable law as provided in Section 7.6.
1.7. Stockholders' Meeting.
(a) Company, acting through its Board of Directors, shall,
in accordance with applicable law and subject to the fiduciary
duties of the Board of Directors:
(i) duly call, give notice of, convene and hold a
special meeting of its stockholders (the "Special Meeting") as
promptly as practicable following the execution hereof for the
purpose of considering and taking action upon the approval of the
Merger and the adoption of this Agreement;
(ii) prepare and file with the SEC a preliminary proxy
or information statement relating to the Merger and this
Agreement and use its best efforts (x) to obtain and furnish the
information required to be included by the SEC in the Proxy
Statement (as hereinafter defined) and, after consultation with
Parent, to respond promptly to any comments made by the SEC with
respect to the preliminary proxy or information statement and
cause a definitive proxy or information statement, including any
amendment or supplement thereto (the "Proxy Statement") to be
mailed to its stockholders, provided that no amendment or
supplement to the Proxy Statement will be made by Company without
consultation with Parent and its counsel and (y) to obtain the
necessary approvals of the Merger and this Agreement by its
stockholders; and
(iii) include in the Proxy Statement the
recommendation of the Board of Directors that stockholders of
Company vote in favor of the approval of the Merger and the
adoption of this Agreement.
(b) As provided in Section 7.8, the Welsh Carson Entities
shall vote, or cause to be voted, all of the WC Shares then owned
by them and their Affiliates in favor of the approval of the
Merger and the approval and adoption of this Agreement.
A-2<PAGE>
ARTICLE 2.
MANNER OF CONVERTING SHARES
---------------------------
2.1. CONVERSION OF SHARES. Subject to the provisions of
this Article 2, at the Effective Time, by virtue of the Merger
and without any action on the part of Parent, Company, Purchaser
or the stockholders of any of the foregoing, the shares of the
constituent corporations shall be converted as follows:
(a) Each share of Purchaser Common Stock issued and
outstanding immediately prior to the Effective Time shall cease
to be outstanding and shall be converted into one share of
Company Common Stock.
(b) Each share of Company Common Stock (excluding
(i) shares held by any Company Entity or any Parent Entity,
(ii) shares held by stockholders who perfect their statutory
dissenters' rights as provided in Section 2.3, and (iii) WC
Shares) issued and outstanding immediately prior to the Effective
Time shall cease to be outstanding and shall be converted into
and exchanged for the right to receive from Parent a cash payment
equal to $1.50 per share (the "Merger Price").
(c) All shares of Company Common Stock Beneficially Owned
by the Welsh Carson Entities or their Affiliates and issued and
outstanding immediately prior to the Effective Time and all
Equity Rights relating to Company Common Stock Beneficially Owned
by the Welsh Carson Entities or their Affiliates and outstanding
immediately prior to the Effective Time, whether or not then
exercisable, shall cease to be outstanding and shall be converted
into and exchanged for the right to receive from Parent a total
cash payment equal to $1.00.
2.2. SHARES HELD BY COMPANY OR PARENT. Each of the shares
of Company Common Stock held by any Company Entity or by any
Parent Entity shall be canceled and retired at the Effective Time
and no consideration shall be issued in exchange therefor.
2.3. DISSENTING STOCKHOLDERS.
(a) Any holder of shares of Company Common Stock who
perfects his dissenters' rights in accordance with and as
contemplated by Section 262 of the DGCL shall be entitled to
receive the value of such shares in cash as determined pursuant
to such provision of Law; provided, that no such payment shall be
made to any dissenting stockholder unless and until such
dissenting stockholder has complied with the applicable
provisions of the DGCL and surrendered to Company the certificate
or certificates representing the shares for which payment is
being made. In the event that after the Effective Time a
dissenting stockholder of Company fails to perfect, or
effectively withdraws or loses, his right to appraisal of and
payment for his shares, Parent shall issue and deliver the
consideration to which such holder of shares of Company Common
Stock is entitled under this Article 2 (without interest) upon
surrender by such holder of the certificate or certificates
representing shares of Company Common Stock held by him. If and
to the extent required by applicable Law, Company will establish
(or cause to be established) an escrow account with an amount
sufficient to satisfy the maximum aggregate payment that may be
required to be paid to dissenting stockholders. Upon
satisfaction of all claims of dissenting stockholders, the
remaining escrowed amount, reduced by payment of the fees and
expenses of the escrow agent, will be returned to the Surviving
Corporation.
(b) If the holders of more than five percent (5%) of the
number of shares of Company Common Stock outstanding immediately
prior to the Effective Time have perfected their dissenters'
rights in accordance with and as contemplated by Section 262 of
the DGCL, then, subject to the further provisions of this
Section 2.3(b) and to Section 7.8(i), Parent shall be entitled to
set off against the Debt Payment required to be paid to
WCAS CP II as provided in Section 7.7 an amount (the "Aggregate
Appraisal Difference") equal to the product of (i) the amount by
which the per share appraisal value, including applicable
interest, determined to be payable with respect to such
dissenting shares pursuant to the DGCL (the "Appraisal
Price(s)"), exceeds the Merger Price (such excess being referred
to herein as the "Appraisal Spread(s)"), multiplied by (ii) the
number of such dissenting shares to which such Appraisal Price is
required to be paid. Notwithstanding anything else to the
contrary: (i) there shall be no set off against or reduction of
A-3<PAGE>
the Debt Payment to pay the Merger Price for any dissenting
shares; (ii) the entire Appraisal Price(s) payable with respect
to the dissenting shares representing the first five percent (5%)
of Company Common Stock outstanding immediately prior to the
Merger shall be paid by Parent; (iii) only the Appraisal Spread,
if any, payable with respect dissenting shares representing more
than five percent (5%) but not more than twenty percent (20%) of
the Company Common Stock outstanding immediately prior to the
Merger shall be set off against the Debt Payment; (iv) if Parent
waives the condition contained in Section 8.2(d) with respect to
dissenting shares, Parent shall pay the entire Appraisal Price(s)
payable with respect to the dissenting shares representing more
than twenty percent (20%) of the Company Common Stock outstanding
immediately prior to the Merger, without any set off against or
reduction of the Debt Payment; (v) WCAS CP II shall have no
obligation whatsoever to fund any portion of the Aggregate
Appraisal Difference or the Appraisal Spread(s) (other than by
means of any set off against or reduction of the Debt Payment
permitted by this Section 2.3(b)), and (vi) in any event, the
Subordinated Debt shall be considered extinguished completely as
of the Closing Date, through contribution to capital and/or
repayment.
(c) Parent shall keep WCAS CP II informed on the status of
all matters affecting the determination of the Appraisal Price(s)
and shall provide WCAS CP II with copies of any information,
proposals, valuations and/or determinations relating to the
Appraisal Price(s) promptly upon receipt thereof.
2.4. PAYMENT IN RESPECT OF EQUITY RIGHTS. At the Effective
Time, each holder of a then outstanding Equity Right relating to
Company Common Stock (other than Equity Rights Beneficially Owned
by the Welsh Carson Entities or one of their Affiliates), whether
or not then exercisable, shall in settlement thereof, receive for
each share of Company Common Stock subject to such Equity Right
an amount (subject to any applicable withholding tax) in cash
equal to the difference between the Merger Price and the per
share exercise price of such Equity Right to the extent such
difference is a positive number. Prior to the Effective Time,
Company shall take all necessary actions to obtain all necessary
consents or releases from holders of Equity Rights, to the extent
required by the terms of the plans or agreements governing such
Equity Rights, as the case may be, or pursuant to the terms of
any Equity Right granted thereunder, and take all such other
lawful action as may be necessary to give effect to the
transactions contemplated by this Section 2.4 (except for such
action that may require the approval of Company's stockholders).
Except as otherwise agreed to by Parent or Purchaser and Company,
Company shall take all action necessary to ensure that (i) the
Company Stock Plans shall have been terminated as of the
Effective Time and the provisions in any other plan, program or
arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of Company or any
Company Subsidiary, shall be canceled as of the Effective Time,
and (ii) following the Effective Time, (x) no participant in any
Company Stock Plan or other plans, programs or arrangements shall
have any right thereunder to acquire equity securities of
Company, the Surviving Corporation or any Subsidiary thereof and
all such plans shall have been terminated, and (y) Company will
not be bound by any Equity Right which would entitle any person
to own any capital stock of Company, the Surviving Corporation or
any Subsidiary thereof.
<PAGE>
ARTICLE 3.
EXCHANGE OF SHARES
------------------
3.1. EXCHANGE PROCEDURES. Promptly after the Effective
Time, Parent and Company shall cause the exchange agent selected
by Parent (the "Exchange Agent") to mail to each holder of record
of a certificate or certificates which represented shares of
Company Common Stock immediately prior to the Effective Time (the
"Certificates") appropriate transmittal materials and
instructions (which shall specify that delivery shall be
effected, and risk of loss and title to such Certificates shall
pass, only upon proper delivery of such Certificates to the
Exchange Agent). The Certificate or Certificates of Company
Common Stock so delivered shall be duly endorsed as the Exchange
Agent may require. In the event of a transfer of ownership of
shares of Company Common Stock represented by Certificates that
are not registered in the transfer records of Company, the
consideration provided in Section 2.1 may be issued to a
transferee if the Certificates representing such shares are
delivered to the Exchange Agent, accompanied by all documents
required to evidence such transfer and by evidence satisfactory
to the Exchange Agent that any applicable stock transfer taxes
have been paid. If any Certificate shall have been lost, stolen,
mislaid or destroyed, upon receipt of (i) an affidavit of that
fact from the holder claiming such Certificate to be lost,
mislaid, stolen or destroyed, (ii) such bond, security or
indemnity as Parent and the Exchange Agent may reasonably require
A-4<PAGE>
and (iii) any other documents necessary to evidence and effect
the bona fide exchange thereof, the Exchange Agent shall issue to
such holder the consideration into which the shares represented
by such lost, stolen, mislaid or destroyed Certificate shall have
been converted. The Exchange Agent may establish such other
reasonable and customary rules and procedures in connection with
its duties as it may deem appropriate. After the Effective Time,
each holder of shares of Company Common Stock (other than shares
to be canceled pursuant to Section 2.2 or as to which statutory
dissenters' rights have been perfected as provided in Section
2.3) issued and outstanding at the Effective Time shall surrender
the Certificate or Certificates representing such shares to the
Exchange Agent and shall promptly upon surrender thereof receive
in exchange therefor the consideration provided in Section 2.1,
together with all undelivered dividends or distributions in
respect of such shares (without interest thereon) pursuant to
Section 3.2. Parent shall not be obligated to deliver the
consideration to which any former holder of Company Common Stock
is entitled as a result of the Merger until such holder
surrenders such holder's Certificate or Certificates for exchange
as provided in this Section 3.1. Any other provision of this
Agreement notwithstanding, neither Parent, the Surviving
Corporation nor the Exchange Agent shall be liable to a holder of
Company Common Stock for any amounts paid or property delivered
in good faith to a public official pursuant to any applicable
abandoned property, escheat or similar Law.
3.2. RIGHTS OF FORMER COMPANY STOCKHOLDERS. At the
Effective Time, the stock transfer books of Company shall be
closed as to holders of Company Common Stock immediately prior to
the Effective Time and no transfer of Company Common Stock by any
such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of
Section 3.1, each Certificate theretofore representing shares of
Company Common Stock (other than shares to be canceled pursuant
to Sections 2.2 and 2.3) shall from and after the Effective Time
represent for all purposes only the right to receive the
consideration provided in Section 2.1 in exchange therefor,
subject, however, to the Surviving Corporation's obligation to
pay any dividends or make any other distributions with a record
date prior to the Effective Time which have been declared or made
by Company in respect of such shares of Company Common Stock in
accordance with the terms of this Agreement and which remain
unpaid at the Effective Time. However, upon surrender of such
Certificate, any undelivered dividends and cash payments payable
hereunder (without interest) shall be delivered and paid with
respect to each share represented by such Certificate.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF COMPANY AND THE WELSH CARSON ENTITIES
- -----------------------------------------------------------------------
Company hereby represents and warrants to Parent as follows:
4.1. ORGANIZATION, STANDING, AND POWER. Company is a
corporation duly organized, validly existing, and in good
standing under the Laws of the State of Delaware, and has the
corporate power and authority to carry on its business as now
conducted and to own, lease and operate its material Assets.
Company is duly qualified or licensed to transact business as a
foreign corporation in good standing in the States of the United
States and foreign jurisdictions where the character of its
Assets or the nature or conduct of its business requires it to be
so qualified or licensed, except for such jurisdictions in which
the failure to be so qualified or licensed is not reasonably
likely to have, individually or in the aggregate, a Company
Material Adverse Effect. The minute book and other
organizational documents for Company have been made available to
Parent for its review and, except as disclosed in Section 4.1 of
the Company Disclosure Memorandum, are true and complete in all
material respects as in effect as of the date of this Agreement
and accurately reflect in all material respects all amendments
thereto and all proceedings of the Board of Directors and
stockholders thereof.
4.2. AUTHORITY OF COMPANY; NO BREACH BY AGREEMENT.
(a) Company has the corporate power and authority necessary
to execute, deliver, and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by
all necessary corporate action in respect thereof on the part of
Company, subject to the adoption of this Agreement by the holders
of a majority of the outstanding shares of Company Common Stock,
which is the only stockholder vote required for approval of this
A-5
<PAGE>
Agreement and consummation of the Merger by Company. Subject to
such requisite stockholder approval, this Agreement represents a
legal, valid, and binding obligation of Company, enforceable
against Company in accordance with its terms (except in all cases
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship,
moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief
is subject to the discretion of the court before which any
proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by
Company, nor the consummation by Company of the transactions
contemplated hereby, nor compliance by Company with any of the
provisions hereof, will (i) conflict with or result in a breach
of any provision of Company's Certificate of Incorporation or
Bylaws or the certificate or articles of incorporation or bylaws
of any Company Subsidiary or any resolution adopted by the board
of directors or the stockholders of any Company Entity, or
(ii) except as disclosed in Section 4.2 of the Company Disclosure
Memorandum, constitute or result in a Default under, or require
any Consent pursuant to, or result in the creation of any Lien on
any Asset of any Company Entity under, any Contract or Permit of
any Company Entity, where such Default or Lien, or any failure to
obtain such Consent, is reasonably likely to have, individually
or in the aggregate, a Company Material Adverse Effect, or,
(iii) subject to receipt of the requisite Consents referred to in
Section 8.1(b), constitute or result in a Default under, or
require any Consent pursuant to, any Law or Order applicable to
any Company Entity or any of their respective material Assets
(including any Parent Entity or any Company Entity becoming
subject to or liable for the payment of any Tax or any of the
Assets owned by any Parent Entity or any Company Entity being
reassessed or revalued by any Taxing authority).
(c) Other than in connection or compliance with the
provisions of the Securities Laws, applicable state corporate and
securities Laws, and rules of the NASD, and other than Consents
required from Regulatory Authorities, and other than notices to
or filings with the Internal Revenue Service or the Pension
Benefit Guaranty Corporation with respect to any employee benefit
plans, or under the HSR Act, and other than Consents, filings, or
notifications which, if not obtained or made, are not reasonably
likely to have, individually or in the aggregate, a Company
Material Adverse Effect, no notice to, filing with, or Consent
of, any public body or authority is necessary for the
consummation by Company of the Merger and the other transactions
contemplated in this Agreement.
4.3. CAPITAL STOCK.
(a) The authorized capital stock of Company consists of
(i) 30,000,000 shares of Company Common Stock, of which
10,464,915 shares were issued and outstanding as of June 1, 1998
and not more than 10,609,715 shares will be issued and
outstanding at the Effective Time, (ii) 9,800,000 shares of
preferred stock, par value $0.10 per share, none of which are
issued and outstanding, and (iii) 200,000 shares of Series A
Preferred Stock, par value $1.00 per share, none of which are
currently issued and outstanding but 167,960 of which were
previously issued and outstanding and subsequently redeemed and
permanently retired. All of the issued and outstanding shares of
capital stock of Company are duly and validly issued and
outstanding and are fully paid and nonassessable under the DGCL.
None of the outstanding shares of capital stock of Company has
been issued in violation of any preemptive rights of the current
or past stockholders of Company.
(b) Except as set forth in Section 4.3(a), or as disclosed
in Section 4.3(b) of the Company Disclosure Memorandum, there are
no shares of capital stock or other equity securities of Company
outstanding and no outstanding Equity Rights relating to the
capital stock of Company.
4.4. COMPANY SUBSIDIARIES. Company has disclosed in Section
4.4 of the Company Disclosure Memorandum all of the Significant
Company Subsidiaries that are corporations (identifying its
jurisdiction of incorporation, each jurisdiction in which it is
qualified and/or licensed to transact business, and the number of
shares owned and percentage ownership interest represented by
such share ownership) and all of the Company Subsidiaries that
are general or limited partnerships, limited liability companies,
or other non-corporate entities (identifying the Law under which
such entity is organized, each jurisdiction in which it is
qualified and/or licensed to transact business, and the amount
and nature of the ownership interest therein). Except as
disclosed in Section 4.4 of the Company Disclosure Memorandum,
Company or one of its Subsidiaries owns all of the issued and
outstanding shares of capital stock (or other equity interests)
of each Company Subsidiary. No capital stock (or other equity
interest) of any Company Subsidiary is or may become required to
be issued (other than to another Company Entity) by reason of any
Equity Rights, and there are no Contracts by which any Company
Subsidiary is bound to issue (other than to another Company
Entity) additional shares of its capital stock (or other equity
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interests) or Equity Rights or by which any Company Entity is or
may be bound to transfer any shares of the capital stock (or
other equity interests) of any Company Subsidiary (other than to
another Company Entity). There are no Contracts relating to the
rights of any Company Entity to vote or to dispose of any shares
of the capital stock (or other equity interests) of any Company
Subsidiary. All of the shares of capital stock (or other equity
interests) of each Company Subsidiary held by a Company Entity
are fully paid and nonassessable under the applicable corporation
Law of the jurisdiction in which such Subsidiary is incorporated
or organized and are owned by the Company Entity free and clear
of any Lien. Except as disclosed in Section 4.4 of the Company
Disclosure Memorandum, each Company Subsidiary is a corporation,
and each such Subsidiary is duly organized, validly existing, and
(as to corporations) in good standing under the Laws of the
jurisdiction in which it is incorporated or organized, and has
the corporate power and authority necessary for it to own, lease,
and operate its Assets and to carry on its business as now
conducted. Each Company Subsidiary is duly qualified or licensed
to transact business as a foreign corporation in good standing in
the States of the United States and foreign jurisdictions where
the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for
such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect. The minute book
and other organizational documents for each Company Subsidiary
have been made available to Parent for its review, and, except as
disclosed in Section 4.4 of the Company Disclosure Memorandum,
are true and complete in all material respects as in effect as of
June 1, 1998 and accurately reflect in all material respects all
amendments thereto and all proceedings of the Board of Directors
and stockholders thereof.
4.5. SEC FILINGS; FINANCIAL STATEMENTS.
(a) Company has timely filed and made available to Parent
all SEC Documents required to be filed by Company since April 3,
1996 (the "Company SEC Reports"). The Company SEC Reports (i) at
the time filed, complied in all material respects with the
applicable requirements of the Securities Laws and other
applicable Laws and (ii) did not, at the time they were filed
(or, if amended or superseded by a filing prior to June 1, 1998,
then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be
stated in such Company SEC Reports or necessary in order to make
the statements in such Company SEC Reports, in light of the
circumstances under which they were made, not misleading. No
Company Subsidiary is required to file any SEC Documents.
(b) Each of the Company Financial Statements (including, in
each case, any related notes) contained in the Company SEC
Reports, including any Company SEC Reports filed after June 1,
1998 until the Effective Time, complied as to form in all
material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in
accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such
financial statements or, in the case of unaudited interim
statements, as permitted by Form 10-Q of the SEC), and fairly
presented in all material respects the consolidated financial
position of Company and its Subsidiaries as at the respective
dates and the consolidated results of operations and cash flows
for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be
material in amount or effect.
(c) The aggregate principal and interest outstanding under
the Credit Agreement as of June 1, 1998 was $37,360,060.
4.6. ABSENCE OF UNDISCLOSED LIABILITIES. No Company Entity
has any Liabilities that are reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect, except Liabilities which are accrued or reserved against
in the consolidated balance sheets of Company as of June 30, 1997
and March 31, 1998, included in the Company Financial Statements
delivered prior to June 1, 1998 or reflected in the notes
thereto. No Company Entity has incurred or paid any Liability
since March 31, 1998, except for such Liabilities incurred or
A-7<PAGE>
paid (i) in the ordinary course of business consistent with past
business practice and which are not reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect or (ii) in connection with the transactions contemplated
by this Agreement.
4.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30,
1997, there have been no events, changes, or occurrences which
have had, or are reasonably likely to have, individually or in
the aggregate, a Company Material Adverse Effect, except (i) as
disclosed in the Company Financial Statements delivered prior to
June 1, 1998, (ii) as disclosed in Section 4.7 of the Company
Disclosure Memorandum, (iii) changes in health care and similar
laws of general applicability or interpretations thereof by
courts or governmental entities effective prior to June 1, 1998,
(iv) changes in GAAP or regulatory accounting requirements or
(v) changes as a result of the proposed acquisition of Company
and the impact thereof on the operating performance of Company.
4.8. TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of
any of the Company Entities have been timely filed or requests
for extensions have been timely filed, granted, and have not
expired for periods ended on or before June 30, 1997, and on or
before the date of the most recent fiscal year end immediately
preceding the Effective Time, except to the extent that all such
failures to file, taken together, are not reasonably likely to
have a Company Material Adverse Effect, and all Tax Returns filed
are complete and accurate in all material respects. All Taxes
shown on filed Tax Returns have been paid. As of the date of
this Agreement, there is no audit examination, deficiency, or
refund Litigation with respect to any Taxes that is reasonably
likely to result in a determination that would have, individually
or in the aggregate, a Company Material Adverse Effect, except as
reserved against in the Company Financial Statements or as
disclosed in Section 4.8 of the Company Disclosure Memorandum.
There are no Liens with respect to Taxes upon any of the Assets
of the Company Entities, except for any such Liens which are not
reasonably likely to have a Company Material Adverse Effect.
(b) None of the Company Entities has executed an extension
or waiver of any statute of limitations on the assessment or
collection of any Tax (excluding such statutes that relate to
years currently under examination by the Internal Revenue Service
or other applicable taxing authorities) that is currently in
effect.
(c) The provision for any Taxes due or to become due for
any of the Company Entities for the period or periods through and
including the date of the respective Company Financial Statements
that has been made and is reflected on such Company Financial
Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the Company Entities have been
provided for in accordance with GAAP.
(e) None of the Company Entities is a party to any Tax
allocation or sharing agreement and none of the Company Entities
has been a member of an affiliated group filing a consolidated
federal income Tax Return (other than a group the common parent
of which was Company), has any Liability for Taxes of any Person
(other than Company and its Subsidiaries) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state,
local or foreign Law), or as a transferee or successor or by
Contract or otherwise.
(f) Each of the Company Entities is in compliance with, and
its records contain all information and documents (including
properly completed IRS Forms W-9) necessary to comply with, all
applicable information reporting and Tax withholding requirements
under federal, state, and local Tax Laws, and such records
identify with specificity all accounts subject to backup
withholding under Section 3406 of the Internal Revenue Code,
except for such instances of noncompliance and such omissions as
are not reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect.
(g) Except as disclosed in Section 4.8 of the Company
Disclosure Memorandum, none of the Company Entities has made any
payments, is obligated to make any payments, or is a party to any
Contract that could obligate it to make any payments that would
be disallowed as a deduction under Section 280G or 162(m) of the
Internal Revenue Code.
A-8<PAGE>
(h) There has not been an ownership change, as defined in
Internal Revenue Code Section 382(g), of any of the Company
Entities that occurred during or after any Taxable Period in
which any of the Company Entities incurred a net operating loss
that carries over to any Taxable Period ending after June 30,
1997.
(i) No Company Entity has or has had in any foreign country
a permanent establishment, as defined in any applicable tax
treaty or convention between the United States and such foreign
country.
(j) The Merger will not result in any Liability for Tax
which, in the aggregate, is reasonably likely to have a Company
Material Adverse Effect by reason of income or gain required to
be taken into account under Treasury Regulation Sections 1.1502-
13 (relating to deferred intercompany transactions), 1.1502-19
(relating to excess loss accounts), or any similar, corresponding
or related state Law provision.
(k) None of the assets of the Company Entities is "tax-
exempt use property" within the meaning of Section 168(h) of the
Internal Revenue Code.
(l) None of the Company Entities has agreed to make, or is
required to make, any adjustment under Section 481(a) of the
Internal Revenue Code by reason of a change in accounting method
or otherwise.
(m) No withholding of tax is required under Section 1445 of
the Code or otherwise by Parent or Purchaser with respect to the
merger consideration and Company will provide any required
certificates in order that Parent or Purchaser need not withhold
any taxes.
(n) No consent under Section 341(f) of the Code is or will
be in effect with respect to Company or any of its Subsidiaries.
(o) Company is not and has not been a U.S. real property
holding corporation within the meaning of Section 897 of the Code
for the period specified in Section 897(c)(1)(A)(ii).
4.9. ASSETS.
(a) Except as disclosed in Section 4.9 of the Company
Disclosure Memorandum or as disclosed or reserved against in the
Company Financial Statements, the Company Entities have good and
marketable title, free and clear of all Liens, to all of their
respective Assets which are material to Company's business on a
consolidated basis, except for any such Liens or other defects of
title which are not reasonably likely to have a Company Material
Adverse Effect. All material tangible properties used in the
businesses of the Company Entities are in good condition,
reasonable wear and tear excepted, and are usable in the ordinary
course of business consistent with Company's past practices.
(b) All items of inventory of the Company Entities
reflected on the most recent balance sheet included in the
Company Financial Statements delivered prior to June 1, 1998 and
prior to the Effective Time consisted and will consist, as
applicable, of items of a quality and quantity usable and
saleable in the ordinary course of business and conform to
generally accepted standards in the industry in which the Company
Entities are a part.
(c) The accounts receivable of the Company Entities as set
forth on the most recent balance sheet included in the Company
Financial Statements delivered June 1, 1998 or arising since the
date of such balance sheet are valid and genuine; have arisen
solely out of bona fide sales and deliveries of goods,
performance of services and other business transactions in the
ordinary course of business consistent with past practice; are
not subject to valid defenses, set-offs or counterclaims. The
allowance for collection losses on such balance sheet has been
determined in accordance with GAAP.
(d) All Assets which are material to Company's business on
a consolidated basis, held under leases or subleases by any of
the Company Entities, are held under valid Contracts enforceable
in accordance with their respective terms (except as
A-9
<PAGE>
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other Laws affecting
the enforcement of creditors' rights generally and except that
the availability of the equitable remedy of specific performance
or injunctive relief is subject to the discretion of the court
before which any proceedings may be brought), and each such
Contract is in full force and effect.
(e) The Company Entities currently maintain insurance
similar in amounts, scope, and coverage to that maintained by
other peer organizations. None of the Company Entities has
received notice from any insurance carrier that (i) any policy of
insurance will be canceled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such
policies of insurance will be substantially increased.
(f) The Assets of the Company Entities include all Assets
required to operate the business of the Company Entities as
presently conducted.
4.10. INTELLECTUAL PROPERTY. Each Company Entity owns
or has a license to use all of the Intellectual Property used by
such Company Entity in the course of its business. Each Company
Entity is the owner of or has a license to any Intellectual
Property sold or licensed to a third party by such Company Entity
in connection with such Company Entity's business operations, and
such Company Entity has the right to convey by sale or license
any Intellectual Property so conveyed. No Company Entity is in
Default under any of its Intellectual Property licenses. No
proceedings have been instituted, or are pending or to the
Knowledge of Company threatened, which challenge the rights of
any Company Entity with respect to Intellectual Property used,
sold or licensed by such Company Entity in the course of its
business, nor has any person claimed or alleged any rights to
such Intellectual Property. The conduct of the business of the
Company Entities does not infringe any Intellectual Property of
any other person. Except as disclosed in Section 4.10 of the
Company Disclosure Memorandum, no Company Entity is obligated to
pay any recurring royalties to any Person with respect to any
such Intellectual Property. Except as disclosed in Section 4.10
of the Company Disclosure Memorandum, no officer, director or
employee of any Company Entity is party to any Contract which
restricts or prohibits such officer, director or employee from
engaging in activities competitive with any Person, including any
Company Entity.
4.11. ENVIRONMENTAL MATTERS.
(a) To the Knowledge of Company, each Company Entity, its
Participation Facilities, and its Operating Properties are, and
have been, in compliance with all Environmental Laws, except for
violations which are not reasonably likely to have, individually
or in the aggregate, a Company Material Adverse Effect.
(b) To the Knowledge of Company, there is no Litigation
pending or threatened before any court, governmental agency, or
authority or other forum in which any Company Entity or any of
its Operating Properties or Participation Facilities (or Company
in respect of such Operating Property or Participation Facility)
has been or, with respect to threatened Litigation, may be named
as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the
release, discharge, spillage, or disposal into the environment of
any Hazardous Material, whether or not occurring at, on, under,
adjacent to, or affecting (or potentially affecting) a site
owned, leased, or operated by any Company Entity or any of its
Operating Properties or Participation Facilities, except for such
Litigation pending or threatened that is not reasonably likely to
have, individually or in the aggregate, a Company Material
Adverse Effect, nor is there any reasonable basis for any
Litigation of a type described in this sentence, except such as
is not reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect.
(c) To the Knowledge of Company, there have been no
releases of Hazardous Material or oil in, on, under or affecting
any property owned by a Company Entity, except such as are not
reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Company.
4.12. COMPLIANCE WITH LAWS. Each Company Entity has in
effect all Permits necessary for it to own, lease, or operate its
Assets and to carry on its business as now conducted, except for
those Permits the absence of which are not reasonably likely to
have, individually or in the aggregate, a Company Material
Adverse Effect, and there has occurred no Default under any such
Permit, other than Defaults which are not reasonably likely to
A-10
<PAGE>
have, individually or in the aggregate, a Company Material
Adverse Effect. Except as disclosed in Section 4.12 of the
Company Disclosure Memorandum, none of the Company Entities:
(a) is in Default under any of the provisions of its
Certificate of Incorporation or Bylaws (or other governing
instruments);
(b) is in Default under any Laws, Orders, or Permits
applicable to its business or employees conducting its business,
except for Defaults which are not reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect; or
(c) since January 1, 1993, has received any notification or
communication from any agency or department of federal, state, or
local government or any Regulatory Authority or the staff thereof
(i) asserting that any Company Entity is not in compliance with
any of the Laws or Orders which such governmental authority or
Regulatory Authority enforces, where such noncompliance is
reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect, (ii) threatening to revoke any
Permits, the revocation of which is reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect, or (iii) requiring any Company Entity to enter into or
consent to the issuance of a cease and desist order, formal
agreement, directive, commitment, or memorandum of understanding,
or to adopt any Board resolution or similar undertaking.
Copies of all material reports, correspondence, notices and
other documents relating to any inspection, audit, monitoring or
other form of review or enforcement action by a Regulatory
Authority have been made available to Parent.
4.13. LABOR RELATIONS. No Company Entity is the subject
of any Litigation asserting that it or any other Company Entity
has committed an unfair labor practice (within the meaning of the
National Labor Relations Act or comparable state law) or seeking
to compel it or any other Company Entity to bargain with any
labor organization as to wages or conditions of employment, nor
is any Company Entity party to any collective bargaining
agreement, nor is there any strike or other labor dispute
involving any Company Entity, pending or threatened, or to the
Knowledge of Company, is there any activity involving any Company
Entity's employees seeking to certify a collective bargaining
unit or engaging in any other organization activity.
4.14. EMPLOYEE BENEFIT PLANS.
(a) Company has disclosed in Section 4.14 of the Company
Disclosure Memorandum, and has delivered or made available to
Parent prior to the execution of this Agreement copies in each
case of, all pension, retirement, profit-sharing, deferred
compensation, stock option, employee stock ownership, severance
pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical,
vision, dental, or other health plans, all life insurance plans,
all specific severance and retention amounts due any Company
employee and all other employee benefit plans or fringe benefit
plans, including "employee benefit plans" as that term is defined
in Section 3(3) of ERISA, currently adopted, maintained by,
sponsored in whole or in part by, or contributed to by any
Company Entity or ERISA Affiliate thereof for the benefit of
employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees,
retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries are eligible to participate
(collectively, the "Company Benefit Plans"). Any of the Company
Benefit Plans which is an "employee pension benefit plan," as
that term is defined in Section 3(2) of ERISA, is referred to
herein as a "Company ERISA Plan." Each Company ERISA Plan which
is also a "defined benefit plan" (as defined in Section 414(j) of
the Internal Revenue Code) is referred to herein as a "Company
Pension Plan." No Company Pension Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All Company Benefit Plans are in compliance with the
applicable terms of ERISA, the Internal Revenue Code, and any
other applicable Laws the breach or violation of which are
reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect. Each Company ERISA Plan which
is intended to be qualified under Section 401(a) of the Internal
Revenue Code has received a favorable determination letter from
the Internal Revenue Service, and Company is not aware of any
A-11<PAGE>
circumstances likely to result in revocation of any such
favorable determination letter. To the Knowledge of Company, no
Company Entity has engaged in a transaction with respect to any
Company Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject any
Company Entity to a Tax imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA in amounts which
are reasonably likely to have, individually or in the aggregate,
a Company Material Adverse Effect.
(c) No Company Pension Plan has any "unfunded current
liability," as that term is defined in Section 302(d)(8)(A) of
ERISA based on actuarial assumptions set forth for such plan's
most recent actuarial valuation. Since the date of the most
recent actuarial valuation, and ignoring any impact from
adjustments in any interest rate established or regulated by the
Pension Benefit Guaranty Corporation, there has been (i) no
material change in the financial position of any Company Pension
Plan, (ii) no change in the actuarial assumptions with respect to
any Company Pension Plan, and (iii) no increase in benefits under
any Company Pension Plan as a result of plan amendments or
changes in applicable Law which is reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect or materially adversely affect the funding status of any
such plan. Neither any Company Pension Plan nor any "single-
employer plan," within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by any Company Entity, or
the single-employer plan of any entity which is considered one
employer with Company under Section 4001 of ERISA or Section 414
of the Internal Revenue Code or Section 302 of ERISA (whether or
not waived) (an "ERISA Affiliate") has an "accumulated funding
deficiency" within the meaning of Section 412 of the Internal
Revenue Code or Section 302 of ERISA, which is reasonably likely
to have a Company Material Adverse Effect. No Company Entity has
provided, or is required to provide, security to a Company
Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective
Time, no Liability under Subtitle C or D of Title IV of ERISA has
been or is expected to be incurred by any Company Entity with
respect to any ongoing, frozen, or terminated single-employer
plan or the single-employer plan of any ERISA Affiliate, which
Liability is reasonably likely to have a Company Material Adverse
Effect. No Company Entity has incurred any withdrawal Liability
with respect to a multiemployer plan under Subtitle B of Title IV
of ERISA (regardless of whether based on contributions of an
ERISA Affiliate), which Liability is reasonably likely to have a
Company Material Adverse Effect. No notice of a "reportable
event," within the meaning of Section 4043 of ERISA for which the
30-day reporting requirement has not been waived, has been
required to be filed for any Company Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof.
(e) Except as disclosed in Section 4.14 of the Company
Disclosure Memorandum, no Company Entity has any Liability for
retiree health and life benefits under any of the Company Benefit
Plans and there are no restrictions on the rights of such Company
Entity to amend or terminate any such retiree health or benefit
Plan without incurring any Liability thereunder, which Liability
is reasonably likely to have a Company Material Adverse Effect.
(f) Except as disclosed in Section 4.14 of the Company
Disclosure Memorandum, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment (including severance,
unemployment compensation, golden parachute, or otherwise)
becoming due to any director or any employee of any Company
Entity from any Company Entity under any Company Benefit Plan or
otherwise, (ii) increase any benefits otherwise payable under any
Company Benefit Plan, or (iii) result in any acceleration of the
time of payment or vesting of any such benefit, where such
payment, increase, or acceleration is reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect.
(g) The actuarial present values of all accrued deferred
compensation entitlements (including entitlements under any
executive compensation, supplemental retirement, or employment
agreement) of employees and former employees of any Company
Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject
to the provisions of Section 412 of the Internal Revenue Code or
Section 302 of ERISA, have been fully reflected on the Company
Financial Statements to the extent required by and in accordance
with GAAP.
A-12<PAGE>
4.15. MATERIAL CONTRACTS. Except as disclosed in
Section 4.15 of the Company Disclosure Memorandum, none of the
Company Entities, nor any of their respective Assets, businesses,
or operations, is a party to, or is bound or affected by, or
receives benefits under, (i) any employment, severance,
termination, consulting, medical director, medical advisor, or
retirement Contract, (ii) any Contract relating to the borrowing
of money by any Company Entity or the guarantee by any Company
Entity of any such obligation (other than Contracts evidencing
trade payables), (iii) any Contract which prohibits or restricts
any Company Entity from engaging in any business activities in
any geographic area, line of business or otherwise in competition
with any other Person, (iv) any Contract relating to the purchase
or sale of any goods or services (other than Contracts entered
into in the ordinary course of business and involving payments
under any individual Contract not in excess of $25,000), (v) any
Contract or amendment thereto that would be required to be filed
as an exhibit to a Form 10-K filed by Company with the SEC as of
the date of this Agreement, (vi) any Contract for the purchase,
sale or lease of real property or office space involving gross or
annual payments by Company in excess of $75,000; (vii) any
Contract for the purchase, licensing or development of software
involving gross or annual payments by Company in excess of
$75,000; (ix) any management, consulting, computer services and
data processing Contract with any hospital or home health agency;
(x) any Contract with any managed care entity; (xi) any provider
agreement related to participation in the Programs (including
reference to any and all "provider numbers" related to the
Programs); (xii) any other Contract not made in the ordinary
course of business (together with all Contracts referred to in
Sections 4.9 and 4.14(a), the "Company Contracts"). With respect
to each Company Contract and except as disclosed in Section 4.15
of the Company Disclosure Memorandum: (i) the Contract is in full
force and effect; (ii) no Company Entity is in Default
thereunder, other than Defaults which are not reasonably likely
to have, individually or in the aggregate, a Company Material
Adverse Effect; (iii) no Company Entity has repudiated or waived
any material provision of any such Contract; and (iv) no other
party to any such Contract is, to the Knowledge of Company, in
Default in any respect, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect, or has repudiated or waived any
material provision thereunder. All Company Contracts have been
listed in Section 4.15 of the Company Disclosure Schedule and
provided to the Parent.
4.16. LEGAL PROCEEDINGS. Except as disclosed in Section
4.16 of the Company Disclosure Memorandum, there is no Litigation
instituted or pending, or, to the Knowledge of Company,
threatened (or unasserted but considered probable of assertion
and which if asserted would have at least a reasonable
probability of an unfavorable outcome) against any Company
Entity, or against any director, employee or employee benefit
plan of any Company Entity, or against any Asset, interest, or
right of any of them, that is reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect, nor are there any Orders of any Regulatory Authorities,
other governmental authorities, or arbitrators outstanding
against any Company Entity, that are reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect. Section 4.16 of the Company Disclosure Memorandum
contains a summary of all Litigation as of the date of this
Agreement to which any Company Entity is a party and which names
a Company Entity as a defendant or cross-defendant or for which
any Company Entity has any potential Liability.
4.17. REPORTS. Since January 1, 1993, or the date of
organization if later, each Company Entity has timely filed all
reports and statements, together with any amendments required to
be made with respect thereto, that it was required to file with
Regulatory Authorities (except failures to file which are not
reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect). As of their respective dates,
each of such reports and documents, including the financial
statements, exhibits, and schedules thereto, complied in all
material respects with all applicable Laws. As of its respective
date, each such report and document did not, in all material
respects, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
4.18. INFORMATION IN PROXY STATEMENT. None of the
information included or incorporated by reference in the Proxy
Statement, including any amendments or supplements thereto, will,
at the time the Proxy Statement is first mailed to Company's
stockholders or at the time of the Special Meeting, contain any
statement which, at such time and in light of the circumstances
under which it is made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary
A-13<PAGE>
in order to make the statements therein not false or misleading.
Notwithstanding the foregoing, Company does not make any
representation or warranty with respect to the information that
has been or will be supplied by Parent, Purchaser or any Parent
Subsidiaries, or their officers, directors, employees,
representatives or agents, for inclusion or incorporation by
reference in the Proxy Statement. The Proxy Statement and any
amendments or supplements thereto will comply in all material
respects with the applicable provisions of the 1934 Act and the
rules and regulations thereunder.
4.19. INSURANCE. Company has in full force and effect
fire and casualty insurance policies, with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow
it to replace any of its properties that might be damaged or
destroyed. Company has in full force and effect general and
professional liability, directors and officers and workers
compensation insurance in amounts sufficient for, and typical of,
comparable businesses.
4.20. MEDICARE, MEDICAID AND OTHER THIRD-PARTY PAYORS.
Company and the Company Subsidiaries participate in the Medicare
Program and in the Medicaid Program (the Medicare Program and the
Medicaid Program are collectively referred to herein as the
"Programs"). Except as disclosed in Section 4.20 of Company
Disclosure Memorandum, (i) Company and each Company Subsidiary
is, and will be at the Effective Time, substantially in
compliance with all of the terms, conditions and provisions of
the existing Medicare and Medicaid Provider Agreements to which
Company or a Company Subsidiary is a party; (ii) as to the
Programs, neither Company nor a Company Subsidiary has notice of
any offsets against future reimbursement nor, to their Knowledge,
is there any basis therefor; (iii) neither Company nor a Company
Subsidiary has been subject to or threatened with loss of waiver
of liability for utilization review denials with respect to the
Programs during the 12 months prior to the Closing Date, nor have
they received notice of pending, threatened or possible
decertification or other loss of participation in the Programs;
and (iv) to the knowledge of Company, the cost reports filed by
Company and each Company Subsidiary for the past five fiscal
years for the Programs are complete and accurate and all
liabilities and contractual adjustments of Company and each
Company Subsidiary under any third party payor or reimbursement
program have been properly reflected and adequately reserved for
the financial statements of Company and the Company Subsidiaries.
4.21. FRAUD AND ABUSE. To the Knowledge of Company,
Persons who provide professional services under agreements with
any Company Entity have not engaged in any activities which are
prohibited under federal Medicare and Medicaid statutes,
42 U.S.C. Sections 1320a-7, 1320a-7(a) and 1320a-7b, or the
regulations promulgated pursuant to such statutes or related
state or local statutes or regulations, or which are prohibited
by rules of professional conduct, including but not limited to
the following:
(a) knowingly and willfully making or causing to be made a
false statement or representation of a material fact in any
application for any benefit or payment or for use in determining
rights to any benefit or payment;
(b) presenting or causing to be presented a claim for
reimbursement for services under Medicare, Medicaid, or any other
state health care program that is for an item or service that is
known or should be known to be (i) not provided as claimed or
(ii) otherwise false or fraudulent;
(c) failing to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of
another, with intent to fraudulently secure such benefit or
payment;
(d) knowingly or willfully offering, paying, soliciting or
receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overly or covertly, in cash or
in kind (i) in return for referring an individual to a person for
the furnishing (or arranging for the furnishing) of any item or
service for which payment may be made in whole or in part by
Medicare, Medicaid, or any other state health care program or
(ii) in return for purchasing, leasing, or ordering any good,
facility, service, or item for which payment may be made in whole
or in part by Medicare or Medicaid or other state health care
program;
A-14<PAGE>
(e) knowingly making a payment, directly or indirectly, to
a physician as an inducement to reduce or limit services to
individuals who are under the direct care of the physician and
who are entitled to benefits under Medicare, Medicaid, or any
other state health care programs;
(f) providing to any person information that is known or
should be known to be false or misleading that could reasonably
be expected to influence the decision when to discharge a
hospital in-patient from the hospital;
(g) knowingly or willfully making or causing to be made or
inducing or seeking to induce the making of any false statement
or representation (or omit to state a fact required to be stated
therein or necessary to make the statements contained therein not
misleading) of a material fact with respect to (i) the conditions
or operations of a facility in order that the facility may
qualify for Medicare, Medicaid or any other state health care
program certification, or (ii) information required to be
provided under Section 1124A of the Social Security Act
(42 U.S.C. Section 1320a-3); or
(h) knowingly and willingly (i) charging for any Medicaid
service money or other consideration at a rate in excess of the
rate established by the state, or (ii) charging, soliciting,
accepting or receiving, in addition to amounts paid by Medicaid,
any gift money, donation or other consideration (other than a
charitable, religious or other philanthropic contribution from an
organization or from a person unrelated to the patient) as a
precondition of a Company Entity precertifying, providing or
continuing care for any patient.
4.22. STATEMENTS TRUE AND CORRECT. No statement,
certificate, instrument or other writing furnished or to be
furnished by any Company Entity or any Affiliate thereof to
Parent pursuant to this Agreement or any other document,
agreement or instrument referred to herein contains or will
contain any untrue statement of material fact or will omit to
state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not
misleading.
4.23. BROKERS AND FINDERS. Except for the fee owed to
Salomon Smith Barney neither Company nor any of its officers,
directors, employees, or Affiliates has employed any broker or
finder or incurred any Liability for any financial advisory fees,
investment bankers' fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the
transactions contemplated hereby. True and correct copies of all
agreements and engagement letters between Company and Salomon
Smith Barney in connection with the transactions contemplated by
the Merger have been disclosed to Parent, including the letter
agreement dated May 21, 1998, which establishes the total amount
owed to Salomon Smith Barney. In the event of a claim by any
broker or finder based upon his or its representing or being
retained by or allegedly representing or being retained by
Company or any Affiliate in excess of the fee set forth in the
Company Disclosure Memorandum, Parent shall be entitled, subject
to Section 7.8(i), to set off against the Debt Payment required
to be paid to WCAS CP II as provided in Section 7.7 an amount
equal to any Liability in respect of such claim.
4.24. OPINION OF FINANCIAL ADVISOR. The Board of
Directors of Company has received the opinion of Salomon Smith
Barney, dated June 1, 1998, to the effect that, as of such date,
the Merger Price to be received in the Merger by the holders of
Company Common Stock (other than the Welsh Carson Entities and
their Affiliates, as to which Salomon Smith Barney has not been
requested to express an opinion) is fair to such holders, from a
financial point of view, a signed copy of which has been
delivered to Parent.
Each of the Welsh Carson Entities hereby represents and
warrants to Parent on its own behalf and on behalf of their
Affiliates as follows:
4.25. OWNERSHIP OF SHARES. The Welsh Carson Entities
and their Affiliates are the record and Beneficial Owners of the
WC Shares. On June 1, 1998, the WC Shares numbered 5,395,614 and
constituted all of the shares of Company Common Stock owned of
record or Beneficially Owned by the Welsh Carson Entities or
their Affiliates. The Welsh Carson Entities and their Affiliates
have sole voting power and sole power to issue instructions with
respect to the matters set forth in Section 7.8 hereof, sole
power of disposition, sole power of conversion, sole power to
demand appraisal rights and sole power to agree to all of the
matters set forth in this Agreement, in each case with respect to
A-15<PAGE>
all of the WC Shares that it owns with no limitations,
qualifications or restrictions on such rights, subject to
applicable securities laws and the terms of this Agreement.
4.26. POWER; BINDING AGREEMENT. Each of the Welsh
Carson Entities have the legal capacity, power and authority to
enter into and perform all of their respective obligations under
this Agreement. The execution, delivery and performance of this
Agreement by the Welsh Carson Entities will not violate any other
agreement to which any of them is a party, including, without
limitation, any partnership agreement, voting agreement, proxy
arrangement, pledge agreement, shareholders agreement or voting
trust. This Agreement has been duly and validly executed and
delivered by the Welsh Carson Entities and constitutes a valid
and binding agreement, enforceable against the Welsh Carson
Entities in accordance with its terms. There is no beneficiary
or holder of a voting trust certificate or other interest of any
trust of which a Welsh Carson Entity or one of its Affiliates is
a trustee whose consent is required for the execution and
delivery of this Agreement or the consummation by the Welsh
Carson Entities of the transactions contemplated hereby.
4.27. NO CONFLICTS. Except for filings under the HSR
Act and the Exchange Act, (i) no filing with, and no permit,
authorization, consent or approval of, any Governmental Entity
for the execution of this Agreement by the Welsh Carson Entities
and the consummation by any of them of the transactions
contemplated hereby and (ii) none of the execution and delivery
of this Agreement by the Welsh Carson Entities, the consummation
by them of the transactions contemplated hereby or compliance by
them with any of the provisions hereof shall (A) conflict with or
result in any breach of any organizational documents applicable
to the Welsh Carson Entities, (B) result in a violation or breach
of, or constitute (with or without notice or lapse of time or
both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration)
under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other
instrument or obligation of any kind to which a Welsh Carson
Entity is a party or by which a Welsh Carson Entity or any of its
properties or assets may be bound, or (C) violate any order,
writ, injunction, decree, judgment, order, statute, rule or
regulation applicable to a Welsh Carson Entity or any of its
properties or assets.
4.28. NO LIENS. Except as permitted by this Agreement,
the WC Shares and the Certificates representing such WC Shares
are now, and at all times during the term hereof will be, held by
the Welsh Carson Entities and their Affiliates, or by a nominee
or custodian for the benefit of the Welsh Carson Entities and
their Affiliates, free and clear of all Liens, proxies, voting
trusts or agreements, understandings or arrangements or any other
rights whatsoever, except for any such Liens or proxies arising
hereunder.
4.29. NO FINDER'S FEES. No broker, investment banker,
financial advisor or other person is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated hereby based
upon arrangements made by or on behalf of a Welsh Carson Entity
or any of its Affiliates.
4.30. RELIANCE BY PARENT. Each of the Welsh Carson
Entities understand and acknowledge that Parent is entering into,
and causing Purchaser to enter into, this Agreement in reliance
upon their execution and delivery of this Agreement.
A-16
<PAGE>
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF PARENT
----------------------------------------
Parent hereby represents and warrants to Company as follows:
5.1. ORGANIZATION, STANDING, AND POWER. Parent is a not for
profit corporation duly organized, validly existing, and in good
standing under the Laws of the State of Florida, and has the
corporate power and authority to carry on its business as now
conducted and to own, lease and operate its material Assets.
5.2. Authority; No Breach By Agreement.
(a) Parent has the corporate power and authority necessary
to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein, including
the Merger, have been duly and validly authorized by all
necessary corporate action in respect thereof on the part of
Parent. This Agreement represents a legal, valid, and binding
obligation of Parent, enforceable against Parent in accordance
with its terms (except in all cases as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
receivership, conservatorship, moratorium, or similar Laws
affecting the enforcement of creditors' rights generally and
except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of
the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by
Parent, nor the consummation by Parent of the transactions
contemplated hereby, nor compliance by Parent with any of the
provisions hereof, will (i) conflict with or result in a breach
of any provision of Parent's Articles of Incorporation or Bylaws,
or (ii) constitute or result in a Default under, or require any
Consent pursuant to, or result in the creation of any Lien on any
Asset of any Parent Entity under, any Contract or Permit of any
Parent Entity, where such Default or Lien, or any failure to
obtain such Consent, is reasonably likely to have, individually
or in the aggregate, a Parent Material Adverse Effect, or,
(iii) subject to receipt of the requisite Consents referred to in
Section 8.1(b), constitute or result in a Default under, or
require any Consent pursuant to, any Law or Order applicable to
any Parent Entity or any of their respective material Assets.
(c) Other than in connection or compliance with the
provisions of the Securities Laws, applicable state corporate and
securities Laws, and rules of any applicable securities market,
and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue
Service or the Pension Benefit Guaranty Corporation with respect
to any employee benefit plans, or under the HSR Act, and other
than Consents, filings, or notifications which, if not obtained
or made, are not reasonably likely to have, individually or in
the aggregate, a Parent Material Adverse Effect, no notice to,
filing with, or Consent of, any public body or authority is
necessary for the consummation by Parent of the Merger and the
other transactions contemplated in this Agreement.
5.3. INFORMATION IN PROXY STATEMENT. None of the
information supplied or to be supplied by Parent or Purchaser, or
any of their officers, directors, employees, representatives or
agents for inclusion or incorporation by reference in the Proxy
Statement, including any amendments or supplements thereto, will,
at the date the Proxy Statement is first mailed to Company's
stockholders or at the time of the Special Meeting, contain any
statement which, at such time and in light of the circumstances
under which it is made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary
in order to make the statements therein not false or misleading.
Notwithstanding the foregoing, Parent and Purchaser do not make
any representation or warranty with respect to the information
that has been supplied by Company or any Company Subsidiaries or
their officers, directors, employees, representatives or agents
for inclusion or incorporation by reference in the Proxy
Statement.
5.4. SUFFICIENT FUNDS. Either Parent or Purchaser has
sufficient funds available to consummate the Merger and to make
all payments required hereunder in respect of Equity Rights and
to pay all fees and expenses incurred by each of them related to
the transactions contemplated by this Agreement.
A-17<PAGE>
5.5. AUTHORITY OF PURCHASER. Purchaser is a corporation
duly organized, validly existing and in good standing under the
Laws of the State of Delaware as a wholly owned Subsidiary of
Parent. The authorized capital stock of Purchaser shall consist
of 1,000 shares of Purchaser Common Stock, 100 shares of which is
validly issued and outstanding, fully paid and nonassessable and
is owned by an Affiliate of Parent free and clear of any Lien.
Purchaser has the corporate power and authority necessary to
execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein, including
the Merger, have been duly and validly authorized by all
necessary corporate action in respect thereof on the part of
Purchaser. This Agreement represents a legal, valid, and binding
obligation of Purchaser, enforceable against Purchaser in
accordance with its terms (except in all cases as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar Laws affecting
the enforcement of creditors' rights generally and except that
the availability of the equitable remedy of specific performance
or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought). Parent, as the sole
stockholder of Purchaser, has voted prior to the Effective Time
the shares of Purchaser Common Stock in favor of adoption of this
Agreement, as and to the extent required by applicable Law.
ARTICLE 6.
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
6.1. AFFIRMATIVE COVENANTS OF COMPANY. From June 1, 1998
until the earlier of the termination of this Agreement or the
time the designees of Parent have been elected to and constitute
a majority of the Board of Directors of Company (the "Appointment
Date"), unless the prior written consent of Parent shall have
been obtained, and except as otherwise expressly contemplated
herein, Company shall and shall cause each of its Subsidiaries to
(i) operate its business only in the usual, regular, and ordinary
course, (ii) preserve intact its business organization and Assets
and maintain its rights and franchises, and (iii) take no
affirmative action which would (x) materially and adversely
affect the ability of any Party to obtain any Consents required
for the transactions contemplated hereby, or (y) materially and
adversely affect the ability of any Party to perform its
covenants and agreements under this Agreement.
6.2. NEGATIVE COVENANTS OF COMPANY. From June 1, 1998 until
the earlier of the termination of this Agreement or the
Appointment Date, unless the prior written consent of Parent
shall have been obtained, and except as otherwise expressly
contemplated herein, Company covenants and agrees that it will
not do or agree or commit to do, or permit any of its
Subsidiaries to do or agree or commit to do, any of the
following:
(a) amend the Certificate of Incorporation, Bylaws or other
governing instruments of any Company Entity, or
(b) incur any additional debt obligation or other
obligation for borrowed money, including without limitation
pursuant to the Bank Debt (other than indebtedness of a Company
Entity to another Company Entity), or impose, or suffer the
imposition, on any Asset of any Company Entity of any Lien or
permit any such Lien to exist (other than in connection with
Liens in effect as of June 1, 1998 that are disclosed in the
Company Disclosure Memorandum); provided, however, (i) Company on
a consolidated basis may borrow up to $500,000 under the Credit
Agreement for any purpose; (ii) Company on a consolidated basis
may borrow an aggregate of up to $2,000,000 under the Credit
Agreement (including the $500,000 referred to above) for
operations shortfalls caused by overpayments in Periodic Interim
Payments made under the Program for the quarter ended March 31,
1998, which are withheld from Periodic Interim Payments made
after June 1, 1998; and (iii) the prior written consent of
WCAS CP II, in addition to the prior written consent of Parent,
shall have been obtained for any additional debt incurred under
the Credit Agreement beyond that contemplated by clauses (i) or
(ii); or
(c) repurchase, redeem, or otherwise acquire or exchange
(other than exchanges in the ordinary course under employee
benefit plans), directly or indirectly, any shares, or any
A-18<PAGE>
securities convertible into any shares, of the capital stock of
any Company Entity, or declare or pay any dividend or make any
other distribution in respect of Company's capital stock; or
(d) except pursuant to the exercise of stock options or
warrants outstanding as of June 1, 1998 and pursuant to the terms
thereof in existence on such date, or as disclosed in Section
6.2(d) of the Company Disclosure Memorandum, issue, sell, pledge,
encumber, authorize the issuance of, enter into any Contract to
issue, sell, pledge, encumber, or authorize the issuance of, or
otherwise permit to become outstanding, any additional shares of
Company Common Stock or any other capital stock of any Company
Entity, or any stock appreciation rights, or any option, warrant,
or other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock
of any Company Entity or issue or authorize the issuance of any
other securities in respect of or in substitution for shares of
Company Common Stock, or sell, lease, mortgage or otherwise
dispose of or otherwise encumber (i) any shares of capital stock
of any Company Subsidiary (unless any such shares of stock are
sold or otherwise transferred to another Company Entity) or
(ii) any Asset having a book value in excess of $100,000 other
than in the ordinary course of business for reasonable and
adequate consideration; or
(f) except for purchases of U.S. Treasury securities or
U.S. Government agency securities, which in either case have
maturities of three years or less, purchase any securities or
make any material investment, either by purchase of stock or
other securities, contributions to capital, Asset transfers, or
purchase of any Assets, in any Person other than a wholly owned
Company Subsidiary, or otherwise acquire direct or indirect
control over any Person, other than in connection with
(i) foreclosures in the ordinary course of business, or (iii) the
creation of new wholly owned Subsidiaries organized to conduct or
continue activities otherwise permitted by this Agreement; or
(g) grant any increase in compensation or benefits to the
employees or officers of any Company Entity, except as disclosed
in Section 6.2(g) of the Company Disclosure Memorandum; pay any
severance or termination pay or any bonus other than pursuant to
written policies or written Contracts in effect on June 1, 1998
and disclosed in Section 6.2(g) of the Company Disclosure
Memorandum; enter into or amend any severance agreements with
officers of any Company Entity; or grant any material increase in
fees or other increases in compensation or other benefits to
directors of any Company Entity except as disclosed in Section
6.2(g) of the Company Disclosure Memorandum; or
(h) enter into or amend any employment Contract between any
Company Entity and any Person having a salary thereunder in
excess of $75,000 per year (unless such amendment is required by
Law) that the Company Entity does not have the unconditional
right to terminate without Liability (other than Liability for
services already rendered), at any time on or after the Effective
Time; or
(i) adopt any new employee benefit plan of any Company
Entity or terminate or withdraw from, or make any material change
in or to, any existing employee benefit plans of any Company
Entity other than any such change that is required by Law or
that, in the opinion of counsel, is necessary or advisable to
maintain the tax qualified status of any such plan, or make any
distributions from such employee benefit plans, except as
required by Law, the terms of such plans or consistent with past
practice; or
(j) make any significant change in any Tax or accounting
methods or systems of internal accounting controls, except as may
be appropriate to conform to changes in Tax Laws or regulatory
accounting requirements or GAAP; or
(k) commence any Litigation other than in accordance with
past practice, settle any Litigation involving any Liability of
any Company Entity for material money damages or involving
material restrictions upon the operations of any Company Entity;
or
(l) except in the ordinary course of business, enter into,
modify, amend or terminate any material Contract (including any
loan Contract with an unpaid balance exceeding $50,000) or waive,
release, compromise or assign any material rights or claims.
A-19<PAGE>
6.3. COVENANTS OF PARENT. From June 1, 1998 until the
earlier of the Effective Time or the termination of this
Agreement, unless the prior written consent of Company shall have
been obtained, and except as otherwise expressly contemplated
herein, Parent covenants and agrees that it shall take no action
which would (i) materially and adversely affect the ability of
any Party to obtain any Consents required for the transactions
contemplated hereby, or (ii) materially and adversely affect the
ability of any Party to perform its covenants and agreements
under this Agreement.
6.4. ADVERSE CHANGES IN CONDITION. Each Party agrees to
give written notice promptly to the other Party upon becoming
aware of the occurrence or impending occurrence of any event or
circumstance relating to it or any of its Subsidiaries which
(i) is reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect or a Parent Material
Adverse Effect, as applicable, or (ii) would cause or constitute
a material breach of any of its representations, warranties, or
covenants contained herein, and to use its reasonable efforts to
prevent or promptly to remedy the same; provided, however, that
no notice provided hereunder shall in any manner affect the right
of the other Party to enforce any provision of this Agreement.
6.5. REPORTS. Company and its Subsidiaries shall file all
reports required to be filed by them with Regulatory Authorities
between June 1, 1998 and the Effective Time and shall deliver to
the Parent copies of all such reports promptly after the same are
filed. If financial statements are contained in any such reports
filed with the SEC, such financial statements will fairly present
the consolidated financial position of the entity filing such
statements as of the dates indicated and the consolidated results
of operations, changes in stockholders' equity, and cash flows
for the periods then ended in accordance with GAAP (subject in
the case of interim financial statements to normal recurring
year-end adjustments that are not material). As of their
respective dates, such reports filed with the SEC will comply in
all material respects with the Securities Laws and will not
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any
financial statements contained in any other reports to another
Regulatory Authority shall be prepared in accordance with Laws
applicable to such reports.
ARTICLE 7.
ADDITIONAL AGREEMENTS
---------------------
7.1. PURCHASER COMPLIANCE. Parent shall cause Purchaser to
comply with all of its obligations under or related to this
Agreement.
7.2. APPLICATIONS; ANTITRUST NOTIFICATION. Parent shall
promptly prepare and file, and Company shall cooperate in the
preparation and, where appropriate, filing of applications with
all Regulatory Authorities having jurisdiction over the
transactions contemplated by this Agreement seeking the requisite
Consents necessary to consummate the transactions contemplated by
this Agreement. To the extent required by the HSR Act, each of
the Parties will promptly file with the United States Federal
Trade Commission and the United States Department of Justice the
notification and report form required for the transactions
contemplated hereby and any supplemental or additional
information which may reasonably be requested in connection
therewith pursuant to the HSR Act and will comply in all material
respects with the requirements of the HSR Act. The Parties shall
deliver to each other copies of all filings, correspondence and
orders to and from all Regulatory Authorities in connection with
the transactions contemplated hereby.
7.3. AGREEMENT AS TO EFFORTS TO CONSUMMATE. Subject to the
terms and conditions of this Agreement, each Party agrees to use,
and to cause its Subsidiaries to use, all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper, or advisable
under applicable Laws to consummate and make effective, as soon
as reasonably practicable after the date of this Agreement, the
transactions contemplated by this Agreement, including using all
commercially reasonable efforts to lift or rescind any Order
adversely affecting its ability to consummate the transactions
contemplated herein and to cause to be satisfied the conditions
referred to in Article 8 hereof; provided, that nothing herein
shall preclude either Party from exercising its rights under this
A-20<PAGE>
Agreement. Each Party shall use, and shall cause each of its
Subsidiaries to use, all commercially reasonable efforts to
obtain all Consents necessary or desirable for the consummation
of the transactions contemplated by this Agreement.
7.4. INVESTIGATION AND CONFIDENTIALITY.
(a) Prior to the Effective Time, Company shall keep Parent
advised of all material developments relevant to its business and
to consummation of the Merger and shall permit Parent to make or
cause to be made such investigation of the business and
properties of Company and its Subsidiaries and of their
respective financial and legal conditions as Parent reasonably
requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby and shall not
interfere unnecessarily with normal operations. No investigation
by a Party shall affect the representations and warranties of the
other Party.
(b) In addition to Parent's obligations under the
Confidentiality Agreement, which is hereby reaffirmed and
adopted, and incorporated by reference herein Parent shall, and
shall cause its advisers and agents to, maintain the
confidentiality of all confidential information furnished to it
by Company concerning Company and its Subsidiaries' businesses,
operations, and financial positions and shall not use such
information for any purpose except in furtherance of the
transactions contemplated by this Agreement. If this Agreement
is terminated prior to the Effective Time, Parent shall promptly
return or certify the destruction of all documents and copies
thereof, and all work papers containing confidential information
received from Company.
(c) Company shall use its reasonable efforts to exercise
its rights under confidentiality agreements entered into with
Persons which were considering an Acquisition Proposal with
respect to Company to preserve the confidentiality of the
information relating to Company Entities provided to such Persons
and their Affiliates and Representatives.
(d) Each Party agrees to give the other Party notice as
soon as practicable after any determination by it of any fact or
occurrence relating to the other Party which it has discovered
through the course of its investigation and which represents, or
is reasonably likely to represent, either a material breach of
any representation, warranty, covenant or agreement of the other
Party or which has had or is reasonably likely to have a Company
Material Adverse Effect or a Parent Material Adverse Effect, as
applicable.
7.5. PRESS RELEASES. Prior to the Effective Time, Company
and Parent shall consult with each other as to the form and
substance of any press release or other public disclosure
materially related to this Agreement or any other transaction
contemplated hereby; provided, that nothing in this Section 7.5
shall be deemed to prohibit any Party from making any disclosure
which its counsel deems necessary or advisable in order to
satisfy such Party's disclosure obligations imposed by Law.
7.6. NO SOLICITATION. (a) Neither Company nor any of its
Subsidiaries shall (and Company shall use its best efforts to
cause its officers, directors, employees, and agents, including,
but not limited to, its Representatives, not to), directly or
indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to,
any corporation, partnership, person or other entity or group
(other than Parent, any of its Affiliates or Representatives)
concerning any Acquisition Proposal, except that nothing
contained in this Section 7.6 or any other provision hereof shall
prohibit Company or Company's Board from (i) taking and
disclosing to Company's stockholders a position with respect to a
tender or exchange offer by a third party pursuant to Rules 14d-9
and 14e-2 promulgated under the Exchange Act, or (ii) making such
disclosure to Company's stockholders as, in the good faith
judgment of the Board, after receiving advice from outside
counsel, is required under applicable law, provided that Company
may not, except as permitted by Section 7.6(b), withdraw or
modify, or propose to withdraw or modify, its position with
respect to the Merger or approve or recommend, or propose to
approve or recommend any Acquisition Proposal, or enter into any
agreement with respect to any Acquisition Proposal. Company will
immediately cease any existing activities, discussions or
negotiations with any parties conducted heretofore with respect
to any of the foregoing. Company shall also promptly request
each person which has heretofore executed a confidentiality
agreement in connection with its consideration of acquiring
Company to return all confidential information heretofore
furnished to such person by or on behalf of Company.
A-21<PAGE>
(b) Notwithstanding the foregoing, prior to the Special
Meeting, Company may furnish information concerning Company and
its Subsidiaries to any corporation, partnership, person or other
entity or group pursuant to appropriate confidentiality
agreements and may negotiate and participate in discussions and
negotiations with such entity or group concerning an Acquisition
Proposal if (x) such entity or group has on an unsolicited basis
submitted a bona fide written proposal to Company relating to any
such transaction which the Board determines in good faith, after
consulting with a nationally recognized investment banking firm,
represents a superior transaction to the Merger and (y) in the
opinion of the Board of Directors of Company, only after receipt
of advice from outside legal counsel to Company, the failure to
provide such information or access or to engage in such
discussions or negotiations would reasonably be expected to cause
the Board of Directors to violate its fiduciary duties to
Company's stockholders under applicable law (an Acquisition
Proposal which satisfies clauses (x) and (y) being referred to
herein as a "Superior Proposal"). Company will immediately
notify Parent of the existence of any proposal or inquiry
received by Company, the identity of the party making such
proposal or inquiry, and the terms (both initial and modified) of
any such proposal or inquiry (and will disclose any written
materials delivered in connection therewith) and Company will
keep Parent reasonably informed of the status (including
amendments or proposed amendments) of any such proposal or
inquiry. Company will promptly provide to Parent any material
non-public information regarding Company provided to any other
party which was not previously provided to Parent. At any time
after two business days following notification to Parent of
Company's intent to do so (which notification shall include the
identity of the bidder and the material terms and conditions of
the proposal) and if Company has otherwise complied with the
terms of this Section 7.6(b), the Board of Directors may withdraw
or modify its approval or recommendation of the Merger and may
enter into an agreement with respect to a Superior Proposal,
provided it shall concurrently with entering into such agreement
pay or cause to be paid to Parent the Termination Fee plus any
amount payable at the time for reimbursement of expenses pursuant
to Section 10.2. If Company shall have notified Parent of its
intent to enter into an agreement with respect to a Superior
Proposal in compliance with the preceding sentence and has
otherwise complied with such sentence, Company may enter into an
agreement with respect to such Superior Proposal (with the bidder
and on terms no less favorable than those specified in such
notification) after the expiration of the initial two business
day period without any further notification.
7.7. DEBT PAYMENT. At the Effective Time, WCAS CP II shall
deliver to Parent any and all notes comprising the Subordinated
Debt marked as "canceled", and in exchange therefor, and in full
satisfaction of such Subordinated Debt, Parent agrees to cause to
be paid to WCAS CP II, subject to Parent's express right of set
off as provided in Sections 2.3(b), 4.23, 7.8(g) and 7.8(i), on
December 31, 2000 (the "Final Payment Date"), the Debt Payment
plus any interest earned thereon. The Debt Payment shall be
escrowed following the Closing on terms mutually acceptable to
Parent and WCAS CP II, and all costs and expenses of the escrow
agent shall be deducted from the Debt Payment. The amount
representing the difference between the Subordinated Debt and the
Debt Payment shall, immediately prior to the Effective Time, be
deemed to have been contributed to the capital of Company. For
purposes of this Agreement, the term "Debt Payment" shall mean
the amount, if any, by which (x) $5,943,147.50 exceeds the sum of
(y) (1) the amount by which the aggregate outstanding principal
and accrued and unpaid interest under the Credit Agreement as of
the Effective Time exceeds $37,490,000, plus (2) the aggregate
amount of the premiums and other payments made to insurance
carriers, plus (3) the amount of the legal fees and expenses
incurred by Company in connection with the transactions
contemplated herein and the printing and mailing costs incurred
in connection with the Proxy Statement.
7.8. ADDITIONAL AGREEMENTS OF THE WELSH CARSON ENTITIES.
(a) CONVERSION OF SHARES.
(i) In order to induce Parent and the Purchaser to
enter into this Agreement, each of the Welsh Carson Entities, on
behalf of itself and its Affiliates, hereby consents and agrees
to have all 5,395,614 shares of Company Common Stock Beneficially
Owned by the Welsh Carson Entities or one of their Affiliates and
any Equity Right relating to Company Common Stock Beneficially
Owned by the Welsh Carson Entities or one of their Affiliates
converted in the Merger into the right to receive total Merger
consideration of $1.00. The Welsh Carson Entities hereby
acknowledge and agree that Parent's and the Purchaser's
obligation to convert and pay for Company Common Stock and Equity
A-22
<PAGE>
Rights in the Merger, including the shares of Company Common
Stock and the Equity Rights Beneficially Owned by the Welsh
Carson Entities or one of their Affiliates, is subject to the
terms and conditions of the Merger and the provisions hereof.
The total number of shares of Company Common Stock Beneficially
Owned by the Welsh Carson Entities and their Affiliates on June
1, 1998, together with any shares acquired by the Welsh Carson
Entities and their Affiliates in any capacity after June 1, 1998
and prior to the termination of this Agreement, whether upon the
exercise of Equity Rights or by means of purchase, dividend,
distribution, gift or otherwise, are referred to herein as the
"WC Shares."
(ii) The conversion of the WC Shares in the Merger
shall extinguish any ownership rights of the Welsh Carson
Entities or their Affiliates in Company or the Surviving
Corporation or rights of the Welsh Carson Entities or their
Affiliates to the Merger Price or any other consideration,
payment or benefit in respect of the WC Shares other than the
payment of $1.00.
(iii) Each of the Welsh Carson Entities, on behalf
of itself and its Affiliates, hereby permits Parent and the
Purchaser to publish and disclose in the Proxy Statement
(including all documents and schedules filed with the SEC) their
identity and ownership of the Company Common Stock and Equity
Rights relating to Company Common Stock and the nature of their
commitments, arrangements and understandings under this
Agreement.
(b) VOTING AGREEMENT. Until the Effective Time or the day
following termination of this Agreement in accordance with its
terms (the "Term"), each of the Welsh Carson Entities and their
Affiliates shall, at any meeting of the holders of Company Common
Stock, however called, or in connection with any written consent
of the holders of Company Common Stock, vote (or cause to be
voted) the WC Shares then held of record or Beneficially Owned by
the Welsh Carson Entities or any Affiliate thereof, (i) in favor
of the Merger, the execution and delivery by Company of this
Agreement and the approval of the terms hereof and each of the
other actions contemplated herein and any actions required in
furtherance hereof; and (ii) against any Acquisition Proposal and
against any action or agreement that would impede, frustrate,
prevent or nullify this Agreement, or result in a breach in any
respect of any covenant, representation or warranty or any other
obligation or agreement of Company contained in this Agreement or
which would result in any of the conditions set forth in
Article 8 to this Agreement not being fulfilled. The parties
hereto agree and acknowledge that nothing in this Section 7.8 or
any other part of this Agreement shall be construed as requiring
any officer, director, employee or agent of a Welsh Carson Entity
or any of their Affiliates who also is a director of Company to
propose, endorse, approve or recommend this Agreement or any
transaction contemplated hereby in such individual's capacity as
a director of Company.
(c) NO INCONSISTENT ARRANGEMENTS. Each of the Welsh Carson
Entities, on behalf of itself and its Affiliates, hereby
covenants and agrees that, except as contemplated by this
Agreement, during the Term it shall not (i) tender, or consent to
any tender of, any or all of the WC Shares, pursuant to any
Acquisition Proposal, (ii) transfer (which term shall include,
without limitation, any sale, gift, pledge or other disposition),
or consent to any transfer of, any or all of the WC Shares, or
any interest therein, (iii) enter into any contract, option or
other agreement or understanding with respect to any transfer of
any or all of the WC Shares, Equity Rights or any interest
therein, (iv) grant any proxy, power-of-attorney or other
authorization in or with respect to the WC Shares or Equity
Rights, (v) deposit the WC Shares or Equity Rights into a voting
trust or enter into a voting agreement or arrangement with
respect to the WC Shares or Equity Rights, or (vi) take any other
action that would in any way restrict, limit or interfere with
the performance of its obligations hereunder or the transactions
contemplated hereby. Without limiting the foregoing sentence,
each Welsh Carson Entity, on behalf of itself and its Affiliates,
hereby covenant and agree to be bound by the provisions of
Section 7.6(a) of this Agreement to the same extent as Company.
(d) GRANT OF IRREVOCABLE PROXY; APPOINTMENT OF PROXY.
(i) Each Welsh Carson Entity, on behalf of itself and
its Affiliates, hereby irrevocably grants to, and appoints,
Parent and T.L. Trimble and Calvin Wiese, or either of them, in
their respective capacities as officers of Parent, and any
individual who shall hereafter succeed to any such office of
Parent, and each of them individually, its proxy and attorney-in-
fact (with full power of substitution), for and in the name,
place and stead of the Welsh Carson Entity or such Affiliate, as
A-23<PAGE>
the case may be, to vote the WC Shares, or grant a consent or
approval in respect of the WC Shares in favor of the various
transactions contemplated by this Agreement and against any
Acquisition Proposal.
(ii) Each Welsh Carson Entity, on behalf of itself and
its Affiliates, represent that any proxies heretofore given in
respect of the WC Shares are not irrevocable, and that any such
proxies are hereby revoked.
(iii) Each Welsh Carson Entity, on behalf of itself
and its Affiliates, understand and acknowledge that Parent is
entering into this Agreement in reliance upon their execution and
delivery of this Agreement. Each Welsh Carson Entity, on behalf
of itself and its Affiliates, hereby affirm that the irrevocable
proxy set forth in this Section 7.8 is given in connection with
the execution of this Agreement, and that such irrevocable proxy
is given to secure the performance of their duties under this
Agreement. Each Welsh Carson Entity, on behalf of itself and its
Affiliates, hereby further affirm that the irrevocable proxy is
coupled with an interest and may under no circumstances be
revoked. Each Welsh Carson Entity, on behalf of itself and its
Affiliates, hereby ratify and confirm all that such irrevocable
proxy may lawfully do or cause to be done by virtue hereof. Such
irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 212 of the DGCL.
(iv) Notwithstanding anything in this Section 7.8(d) to
the contrary, the irrevocable proxy granted hereunder shall
terminate at the end of the Term without any action on the part
of the parties to this Agreement.
(e) EQUITY RIGHTS. In the event that a Welsh Carson Entity
or one of their Affiliates hold Equity Rights to acquire shares
of Company Common Stock, the Welsh Carson Entities, if requested
by Company, shall, or shall cause their Affiliates to, consent to
the cancellation or substitution of such Equity Rights in
accordance with the terms of this Agreement and shall, or shall
cause their Affiliates to, execute all appropriate documentation
in connection with such cancellation or substitution.
(f) WAIVER OF RIGHTS TO DISSENT. Each of the Welsh Carson
Entities, on behalf of itself and its Affiliates, hereby waives
any right of appraisal or right to dissent from the Merger that
it may have.
(g) FINANCIAL ADVISOR FEE. At the Closing, Company shall
pay to Salomon Smith Barney the total fees and expenses as set
forth in the letter agreement dated May 21, 1998 owed to Salomon
Smith Barney in connection with its financial advisory services
in respect of the Merger and shall be responsible for the payment
of any additional fees or expenses owed to Salomon Smith Barney
only to the extent it may be paid out of the Debt Payment.
(h) WAIVER OF CLAIMS. Each of the Welsh Carson Entities,
on behalf of itself and its Affiliates, hereby agrees to waive
any claims that any of them may have against Company or any of
its Affiliates for any reason whatsoever, including without
limitation any claim based upon ownership of Company Common
Stock, Equity Rights or the Subordinated Debt.
(i) SET OFF AGAINST DEBT PAYMENT.
(i) In addition to Parent's express right of set off
against the Debt Payment as provided in Sections 2.3(b), 4.23 and
7.8(g), Parent shall also be entitled to set off against the Debt
Payment, subject to the terms of this Section 7.8(i), an amount
equal to all Liabilities arising out of, or as a result of, or
with respect to the defense, settlement or satisfaction of a
judgment incurred by Parent, Purchaser, Surviving Corporation or
their respective directors, officers, employees and agents (each
a "Specified Parent Person") in which (and to the extent that)
the plaintiffs allege a violation by Company or one of its
Affiliates of any federal or state Law relating to the issuance,
sale or other transaction with respect to securities, or any
state Law relating to fraud generally, in each case to the extent
that such Law relates to the offer and/or sale of securities of
Company or to the public trading of Company's securities.
A-24<PAGE>
(ii) In the event that Parent incurs an obligation or
liability for which it is entitled to a set off against the Debt
Payment as provided in this Section 7.8(i) or in Section 2.3(b),
4.23 or 7.8(g), Parent shall notify WCAS CP II in writing of such
obligation or liability, specifying in reasonable detail the
nature of such obligation or liability, the Section of this
Agreement that authorizes such set off, and, if known, the amount
or any estimate of the amount of such obligation or liability for
which such set off is sought. The Specified Parent Person shall
provide to WCAS CP II as promptly as practicable thereafter such
information and documentation as may be reasonably requested by
WCAS CP II to support and verify the right of set off asserted,
so long as such disclosure would not violate any applicable
attorney-client privileges. If a claim for set off is not
contested by WCAS CP II within 10 days of the date of the notice
of claim, WCAS CP II will be deemed to have no objection to such
right of set off, and the Debt Payment shall be reduced (but not
below zero) accordingly. If WCAS CP II contests all or any
portion of such claim of a right to set off, the portion of the
set off amount to which WCAS CP II objects (the "Contested Set
Off Amount") shall be held by Parent (and shall not be deemed set
off against the Debt Payment) until Parent and WCAS CP II resolve
such objection by an agreement in writing or until such objection
is resolved by a court of competent jurisdiction from which the
time periods for all applicable appeals have expired. Any
portion of the Debt Payment held by Parent after the Final
Payment Date in connection with a dispute as described herein and
finally determined to be payable to WCAS CP II shall bear
interest at the rate described in Section 7.7(ii) from the Final
Payment Date to the date such amount is paid to WCAS CP II.
(iii) This Section 7.8(i) shall survive the
Effective Time and is intended to benefit the Surviving
Corporation, Parent and each of the Specified Parent Persons and
their heirs and representatives.
(iv) Notwithstanding anything in this Agreement to the
contrary (whether express or implied), neither WCAS CP II nor any
of its Affiliates or partners or any of their respective
partners, directors, officers, employees, agents or
representatives shall have any liability or obligation whatsoever
with respect to any claim, liability or obligation for which
Parent has an express right of set off as provided in
Section 2.3(b), 4.23 or 7.8(g) or this Section 7.8(i), whether or
not the Debt Payment is sufficient to pay all of any portion of
such claims, liabilities and obligations.
7.9. RETENTION BONUSES AND SEVERANCE PAYMENTS. At the
Closing or such later date as Company is required by the terms
thereof to pay such bonuses, Parent shall pay to management of
Company the retention bonuses as instructed by Company in
accordance with the Minutes of the Compensation Committee Meeting
of Company dated December 12, 1997, in an aggregate amount equal
to $2,000,000. At the Closing, Parent shall use $442,500, by
which the Debt Payment has been reduced, to pay to management of
Company the severance payments as instructed by Company in
accordance with the Minutes of the Compensation Committee Meeting
of Company dated December 12, 1997. This Section 7.9 shall
survive the Effective Time and is intended to benefit each
employee and his or her heirs and representatives (each of whom
shall be entitled to enforce this Section 7.9 against Parent) and
shall be binding upon all successors and assigns (whether by
operation of Law or by contract) of Parent.
7.10. DIRECTORS AND OFFICERS INDEMNIFICATION. From the
Effective Time through December 31, 2000, Parent shall cause the
Surviving Corporation to indemnify, defend and hold harmless the
present and former directors and officers of Company (each, an
"Indemnified Party") against all Liabilities arising out of
actions or omissions arising out of the Indemnified Party's
service as a director or officer of Company occurring at or prior
to the Effective Time (including the transactions contemplated by
this Agreement) to the fullest extent permitted by Company's
Certificate of Incorporation and Bylaws as in effect on June 1,
1998 to the extent such Liabilities are covered by the directors
and officers insurance policies referred to in Section 8.2(k).
This Section 7.10 shall survive the Effective Time and is
intended to benefit each of the Indemnified Parties and his or
her heirs and representatives (each of whom shall be entitled to
enforce this Section 7.10 against Surviving Corporation) and
shall be binding upon all successors and assigns (whether by
operation of Law or by Contract) of the Surviving Corporation.
A-25<PAGE>
ARTICLE 8.
CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
8.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY. The
respective obligations of each Party to perform this Agreement
and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following
conditions, unless waived by both Parties pursuant to Section
10.5:
(a) STOCKHOLDER APPROVAL. The stockholders of Company
shall have adopted this Agreement, and the consummation of the
transactions contemplated hereby, including the Merger, as and to
the extent required by Law, by the provisions of any governing
instruments, or by the rules of the NASD.
(b) REGULATORY APPROVALS. All Consents of, filings and
registrations with, and notifications to, all Regulatory
Authorities required for consummation of the Merger shall have
been obtained or made and shall be in full force and effect and
all waiting periods required by Law, including any applicable
waiting period under the HSR Act, shall have expired.
(c) CONSENTS AND APPROVALS. Each Party shall have obtained
any and all Consents required for consummation of the Merger
(other than those referred to in Section 8.1(b)) or for the
preventing of any Default under any Contract or Permit of such
Party which, if not obtained or made, is reasonably likely to
have, individually or in the aggregate, a Company Material
Adverse Effect or a Parent Material Adverse Effect, as
applicable.
(d) LEGAL PROCEEDINGS. No court or governmental or
regulatory authority of competent jurisdiction shall have
enacted, issued, promulgated, enforced or entered any Law or
Order (whether temporary, preliminary or permanent) or taken any
other action which prohibits, restricts or makes illegal
consummation of the transactions contemplated by this Agreement.
(e) BANK DEBT AND WARRANTS. The accrued indebtedness (the
"Bank Debt") of Company owed to the lenders pursuant to that
certain Amended and Restated Credit Agreement, dated as of
May 13, 1997, among Company, certain Affiliates of Company, The
Toronto-Dominion Bank and the other financial institutions party
thereto (the "Credit Agreement"), shall have been repaid in full
by Parent or otherwise refinanced by Parent and the warrants and
any other Equity Right held by the financial institutions party
to the Credit Agreement shall have been terminated, all on terms
satisfactory to Parent.
(f) WORKERS COMPENSATION LETTERS OF CREDIT. The letters of
credit aggregating $2,749,838 that support Company's workers
compensation arrangements shall have been assumed, replaced or
otherwise rendered unnecessary by Parent on terms reasonably
satisfactory to Parent.
(g) SUBORDINATED DEBT. The Subordinated Debt shall have
been extinguished as provided in Section 2.3(b).
8.2. CONDITIONS TO OBLIGATIONS OF PARENT AND PURCHASER. The
respective obligations of Parent and Purchaser to perform this
Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parent and Purchaser
pursuant to Section 10.5:
(a) MATERIAL ADVERSE EFFECT. There shall not have occurred
any events after June 1, 1998 which, either individually or in
the aggregate, would have a Company Material Adverse Effect.
(b) REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of Company and the Welsh Carson
Entities set forth in the Merger Agreement shall be true and
correct, in each case (i) as of the date referred to in any
representation or warranty which addresses matters as of a
particular date, or (ii) as to all other representations and
warranties, as of June 1, 1998 and as of the Effective Time,
unless the inaccuracies (without giving effect to any materiality
or material adverse effect qualifications or materiality
exceptions contained therein) under such representations and
A-26<PAGE>
warranties, taking all the inaccuracies under all such
representations and warranties together in their entirety, would
not, individually or in the aggregate, result in a Company
Material Adverse Effect.
(c) COVENANTS. Company, the Welsh Carson Entities and all
their Affiliates shall have performed all obligations and
complied with any agreement or covenant to be performed or
complied with by them hereunder other than any failure which
would not have, either individually or in the aggregate, a
Company Material Adverse Effect.
(d) DISSENTERS RIGHTS. Holders of not more than twenty
percent (20%) of the outstanding Company Common Stock shall have
validly exercised their "dissenters rights" pursuant to the DGCL.
(e) EQUITY RIGHTS. Each holder of an Equity Right which
does not automatically convert in the Merger into a right to
receive the Merger Price (less the applicable exercise price of
the Equity Right) shall have (i) agreed to amend such Equity
Right such that the Equity Right will automatically convert into
a right to receive the Merger Price (less the applicable exercise
price of the Equity Right) prior to the Merger or (ii) consented
to the termination of such Equity Right as contemplated by
Section 2.4 pursuant to a written agreement or instrument signed
by such holder.
(f) LEGAL OPINION; CLOSING CERTIFICATES. Parent shall have
received from Alston & Bird LLP, counsel to Company, an opinion
substantially in the form attached as Exhibit A.
(g) LITIGATION. No Material Litigation shall be pending,
or to the Knowledge of Company be threatened, against or related
to any Company Entity or any Assets or business of a Company
Entity other than the cases represented by Civil Action Nos. 96-
CV-2214-JEC, 96-CV-2220-JEC, E-52883 and 96-CV-2914-JEC, all of
which have been consolidated with the United States District
Court for the Northern District of Georgia (the "Shareholder
Litigation").
(h) EMPLOYMENT ARRANGEMENTS. Daniel Kohl, Fred Follmer and
Shaun Mahoney (the "Employees") shall have agreed to employment
arrangements with Company reasonably satisfactory to Parent.
Parent agrees that the failure to reach agreement with one or
more of the Employees shall not be grounds upon which this
Agreement may be terminated, unless Parent shall have first
offered employment to such Employee(s) on terms at least equal to
such Employee(s)' current compensation. Notwithstanding the
foregoing, nothing contained in this Section 8.2(h) shall be
construed as requiring Parent to offer employment to any of the
Employees or to offer employment at any specific compensation
level.
(i) ADEQUATE INSURANCE. Parent shall have determined that,
in Parent's sole discretion, there is in full force and effect
adequate insurance coverage for Company.
(j) BANK DEBT. The Bank Debt shall not exceed $39,500,000,
unless consented to by Parent and WCAS CP II pursuant to
Section 6.2(b).
(k) EXTENSION OF INSURANCE COVERAGE. On or prior to
July 31, 1998, Company shall have obtained, at no cost to Company
or Parent, on terms acceptable in all respects to Parent in its
sole discretion, an extension of the policy period of the
directors and officers liability insurance policies currently in
effect with American International South Insurance Company
("AISIC") and Zurich Insurance Company in the aggregate amount of
$10,000,000 to December 31, 2000. It is expressly agreed and
understood among the Parties that, as provided in Section 7.7,
the Debt Payment may be reduced by the premiums to be paid to
AISIC and Zurich to secure such extension.
The foregoing conditions are for the sole benefit of Parent and
Purchaser, may be asserted by Parent or Purchaser regardless of
the circumstances giving rise to such condition (including any
action or inaction by Parent or Purchaser not in violation
hereof) and may be waived by Parent or Purchaser in whole or in
part at any time and from time to time in the sole discretion of
Parent or Purchaser, subject in each case to the terms hereof;
A-27<PAGE>
provided, however, Parent and Purchaser may not waive the
condition set forth in Section 8.2(k) without the consent of
Company and the Welsh Carson Entities. The failure by Parent or
Purchaser at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted at
any time and from time to time until the Closing.
8.3. CONDITIONS TO OBLIGATIONS OF COMPANY AND THE WELSH
CARSON ENTITIES. The respective obligations of Company and each
Welsh Carson Entity to perform this Agreement and consummate the
Merger and the other transactions contemplated hereby are subject
to the satisfaction of the following conditions, unless waived by
both Company and the Welsh Carson Entities pursuant to Section
10.5:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of Parent set forth in the Merger
Agreement shall be true and correct, in each case (i) as of the
date referred to in any representation or warranty which
addresses matters as of a particular date, or (ii) as to all
other representations and warranties, as of June 1, 1998 and as
of the Effective Time, unless the inaccuracies (without giving
effect to any materiality or material adverse effect
qualifications or materiality exceptions contained therein) under
such representations and warranties, taking all the inaccuracies
under all such representations and warranties together in their
entirety, would not, individually or in the aggregate, result in
a Parent Material Adverse Effect.
(b) COVENANTS. Parent and Purchaser shall have performed
all obligations and complied with any agreement or covenant to be
performed or complied with by them hereunder other than any
failure which would not have, either individually or in the
aggregate, a Parent Material Adverse Effect.
The foregoing benefits are for the sole benefit of Company and
the Welsh Carson Entities, may be asserted by both Company and
the Welsh Carson Entities regardless of the circumstances giving
rise to such condition (including any action or inaction by
Company or the Welsh Carson Entities not in violation hereof) and
may be waived by both Company and the Welsh Carson Entities in
whole or in part at any time and from time to time in the sole
discretion of both Company and the Welsh Carson Entities, subject
in each case to the terms hereof. The failure by Company and the
Welsh Carson Entities at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right
and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time until the Closing.
ARTICLE 9.
TERMINATION
-----------
9.1. TERMINATION. Notwithstanding any other provision of
this Agreement, and notwithstanding the approval of this
Agreement by the stockholders of Company, this Agreement may be
terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) By the mutual written consent of Parent and Company; or
(b) By either of Company or Parent:
(i) if the Merger shall not have been consummated by
August 31, 1998; provided, however, that the right to terminate
this Agreement under this Section 9.1(b)(i) shall not be
available to any Party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the
failure of Company or Purchaser, as the case may be, to
consummate the Merger on or prior to such date; or
(ii) if any court, arbitration tribunal, administrative
agency or commission or other governmental or regulatory
authority or agency (a "Governmental Entity") shall have issued
an order, decree or ruling or taken any other action (which
order, decree, ruling or other action the parties hereto shall
use their reasonable efforts to lift), which permanently
restrains, enjoins or otherwise prohibits the acceptance for
payment of, or payment for, Company Common Stock pursuant to the
Merger and such order, decree, ruling or other action shall have
become and final and non-appealable; or
A-28<PAGE>
(c) By Company:
(i) if Parent or Purchaser shall have breached in any
material respect any of their respective representations,
warranties, covenants or other agreements contained in this
Agreement, which breach cannot be or has not been cured, in all
material respects, within 30 days after the giving of written
notice to Parent or Purchaser, as applicable; or
(ii) in connection with entering into a definitive
agreement with a Person in accordance with Section 7.6, provided
it has complied with all of the provisions thereof, including the
advice of counsel and notice provisions thereof; or
(d) By Parent:
(i) if, due to an occurrence, not involving a breach
by Parent or Purchaser of their obligations hereunder, it is
impossible to satisfy any one of the conditions set forth in
Article 8 hereto; or
(ii) if prior to the Merger, Company shall have
breached in any material respect any representation, warranty,
covenant or other agreement contained in this Agreement which (A)
would give rise to the failure of a condition set forth in
paragraph (b) or (c) of Section 8.2 hereto and (B) cannot be or
has not been cured, in all material respects, within 30 days
after the giving of written notice to Company; or
(iii) if the Board of Directors of Company or any
committee thereof shall have withdrawn or modified in a manner
adverse to Parent or Purchaser its approval or recommendation or
the Merger or this Agreement, or approved or recommended any
Acquisition Proposal.
9.2. EFFECT OF TERMINATION. In the event of the termination
and abandonment of this Agreement pursuant to Section 9.1, this
Agreement shall become void and have no effect, except that
(i) the provisions of this Section 9.2 and Article 10 and Section
7.4(b) shall survive any such termination and abandonment, and
(ii) a termination shall not relieve any Party from Liability for
an uncured willful breach by such Party of a representation,
warranty, covenant, or agreement giving rise to such termination.
9.3. NON-SURVIVAL OF REPRESENTATIONS AND COVENANTS FOLLOWING
CONSUMMATION OF MERGER. If the Merger shall become effective at
the Effective Time as provided in Section 1.4, then all of the
representations, warranties, covenants and agreements of the
Parties hereto shall terminate as of the Effective Time except
for (i) this Section 9.3, (ii) Articles 1, 2, 3 and 10 of the
Agreement, (iii) the provisions of Sections 7.7 and 7.8 providing
for the Debt Payment and compensation amounts described in said
Section 7.8, (iv) all of Section 7.8(i), and (v) all of Sections
7.9 and 7.10.
ARTICLE 10.
MISCELLANEOUS
-------------
10.1. DEFINITIONS.
(a) Except as otherwise provided herein, the capitalized
terms set forth below shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as
amended.
"1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
"Acquisition Proposal" shall mean a proposal or offer
by a Person (other than Parent or any of its Affiliates or
Representatives) to acquire all or a substantial part of the
business and properties of Company or any Company Subsidiary or
A-29
<PAGE>
any capital stock of Company or any Company Subsidiary, whether
by merger, tender offer, exchange offer, sale of assets or
similar transactions involving Company or any Company Subsidiary
or any division or operating or principal business unit of
Company.
"Affiliate" of a Person shall mean: (i) any other
Person directly, or indirectly through one or more
intermediaries, controlling, controlled by or under common
control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or
greater equity or voting interest of such Person; or (iii) any
other Person for which a Person described in clause (ii) acts in
any such capacity; provided, however, with respect to the Welsh
Carson Entities, the term "Affiliate" shall mean solely the
individual general partners of the several general partners
thereof.
"Agreement" shall mean this Agreement and Plan of
Merger, including Exhibit A hereto and the Company Disclosure
Memorandum which are incorporated herein by reference.
"Assets" of a Person shall mean all of the assets,
properties, businesses and rights of such Person of every kind,
nature, character and description, whether real, personal or
mixed, tangible or intangible, accrued or contingent, or
otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not
carried on the books and records of such Person, and whether or
not owned in the name of such Person or any Affiliate of such
Person and wherever located.
"Beneficially Own" or "Beneficial Ownership" with
respect to any securities shall mean having "beneficial
ownership" of such securities (as determined pursuant to
Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder,
securities Beneficially Owned by a Person shall include securities
Beneficially Owned by all other Persons with whom such Person would
constitute a "group" as within the meaning of Section 13(d)(3) of
the Exchange Act.
"Certificate of Merger" shall mean the Certificate of
Merger to be executed by Company and filed with the Secretary of
State of the State of Delaware relating to the Merger as
contemplated by Section 1.3.
"Company Common Stock" shall mean the $0.01 par value
common stock of Company.
"Company Disclosure Memorandum" shall mean the written
information entitled "Housecall Medical Resources, Inc.
Disclosure Memorandum" delivered prior to June 1, 1998 to Parent
describing in reasonable detail the matters contained therein
and, with respect to each disclosure made therein, specifically
referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to
one Section shall be deemed to be disclosed for purposes of all
other Sections not specifically referenced with respect thereto.
"Company Entities" shall mean, collectively, Company
and all Company Subsidiaries.
"Company Financial Statements" shall mean (i) the
consolidated balance sheets (including related notes and
schedules, if any) of Company as of March 31, 1998, and as of
June 30, 1997 and 1996, and the related statements of income,
changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) for the nine months ended
March 31, 1998, and for each of the three fiscal years ended June
30, 1997, 1996 and 1995, as filed by Company in SEC Documents,
and (ii) the consolidated balance sheets of Company (including
related notes and schedules, if any) and related statements of
income, changes in stockholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC
Documents filed with respect to periods ended subsequent to
March 31, 1998.
"Company Material Adverse Effect" shall mean an event,
change or occurrence which, individually or together with any
other event, change or occurrence, has a material adverse impact
on (i) the financial position, or business or prospects of
Company and its Subsidiaries, taken as a whole, (ii) the ability
of Company to perform its obligations under this Agreement or
(iii) the market for Company's products and services, provided
A-30<PAGE>
that "Material Adverse Effect" shall not be deemed to include the
impact of (a) changes in laws of general applicability or
interpretations thereof by courts or governmental authorities
effective prior to June 1, 1998 (b) changes in generally accepted
accounting principles, (c) actions and omissions of Company (or
any of its Subsidiaries) taken with the prior informed written
Consent of Parent in contemplation of the transactions
contemplated hereby, and (d) the Merger on the operating
performance of Company, including expenses incurred by Company in
consummating the transactions contemplated by this Agreement.
"Company Stock Plans" shall mean the existing stock
option and other stock-based compensation plans of Company
designated as follows: the "1996 Stock Option and Restricted
Stock Purchase Plan", the "Performance Stock Option and
Restricted Stock Purchase Plan" and the "Stock Option and
Restricted Stock Purchase Plan".
"Company Subsidiaries" shall mean the Subsidiaries of
Company, which shall include the Company Subsidiaries described
in Section 4.4 and any corporation or other organization acquired
as a Subsidiary of Company in the future and held as a Subsidiary
by Company at the Effective Time.
"Confidentiality Agreement" shall mean those certain
sections of the Letter Agreement, dated April 6, 1998, between
Company and Parent.
"Consent" shall mean any consent, approval,
authorization, clearance, exemption, waiver, or similar
affirmation by any Person pursuant to any Contract, Law, Order,
or Permit.
"Contract" shall mean any written or oral agreement,
arrangement, authorization, commitment, contract, indenture,
instrument, lease, obligation, plan, practice, restriction,
understanding, or undertaking of any kind or character, or other
document to which any Person is a party or that is binding on any
Person or its capital stock, Assets or business.
"Default" shall mean (i) any breach or violation of,
default under, contravention of, or conflict with, any Contract,
Law, Order, or Permit, (ii) any occurrence of any event that with
the passage of time or the giving of notice or both would
constitute a breach or violation of, default under, contravention
of, or conflict with, any Contract, Law, Order, or Permit, or
(iii) any occurrence of any event that with or without the
passage of time or the giving of notice would give rise to a
right of any Person to exercise any remedy or obtain any relief
under, terminate or revoke, suspend, cancel, or modify or change
the current terms of, or renegotiate, or to accelerate the
maturity or performance of, or to increase or impose any
Liability under, any Contract, Law, Order, or Permit.
"DGCL" shall mean the Delaware General Corporation Law.
"Environmental Laws" shall mean all Laws relating to
pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land
surface, or subsurface strata) and which are administered,
interpreted, or enforced by the United States Environmental
Protection Agency and state and local agencies with jurisdiction
over, and including common law in respect of, pollution or
protection of the environment, including the Comprehensive
Environmental Response Compensation and Liability Act, as
amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq.
("RCRA"), and other Laws relating to emissions, discharges,
releases, or threatened releases of any Hazardous Material, or
otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of any
Hazardous Material.
"Equity Rights" shall mean all arrangements, calls,
commitments, Contracts, options, rights to subscribe to, scrip,
understandings, warrants, or other binding obligations of any
character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock
of a Person or by which a Person is or may be bound to issue
additional shares of its capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
A-31<PAGE>
"GAAP" shall mean generally accepted accounting
principles, consistently applied during the periods involved.
"Hazardous Material" shall mean (i) any hazardous
substance, hazardous material, hazardous waste, regulated
substance, or toxic substance (as those terms are defined by any
applicable Environmental Laws) and (ii) any chemicals,
pollutants, contaminants, petroleum, petroleum products, or oil
(and specifically shall include asbestos requiring abatement,
removal, or encapsulation pursuant to the requirements of
governmental authorities and any polychlorinated biphenyls).
"HSR Act" shall mean Section 7A of the Clayton Act, as
added by Title II of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations
promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents,
trademarks, service marks, service names, trade names,
applications therefor, technology rights and licenses, computer
software (including any source or object codes therefor or
documentation relating thereto), trade secrets, franchises, know-
how, inventions, and other intellectual property rights.
"Internal Revenue Code" shall mean the Internal Revenue
Code of 1986, as amended, and the rules and regulations
promulgated thereunder.
"Knowledge" as used with respect to a Person (including
references to such Person being aware of a particular matter)
shall mean the actual knowledge after due inquiry, or such
knowledge as should reasonably have been known if due inquiry had
been made, of the president, chief financial officer, chief
operating officer, general counsel, or any senior or executive
vice president of such Person.
"Law" shall mean any code, law (including common law),
ordinance, regulation, reporting or licensing requirement, rule,
or statute applicable to a Person or its Assets, Liabilities, or
business, including those promulgated, interpreted or enforced by
any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary
or secondary, liability, indebtedness, obligation, penalty, cost
or expense (including costs of investigation, collection and
defense), claim, deficiency, guaranty or endorsement of or by any
Person (other than endorsements of notes, bills, checks, and
drafts presented for collection or deposit in the ordinary course
of business) of any type, whether accrued, absolute or
contingent, liquidated or unliquidated, matured or unmatured, or
otherwise.
"Lien" shall mean any conditional sale agreement,
default of title, easement, encroachment, encumbrance,
hypothecation, infringement, lien, mortgage, pledge, reservation,
restriction, security interest, title retention or other security
arrangement, or any adverse right or interest, charge, or claim
of any nature whatsoever of, on, or with respect to any property
or property interest, other than (i) Liens for current property
Taxes not yet due and payable, and (iii) Liens which do not
materially impair the use of or title to the Assets subject to
such Lien.
"Litigation" shall mean any action, arbitration, cause
of action, claim, complaint, criminal prosecution, governmental
or other examination or investigation, hearing, administrative or
other proceeding relating to or affecting a Party, its business,
its Assets (including Contracts related to it), or the transactions contemplated
by this Agreement.
"Material" for purposes of this Agreement shall be
determined in light of the facts and circumstances of the matter
in question; provided that any specific monetary amount stated in
this Agreement shall determine materiality in that instance.
"Purchaser Common Stock" shall mean the $0.01 par value
common stock of Purchaser.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
A-32<PAGE>
"Nasdaq National Market" shall mean the National Market
System of the National Association of Securities Dealers
Automated Quotations System.
"Operating Property" shall mean any property owned,
leased, or operated by the Party in question or by any of its
Subsidiaries or in which such Party or Subsidiary holds a
security interest or other interest (including an interest in a
fiduciary capacity), and, where required by the context, includes
the owner or operator of such property, but only with respect to
such property.
"Order" shall mean any administrative decision or
award, decree, injunction, judgment, order, quasi-judicial
decision or award, ruling, or writ of any federal, state, local
or foreign or other court, arbitrator, mediator, tribunal,
administrative agency, or Regulatory Authority.
"Parent Entities" shall mean, collectively, Parent and
all Parent Subsidiaries.
"Parent Material Adverse Effect" shall mean an event,
change or occurrence which, individually or together with any
other event, change or occurrence, has a material adverse impact
on the ability of Parent to perform its obligations under this
Agreement, provided that "Material Adverse Effect" shall not be
deemed to include the impact of (a) changes in Laws of general
applicability or interpretations thereof by courts or
governmental authorities, (b) changes in generally accepted
accounting principles, (c) actions and omissions of Parent (or
any of its Subsidiaries) taken with the prior informed written
Consent of Company in contemplation of the transactions
contemplated hereby, and (d) the Merger on the operating
performance of Parent, including expenses incurred by Parent in
consummating the transactions contemplated by this Agreement.
"Parent Subsidiaries" shall mean the Subsidiaries of
Parent, which shall include any corporation or other organization
acquired as a Subsidiary of Parent in the future and held as a
Subsidiary by Parent at the Effective Time.
"Participation Facility" shall mean any facility or
property in which the Party in question or any of its
Subsidiaries participates in the management and, where required
by the context, said term means the owner or operator of such
facility or property, but only with respect to such facility or
property.
"Party" shall mean either Company or Parent, and
"Parties" shall mean both Company and Parent.
"Permit" shall mean any federal, state, local, and
foreign governmental approval, authorization, certificate,
easement, filing, franchise, license, notice, permit, or right to
which any Person is a party or that is or may be binding upon or
inure to the benefit of any Person or its securities, Assets, or
business.
"Person" shall mean a natural person or any legal,
commercial or governmental entity, such as, but not limited to, a
corporation, general partnership, joint venture, limited
partnership, limited liability company, trust, business
association, group acting in concert, or any person acting in a
representative capacity.
"Regulatory Authorities" shall mean, collectively, the
SEC, the NASD, the Federal Trade Commission, the United States
Department of Justice, and all other federal, state, county,
local or other governmental or regulatory agencies, authorities
(including self-regulatory authorities), instrumentalities,
commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker,
financial advisor, attorney, accountant, consultant, or other
representative engaged by a Person.
"SEC" shall mean the United States Securities and
Exchange Commission.
A-33<PAGE>
"SEC Documents" shall mean all forms, proxy statements,
registration statements, reports, schedules, and other documents
filed, or required to be filed, by a Party or any of its
Subsidiaries with any Regulatory Authority pursuant to the
Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934
Act, the Investment Company Act of 1940, as amended, the
Investment Advisors Act of 1940, as amended, the Trust Indenture
Act of 1939, as amended, and the rules and regulations of any
Regulatory Authority promulgated thereunder.
"Significant Subsidiary" shall mean any present or
future consolidated Subsidiary of the Party in question, the
assets of which constitute ten percent (10%) or more of the
consolidated assets of such Party as reflected on such Party's
consolidated statement of condition prepared in accordance with
GAAP.
"Subsidiaries" shall mean all those corporations,
associations, or other business entities of which the entity in
question either (i) owns or controls 50% or more of the
outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the
outstanding equity securities is owned directly or indirectly by
its parent (provided, there shall not be included any such entity
the equity securities of which are owned or controlled in a
fiduciary capacity), (ii) in the case of partnerships, serves as
a general partner, (iii) in the case of a limited liability
company, serves as a managing member, or (iv) otherwise has the
ability to elect a majority of the directors, trustees or
managing members thereof.
"Surviving Corporation" shall mean Company as the
surviving corporation resulting from the Merger.
"Tax Return" shall mean any report, return, information
return, or other information required to be supplied to a taxing
authority in connection with Taxes, including any return of an
affiliated or combined or unitary group that includes a Party or
its Subsidiaries.
"Tax" or "Taxes" shall mean any federal, state, county,
local, or foreign taxes, charges, fees, levies, imposts, duties,
or other assessments, including income, gross receipts, excise,
employment, sales, use, transfer, license, payroll, franchise,
severance, stamp, occupation, windfall profits, environmental,
federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security,
single business and unemployment, disability, real property,
personal property, registration, ad valorem, value added,
alternative or add-on minimum, estimated, or other tax or
governmental fee of any kind whatsoever, imposed or required to
be withheld by the United States or any state, county, local or
foreign government or subdivision or agency thereof, including
any interest, penalties, and additions imposed thereon or with
respect thereto.
"Treasury Regulation" shall mean a regulation in effect
from time to time under the Internal Revenue Code and comparable
provisions of any prior or later regulations.
(b) The terms set forth below shall have the meanings
ascribed thereto in the referenced sections:
Aggregate Appraisal Difference Section 2.3(b)
AISIC Section 8.2(k)
Appointment Date Section 6.1
Appraisal Price(s) Section 2.3(b)
Appraisal Spread(s) Section 2.3(b)
Bank Debt Section 8.1(e)
Certificates Section 3.1
Closing Section 1.4
Closing Date Section 1.4
Company Benefit Plans Section 4.14(a)
Company Contracts Section 4.15
Company ERISA Plan Section 4.14(a)
Company Pension Plan Section 4.14(a)
A-34<PAGE>
Company SEC Reports Section 4.5(a)
Contested Set Off Amount Section 7.8(i)
Credit Agreement Section 8.1(e)
Debt Payment Section 7.7
Effective Time Section 1.3
Employees Section 8.2(h)
ERISA Affiliate Section 4.14(c)
Exchange Agent Section 3.1
Governmental Entity Section 9.1(b)
Indemnified Party Section 7.10
Merger Section 1.2
Merger Price Section 2.1(b)
Programs Section 4.20
Proxy Statement Section 1.7
Shareholder Litigation Section 8.2(g)
Special Meeting Section 1.7
Specified Parent Person Section 7.8(i)
Subordinated Debt Section 7.7
Superior Proposal Section 7.6(b)
Term Section 7.8(b)
Termination Fee Section 10.2
WC Shares Section 7.8(a)
(c) Any singular term in this Agreement shall be deemed to
include the plural, and any plural term the singular. Whenever
the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed followed by the words "without
limitation."
10.2. EXPENSES.
(a) Except as otherwise provided in Section 7.7 and this
Section 10.2, each of the Parties shall bear and pay all direct
costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated hereunder, including filing,
registration and application fees, printing fees, and fees and
expenses of its own financial or other consultants, investment
bankers, accountants, and counsel.
(b) If (i) Parent terminates this Agreement pursuant to
Section 9.1(d)(iii) hereof, (ii) Company terminates this
Agreement pursuant to Section 9.1(c)(ii) hereof, or (iii) either
Company or Parent terminates this Agreement pursuant to Section
9.1(b)(i) and prior thereto there shall have been publicly
announced another Acquisition Proposal, Company shall pay to
Parent, an amount equal to $1,000,000 (the "Termination Fee"),
which shall be payable in same day funds.
(c) Nothing contained in this Section 10.2 shall constitute
or shall be deemed to constitute liquidated damages for the
willful breach by a Party of the terms of this Agreement or
otherwise limit the rights of the nonbreaching Party.
10.3. ENTIRE AGREEMENT. Except as otherwise expressly
provided herein, this Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement
between the Parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings
with respect thereto, written or oral (except, as to Section
7.4(b), for the Confidentiality Agreement). Nothing in this
Agreement expressed or implied, is intended to confer upon any
Person, other than the Parties or their respective successors,
any rights, remedies, obligations, or liabilities under or by
reason of this Agreement.
10.4. AMENDMENTS. To the extent permitted by Law, this
Agreement may be amended by a subsequent writing signed by each
of the Parties upon the approval of each of the Parties, whether
before or after stockholder approval of this Agreement has been
obtained; provided, that after any such approval by the holders
of Company Common Stock, there shall be made no amendment that
A-35<PAGE>
reduces or modified in any material respect the consideration to
be received by holders of Company Common Stock.
10.5. WAIVERS.
(a) Prior to or at the Effective Time, Parent, acting
through its Board of Directors, chief executive officer or other
authorized officer, shall have the right to waive any Default in
the performance of any term of this Agreement by Company, to
waive or extend the time for the compliance or fulfillment by
Company of any and all of its obligations under this Agreement,
and to waive any or all of the conditions precedent to the
obligations of Parent under this Agreement, except any condition
which, if not satisfied, would result in the violation of any
Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of Parent.
(b) Prior to or at the Effective Time, Company, acting
through its Board of Directors, chief executive officer or other
authorized officer, shall have the right to waive any Default in
the performance of any term of this Agreement by Parent, to waive
or extend the time for the compliance or fulfillment by Parent of
any and all of its obligations under this Agreement, and to waive
any or all of the conditions precedent to the obligations of
Company under this Agreement, except (i) any condition which, if
not satisfied, would result in the violation of any Law or
(ii) any condition which is for the direct benefit of any WCAS
Entity. No such waiver shall be effective unless in writing
signed by a duly authorized officer of Company.
(c) The failure of any Party at any time or times to
require performance of any provision hereof shall in no manner
affect the right of such Party at a later time to enforce the
same or any other provision of this Agreement. No waiver of any
condition or of the breach of any term contained in this
Agreement in one or more instances shall be deemed to be or
construed as a further or continuing waiver of such condition or
breach or a waiver of any other condition or of the breach of any
other term of this Agreement.
10.6. ASSIGNMENT. Except as expressly contemplated
hereby, neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any Party hereto
(whether by operation of Law or otherwise) without the prior
written consent of the other Parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the Parties and their respective
successors and assigns.
10.7. NOTICES. All notices or other communications
which are required or permitted hereunder shall be in writing and
sufficient if delivered by hand, by facsimile transmission, by
registered or certified mail, postage pre-paid, or by courier or
overnight carrier, to the persons at the addresses set forth
below (or at such other address as may be provided hereunder),
and shall be deemed to have been delivered as of the date so
delivered:
Company: Housecall Medical Resources, Inc.
1000 Abernathy Road, Suite 1825
Atlanta, Georgia 30328
Telecopy Number: (770) 395-9891
Attention: Daniel J. Kohl
Copy to Counsel: Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-4777
Attention: J. Vaughan Curtis
A-36
<PAGE>
The Welsh Carson Entities: Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, New York 10022
Attention: Andrew M. Paul
Copy to Counsel: Reboul, MacMurray, Hewitt, Maynard
& Kristol
45 Rockefeller Plaza
New York, New York 10111
Telecopy Number: (212) 841-5725
Attention: William J. Hewitt, Esq.
Parent: Adventist Health System
111 North Orlando Avenue
Winter Park, Florida 32789
Telecopy Number: (407) 975-1414
Attention: Sandra K. Johnson
Vice President
Copy to Counsel: Corporate Legal
Adventist Health System
111 North Orlando Avenue
Winter Park, Florida 32789
Telecopy Number: (407) 975-1414
Attention: T.L. Trimble
Gardner, Carton & Douglas
Quaker Tower, Suite 3400
321 North Clark Street
Chicago, Illinois 60610-4795
Telecopy Number: (312) 644-3381
Attention: Nancy M. Borders
10.8. GOVERNING LAW. This Agreement shall be governed
by and construed in accordance with the Laws of the State of
Delaware, without regard to any applicable conflicts of Laws.
10.9. COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the
same instrument.
10.10. CAPTIONS; ARTICLES AND SECTIONS. The captions
contained in this Agreement are for reference purposes only and
are not part of this Agreement. Unless otherwise indicated, all
references to particular Articles or Sections shall mean and
refer to the referenced Articles and Sections of this Agreement.
10.11. INTERPRETATIONS. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved
against any party, whether under any rule of construction or
otherwise. No party to this Agreement shall be considered the
draftsman. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all parties and
their attorneys and shall be construed and interpreted according
to the ordinary meaning of the words used so as fairly to
accomplish the purposes and intentions of all parties hereto.
A-37<PAGE>
10.12. ENFORCEMENT OF AGREEMENT. The Parties hereto
agree that irreparable damage would occur in the event that any
of the provisions of this Agreement was not performed in
accordance with its specific terms or was otherwise breached. It
is accordingly agreed that the Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction,
this being in addition to any other remedy to which they are
entitled at law or in equity.
10.13. SEVERABILITY. Any term or provision of this
Agreement which is invalid or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of
the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as
to be unenforceable, the provision shall be interpreted to be
only so broad as is enforceable.
[Remainder of page intentionally left blank]
A-38
<PAGE>
IN WITNESS WHEREOF, each of the Parties has caused this
Agreement to be executed on its behalf by its duly authorized
officers as of the day and year first above written.
ADVENTIST HEALTH SYSTEM SUNBELT
HEALTHCARE CORPORATION
By: /s/ Mardian Blair
----------------------------------------
President
HOMECARE ACQUISITION CORP.
By: /s/ Mardian Blair
----------------------------------------
President
HOUSECALL MEDICAL RESOURCES, INC.
By: /s/ Daniel J. Kohl
----------------------------------------
President
WELSH, CARSON, ANDERSON &
STOWE VI, L.P.
By: /s/ Andrew M. Paul
----------------------------------------
__________
WCAS HEALTHCARE PARTNERS, L.P.
By: /s/ William J. Hewitt
----------------------------------------
William J. Hewitt, as Attorney-in-Fact
WCAS CAPITAL PARTNERS II, L.P.
By: /s/ Andrew M. Paul
---------------------------------------
____________
A-39<PAGE>
FORM OF
LEGAL OPINION TO BE DELIVERED BY COUNSEL TO
HOUSECALL MEDICAL RESOURCES, INC.
The legal opinion of counsel to Housecall Medical Resources,
Inc. ("Company") shall be to the effect that:
1. Company and each of its Subsidiaries are corporations validly
existing and in good standing under the laws of their respective
states of incorporation. Company and each of its Subsidiaries
have the corporate power and authority to own or lease all of
their respective properties and assets and to carry on their
businesses as they are now being conducted. Company and each of
its Subsidiaries are duly qualified to do business and are in
good standing as a foreign corporation under the laws of the
jurisdictions scheduled.
2. The authorized capital stock of Company consists of
(i) 30,000,000 shares of Company Common Stock, of which
___________ shares are issued and outstanding, (ii) 9,800,000
shares of preferred stock, par value $0.10 per share, none of
which are issued and outstanding, and (iii) 200,000 shares of
Series A Preferred Stock, par value $1.00 per share, none of
which are currently issued and outstanding but 167,960 of which
were previously issued and outstanding and subsequently redeemed
and permanently retired. Each of the Equity Rights listed in
Section 4.3(b) of the Company Disclosure Schedule (other than
Equity Rights held by persons who have consented in writing to
have such Equity Right convert into the right to receive the
Merger Price upon exercise of the Equity Right) shall, under its
terms, automatically convert as a result of the Merger into an
Equity Right to receive the Merger Price upon exercise of the
Equity Right.
3. Company has the corporate power and authority to execute and
deliver the Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated
thereby have been duly and validly approved by the Board of
Directors and stockholders of Company. No other corporate
proceedings on the part of Company are necessary to approve the
Merger Agreement or to consummate the transactions contemplated
thereby. The Merger Agreement has been duly and validly executed
and delivered by Company and constitutes a valid and binding
obligation of Company, enforceable against Company in accordance
with its terms, subject to the qualifications that enforcement
may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting
creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in equity or in
law).
4. The execution and delivery of the Merger Agreement by Company,
the consummation by Company of the transactions contemplated
thereby, and the compliance by Company with the terms or
provisions thereof, will not (i) violate any provision of the
Certificate of Incorporation or By-Laws of Company,
(ii) contravene any provision of any Applicable Law, or
(iii) contravene any Applicable Order of any Governmental
Authority against Company.
Reference to (i) "Applicable Laws" shall mean those laws, rules,
and regulations, other than Medicare, Medicaid and other health
care regulatory statutes, of the State of Delaware and of the
United States of America which, in such counsel's experience, are
normally applicable to transactions of the type contemplated by
the Merger Agreement; (ii) "Governmental Authorities" shall mean
any Delaware or federal executive, legislative, judicial,
administrative, or regulatory body; and (iii) "Applicable Orders"
shall mean those orders or decrees of Governmental Authorities
identified on a schedule attached to such opinion which are the
only orders or decrees known to such counsel to be binding on
Company.
5. Except for (i) the filing of Articles of Merger with the
Delaware Secretary of State pursuant to the DGCL, (ii) expiration
of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, and (iii) the approval of the Merger
Agreement by the requisite vote of the holders of Company Common
Stock, which filing, expiration and approval have been made,
obtained or occurred, no Consent of any Governmental Authority,
is necessary in connection with the execution and delivery by
Company of the Merger Agreement and the consummation by Company
of the Merger and the other transactions contemplated thereby.
<PAGE>
APPENDIX B
SALOMON SMITH BARNEY
- --------------------
A MEMBER OF TRAVELERS GROUP
June 1, 1998
The Board of Directors
Housecall Medical Resources, Inc.
1000 Abernathy Road
Atlanta, Georgia 30328
Members of the Board:
You have requested our opinion as to the fairness, from a
financial point of view, to the holders of the common stock of
Housecall Medical Resources, Inc. ("Housecall"), other than
Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS") and its
affiliates, of the consideration to be received by such holders
pursuant to the terms and subject to the conditions set forth in
the Agreement and Plan of Merger, dated as of June 1, 1998 (the
"Merger Agreement"), by and among Adventist Health System Sunbelt
Healthcare Corporation ("Adventist"), Homecare Acquisition Corp.,
a wholly owned subsidiary of Adventist ("Sub"), Housecall, WCAS
and certain affiliates of WCAS. As more fully described in the
Merger Agreement, (i) Sub will be merged with and into Housecall
(the "Merger") and (ii) each outstanding share of the common
stock, par value $0.01 per share, of Housecall (the "Housecall
Common Stock"), other than shares held by Housecall, Adventist or
their respective affiliates, shares held by stockholders who
properly perfect dissenters' rights and shares held by WCAS and
its affiliates, will be converted into the right to receive a
cash payment of $1.50 per share (the "Merger Consideration").
In arriving at our opinion, we reviewed the Merger Agreement and
held discussions with certain senior officers, directors and
other representatives and advisors of Housecall concerning the
business, operations and prospects of Housecall. We examined
certain publicly available business and financial information
relating to Housecall as well as certain financial forecasts and
other information and data for Housecall which were provided to
or otherwise discussed with us by the management of Housecall.
We reviewed the financial terms of the Merger as set forth in the
Merger Agreement in relation to, among other things: current and
historical market prices and trading volumes of Housecall Common
Stock; the historical and projected earnings and other operating
data of Housecall; and the capitalization and financial condition
of Housecall, including the near-term liquidity needs of, and
capital resources available to, Housecall. We considered, to the
extent publicly available, the financial terms of other
transactions recently effected which we considered relevant in
evaluating the Merger and analyzed certain financial, stock
market and other publicly available information relating to the
businesses of other companies whose operations we considered
relevant in evaluating those of Housecall. In connection with our
engagement, we were requested to approach, and we held
discussions with, third parties to solicit indications of
interest in a possible acquisition of Housecall. In addition to
the foregoing, we conducted such other analyses and examinations
and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without
independent verification, upon the accuracy and completeness of
all financial and other information and data publicly available
or furnished to or otherwise reviewed by or discussed with us.
With respect to financial forecasts and other information and
data provided to or otherwise reviewed by or discussed with us,
we have been advised by the management of Housecall that such
forecasts and other information and data were reasonably prepared
reflecting the best currently available estimates and judgments
of the management of Housecall as to the future financial
performance of Housecall. We have not made or been provided with
an independent evaluation or appraisal of the assets or liabilities
<PAGE>
The Board of Directors
Housecall Medical Resources, Inc.
June 1, 1998
Page 2
(contingent or otherwise) of Housecall nor have we made any physical
inspection of the properties or assets of Housecall. We express no
view as to, and our opinion does not address, the relative merits of
the Merger as compared to any alternative business strategies that
might exist for Housecall or the effect of any other transaction
in which Housecall might engage. Our opinion is necessarily
based upon information available to us, and financial, stock
market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Smith Barney Inc. and Salomon Brothers Inc (collectively doing
business as Salomon Smith Barney) have acted as financial
advisors to Housecall in connection with the Merger and will
receive a fee for such services, a significant portion of which
is contingent upon consummation of the Merger. We also will
receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we and our affiliates may actively trade
or hold the securities of Housecall for our own account or for
the account of our customers and, accordingly, may at any time
hold a long or short position in such securities. We have in the
past provided investment banking services to certain affiliates
of Housecall, including WCAS, unrelated to the proposed Merger,
for which services we have received compensation. In addition, we
and our affiliates (including Travelers Group Inc. and its
affiliates) may maintain relationships with Housecall, Adventist
and their respective affiliates.
Our advisory services and the opinion expressed herein are
provided for the information of the Board of Directors of
Housecall in its evaluation of the proposed Merger, and our
opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger. Our opinion may not be
published or otherwise used or referred to, nor shall any public
reference to Salomon Smith Barney be made, without our prior
written consent.
Based upon and subject to the foregoing, our experience as
investment bankers, our work as described above and other factors
we deemed relevant, we are of the opinion that, as of the date
hereof, the Merger Consideration to be received in the Merger by
holders of Housecall Common Stock (other than WCAS and its
affiliates) is fair, from a financial point of view, to such
holders.
Very truly yours,
SALOMON SMITH BARNEY
2
<PAGE>
APPENDIX C
DELAWARE STATUTORY LAW RELATING TO APPRAISAL RIGHTS
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation
of this State who holds shares of stock on the date of the making
of a demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Section 228 of this title shall
be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this
Section. As used in this section, the word "stockholder" means a
holder of record of stock in a stock corporation and also a
member of record of a non-stock corporation; the words "stock"
and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing
an interest in one or more shares, or fractions thereof, solely
of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to Sections 251,
252, 254, 257, 258, 263 or 264 of this chapter:
(1) Provided, however, that no appraisal rights under
this Section shall be available for the shares of any class
or series of stock, which stock, or depository receipts in
respect thereof, at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national
market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or (ii)
held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for
the shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms
of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except: (a) shares of
stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect
thereof; (b) shares of stock of any other corporation or
depository receipts in respect thereof, which shares of
stock or depository receipts at the effective date of the
merger or consolidation will be either listed on a national
securities exchange or designated as a market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders; (c) cash in lieu of fractional
shares or fractional depository receipts described in the
foregoing subparagraphs a. and b. of this paragraph; or (d)
any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under
Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this Section shall be
available for the shares of any class or series of its stock as a
result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent
corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this Section, including those
<PAGE>
set forth in subsections (d) and (e), shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this Section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections
(b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this Section.
Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor
of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved
pursuant to Section 228 or Section 253 of this title, each
constituent corporation, either before the effective date of
the merger or consolidation or within 10 days thereafter,
shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for
any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this Section;
provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to
all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger
or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second
notice before the effective date of the merger or
consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the
merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such
holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such
second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal
of such holder's shares in accordance with this subsection.
An affidavit of the secretary and assistant secretary or of
the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the
stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date
is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger
or consolidation, the surviving or resulting corporation or any
stockholder who has complied with the provisions of subsections
(a) and (d) hereof and who is otherwise entitled to appraisal
C-2
<PAGE>
rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to
accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation,
any stockholder who has complied with the requirements of subsections
(a) and (d) hereof, upon written request, shall be entitled to receive
from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement
shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d)
hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names
and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such
a duly verified list. The Register in Chancery, if so ordered by
the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall
also be given by one or more publications at least one week
before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the
notices by mail and by publications shall be approved by the
Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this Section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for their
shares and who hold stock represented by certificates to submit
their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their
fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors.
In determining the fair rate of interest, the Court may consider
all relevant factors, including the rate of interest which the
surviving or resulting corporation would have had to pay to borrow
money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled
to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery,
if such is required, may participate in all proceedings until it is
finally determined that he is not entitled to appraisal rights under
this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct.
Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court
of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
C-3<PAGE>
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the
value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal
rights as provided in subsection (d) of this Section shall be
entitled to vote such stock for any purpose or to receive payment
of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this Section, or if such stockholder shall
deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of
the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written
approval of the corporation, then the right of such stockholder
to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation
into which the shares of such objecting stockholders would have
been converted had they assented to the merger or consolidation
shall have the status of authorized and unissued shares of the
surviving or resulting corporation.
C-4
<PAGE>
APPENDIX D
FORM 10-K FOR THE YEAR ENDED
JUNE 30, 1997
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-28134
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
HOUSECALL MEDICAL RESOURCES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 58-2114917
------------------------------- ------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
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 / /.
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 /x/.
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
9, 1997: $21,525,066.75 based on 10,399,934 shares outstanding at $4
1/8 per share, the last sale price on The Nasdaq Stock Market on
September 9, 1997.)
At September 9, 1997, there were issued and outstanding
10,399,934 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the
1997 Annual Meeting of Shareholders, to be filed with the
Commission, are incorporated into Part III.<PAGE>
PART I
ITEM 1. BUSINESS
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 quality, cost-
effective services and products with a substantial market share
in the Southeastern United States and select other geographic
regions. As of September 1, 1997, the Company had 110 owned and 85
managed branch offices in 20 states. 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 64 clients who own home health agencies.
By offering a comprehensive range of 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.
SIGNIFICANT ACQUISITIONS
The Company acquired its predecessor (Housecall, Inc.) on
July 1, 1994. Since the acquisition of its predecessor, the
Company has completed five significant acquisitions: the
purchase of all the stock of (i) Medical Support Services, Inc.
("MSS") on February 3, 1995; (ii) Home Care Affiliates, Inc. ("Home Care")
on May 31, 1995; (iii) Biomedical Home Care, Inc. ("Biomedical") on July 10,
1995; (iv) Messick Home Care, Inc. ("Messick") on October 31, 1996; and
the purchase of stock and certain assets to acquire (v) the Healthfirst
entities (a group of home health management companies under common
management and control hereafter referred to as "Healthfirst") on
May 13, 1997. The latter acquisition included the following affiliates
of Healthfirst: HFI Management, Inc., HFI Home Care Management,
L.P., Computer Masters of Kentucky, Inc. and Health Care
Resources, Inc.
MSS, based in Centreville, Alabama, had been engaged for four
years exclusively in providing management and administrative
services to home care agencies. Home Care, based in Louisville,
Kentucky, 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, was formed in 1983 and was
engaged primarily in the provision of infusion therapy services
in markets across the United States. The Biomedical acquisition
1<PAGE>
added substantially to the Company's infusion therapy services
business and contributed a large professional staff of infusion
therapists and pharmacists. Messick, based in Murfreesboro, Tennessee,
has been engaged in the home medical equipment business for over 13
years. Healthfirst, based in Knoxville, Tennessee,
has been in operations since 1992, providing home care management and
consulting services in markets across the United States.
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,
Biomedical, Messick, and Healthfirst 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, as defined in the Private
Securities Litigation Reform Act of 1995. Any forward looking
statements included herein have been included based upon facts
available to management as of the date of the statement. These
statements involve a number of risks and uncertainties that could
cause actual results to differ materially from any such
statement. The following is a nonexclusive list of factors that
could cause 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 1997 approximately 61% of the Company's net
revenues was derived from Medicare cost-based reimbursement;
approximately 8% was derived from Medicare charge-based
reimbursement; 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 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
2<PAGE>
material adverse effect on the Company's business, results of
operations, or financial condition. The passage of the 1997 tax
bill could have a material effect on reimbursement in the home
healthcare industry by significantly altering the home health
reimbursement system. Beginning with services furnished on or after
January 1, 1998, coverage of home health services under Medicare Part
A will be reduced to a maximum of 100 visits during a spell of illness
after a three-day hospitalization or after receiving any covered
services in a skilled nursing facility. Coverage for all other
services will be provided under Part B. Funding responsibility
will be gradually shifted from Part A to Part B over a period of
seven years. As a result of these changes, the patient will be
required to pay some of the cost of home care. Previously,
all home health benefits fell under Part A and the number of
visits was unlimited. Part B requires an annual deductible and
copayments. Periodic Interim Payments ("PIP") will be eliminated
for cost reporting periods on or after October 1, 1999. This
tax law will also require all home healthcare companies to post a
bond in the amount of $50,000 in a form to be specified. At this
point, is it unclear whether this new requirement will be applied
on a per agency provider number, per organization, or per division
basis, or whether some other application criterion will be used.
Reductions will be made for oxygen and oxygen equipment. Updates to
the durable medical equipment ("DME") fee schedule will be eliminated
for the years 1998 through 2002. HCFA must also propose a plan
for the prospective payment system for cost reporting periods
beginning on or after October 1, 1999. 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.
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 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 reducing 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.
An industry study has found Tennessee to have some of 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 continuing 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,
3<PAGE>
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 has been the acquisition of other home health care companies.
The Company has acquired five such companies since July 1, 1994,
and may pursue additional acquisitions in the future. The Company has
slowed its acquisitions activities. When and if the Company
resumes an emphasis on acquisitions, the Company will face significant
competition from other companies. There can be no assurance that the
Company will be able to realize expected operating and economic efficiencies
from the prior acquisitions or from any future acquisitions. To do so, the
operations, personnel, and management information systems of acquired
businesses must be successfully integrated into the Company without material
disruptions or unexpected expenses. The failure to effectively integrate
acquisitions can adversely impact operations or profitability.
EFFECT OF ACQUISITIONS ON QUALIFICATION FOR NASDAQ NATIONAL
MARKET LISTING. The Company has been notified that the
administrative staff of The Nasdaq Stock Market, Inc. has
recommended that the Company's common stock be disqualified for
continued listing on the Nasdaq National Market because the Company
no longer satisfies the net tangible assets criterion of Nasdaq's
Marketplace Rule 4450(a)(3). Marketplace Rule 4450(a)(3) requires
the Company to have at least $1,000,000 of net tangible assets,
calculated by deducting all goodwill as well as liabilities from the
Company's total assets. Under that special calculation, the
Company, which has total assets as of June 30, 1997 of $130,766,000
and liabilities of only $68,919,000, has negative net tangible
assets of $(18,345,000) because it has $80,192,000 of goodwill as a
result of the required financial accounting for several prior
acquisitions by the Company.
The Company otherwise satisfies all of the several criteria of
Marketplace Rule 4450, and has requested a review of the
administrative staff's determination by a committee of the NASD's
Board of Governors. A hearing before the review committee has been
set for November 13, 1997, and no action can be taken to de-list the
Common Stock pending the conclusion of that hearing. Management
believes that it should be able to establish (during the review of
the administrative staff's determination) that Housecall is a
substantial business enterprise that "substantially meets" the
Marketplace Rule's criteria -- which is the standard expressed in
that rule -- and warrants continued listing on the Nasdaq National
Market. The Company believes that its acquisitions have provided
substantial value to its operations and business enterprise, which
should be considered favorably for listing purposes. There is no
assurance, however, that the Company will be successful, and the
Common Stock might be de-listed from the Nasdaq National Market if
the review committee accepts the administrative staff's
determination. In such event, the Company would apply to list the
Common Stock on the Nasdaq SmallCap Market or a stock exchange (for
which it should qualify) in order to ensure the existence of a
public trading market for the Common Stock, until such time that the
Company is able to increase its net tangible assets and again
qualify for listing on the Nasdaq National Market. It is possible,
however, that investors might react negatively to such a development,
which could adversely affect trading in the Common Stock.
4<PAGE>
HIGH LEVEL OF CURRENT GEOGRAPHIC CONCENTRATION.
Approximately 82% of the Company's net revenues in fiscal year
1997 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 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
Government has increased scrutiny of the home health care
industry by expanding Operation Restore Trust ("ORT") to twelve
states, as well as implementing "Wedge" audits. Any adverse
findings under these types of audits can result in adjustments in
future payments. See Regulation -- Fraud and Abuse Laws."
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
5<PAGE>
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 a Medicare or Medicaid payment would
otherwise be made with some exceptions. 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 patients any
financial relationship with a provider and to advise patients of
the availability of alternative providers.
6<PAGE>
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 30 days
for governmental third party payors and 114 days for private
third party payors, both of which the Company believes are
consistent with or below the averages in the industry.
DEPENDENCE ON KEY PERSONNEL. The Company's growth and
success are highly dependent on the skills and efforts of its
Chief Executive Officer, Daniel J. Kohl; its Chief Financial
Officer, Fred C. Follmer; 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 recruit 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
recruit 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
save costs and enhance the one-stop-shop services provided in
each of its geographical regions, the Company will face
significant competition from other companies. The Company has
slowed its acquisitions activities. When and if the Company
resumes an emphasis on acquisitions, the Company will face
significant competition from other companies. 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
7<PAGE>
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 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 1995 of
approximately $36.1 billion, up from approximately $30.3 billion
in 1994, and estimated expenditures in 1996 of approximately
$42.5 billion and in 1997 of $48.9 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 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 1996 is estimated to
have accounted for only 3.7% 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 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
8<PAGE>
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 2000 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 4.0%. The 85 and older population is expected
to be growing at a rate of 20.4% by the year 2000.
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. 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 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 mission is to restore the
Company to profitability and then become the leading provider and
manager of home health care services in the Southeast. The
Company's principal strategic initiatives include:
ORGANIZATIONAL RESTRUCTURING. The Company has recently
undergone a restructuring to move its business from a product line
to a regional general management structure. The Company believes
that in order to succeed with the one-stop-shop strategy, the
organization must be structured to support it. The Company
believes an individual with general management responsibility for
all product lines will be inclined to cross sell and service its
whole array of products and services. In addition, the Company
recently launched a project to create a shared support
organization for its field operations. The Company will review
and consolidate its various administrative support departments
into one shared support organization.
9<PAGE>
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, with a $30.1 billion market estimated in 1997
a $37.9 billion market estimated in 1999. 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. To drive its growth of non-Medicare
reimbursed products and services, the Company expects to more
than double its sales force over the next several months from 6
to 14 for its owned agencies.
EXPANDING ITS MANAGEMENT SERVICES BUSINESS. The Company
seeks in its markets to develop relationships with leading
institutional health care providers, primarily hospitals, by
providing management services for their home health care
operations. With the acquisition of HealthFirst, the Company has
significantly increased the size of its management services
business. This business has historically had higher margins than
the owned agencies and is less capital intensive. The Company
will aggressively market these services in an effort to both
capture the higher margin business and further expand its network
of providers. Where possible, the Company will structure joint
ventures or alliances with its managed clients to enhance its
network capabilities and coverage.
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 quality of care,
managed care organizations are primarily concerned with cost-
effectiveness and the convenience of accessing a comprehensive
range of patient services through a limited number of home health
care providers. Housecall intends to meet these needs by
offering its comprehensive one-stop-shop services and by
developing specialty programs that address specific needs of
population groups that are particularly important to these
organizations. The Company is also developing the necessary
infrastructure to offer capitated arrangements where required by
such organizations.
DEVELOPING STRATEGIC ALLIANCES. The Company seeks alliances
that either result in direct sales of its products and services
or that increase the breadth of its disease management programs.
The scope of alliances may begin with providing management or
consulting services to Medicare certified home health agencies
and expand 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.
10<PAGE>
BUILDING CRITICAL MASS AND MARKET PRESENCE. The Company
believes that a critical mass of operations within selected
markets is important to its customers and promotes internal
operating efficiencies. These efficiencies, in turn, are
essential to Housecall's ability to offer a comprehensive range
of 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 build critical mass and market
presence in the Southeast through internal expansion and
strategic alliances.
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:
<TABLE>
<CAPTION>
COMBINED <F1> YEAR ENDED JUNE 30,
PRO FORMA
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Nursing and related care 76.8 % 78.5% 77.6%
Infusion therapy 12.0 9.7 8.4
Hospice care 3.8 5.0 4.6
Respiratory therapy 1.4 0.9 2.7
Management services 3.9 4.0 5.3 <F2>
Home medical equipment 2.1 1.9 1.4
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
<FN>
<F1> The above amounts for the twelve-month period of 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.
<F2> Reflects approximately six weeks' revenues from Healthfirst following
its acquisition on May 13, 1997.
</FN>
</TABLE>
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
11<PAGE>
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 $ 30.1 billion will be
expended in the United States in 1997 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% from 1989 to 1994, and are
projected to grow approximately 14% from 1994 to 1999. For 1997, it
is estimated that 62% 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. 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.
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, 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.
12<PAGE>
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.
INFUSION THERAPY
It is estimated that approximately $6.2 billion was expended
in 1995 and $7.4 billion expended in 1996 and $8.9 billion will be
expended in 1997 for home infusion therapy in the United States.
Expenditures for such services have grown at a compound annual rate
of approximately 24% from 1989 to 1994 and are estimated to increase
approximately 19% from 1994 to 1999. Infusion is the second largest
segment in home care with approximately 18% of the market for 1997,
and revenue is expected to grow to $12.4 billion by 1999 and represent
approximately 19% of the home care market.
Housecall provides infusion therapy services from four (4)
Company-owned pharmacies in North Carolina, Tennessee 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. The
Company is seeking to increase its volume of infusion therapy
business.
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.
13<PAGE>
- Pain Management Therapy -- the administration of analgesic
medications to terminally or chronically ill patients
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 $1.8 billion was expended
on Medicare-certified hospice care services in the United States
in 1995 and $2 billion in 1996. It is estimated that $2.1
billion will be spent in 1997. 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
1604 in 1994, 1857 in 1995, and 2154 in 1996, though only 9.8% of
home health agencies in the United States offered hospice care
services in 1995. 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 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.
14<PAGE>
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, $5.8 billion in 1996, and $6.8
billion will be expended in 1997 for respiratory therapy services
provided in the home, and that such services have grown at a
compound annual rate of approximately 25% from 1989 to 1994,
and will grow approximately 17% from 1994 to 1999.
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, Tennessee, and
North Carolina. 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).
HOME MEDICAL EQUIPMENT
The Company provides home medical equipment, including
hospital beds, wheelchairs, ambulatory aids, bathroom aids, and
patient lifts, to its patients from the same branch offices as
its Florida, Tennessee, and North Carolina respiratory therapy
branches. 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.
15<PAGE>
MANAGEMENT SERVICES
The Company provides management services to client-owned
home health agencies which are either free-standing or provider-
based. The Company has clients in over twenty states and plans
to continue to expand client relationship nationwide.
Housecall's management agreement provides business,
clinical, operations, financial, and Medicare-allowable marketing
support. The client's agency pays the Company a prescribed
amount for services rendered. The Company's management
agreements typically provide for a term of several years and are
subject to renegotiation in the event of certain changes in the
current reimbursement system.
The Company believes that its management services enhance
the Company's overall presence as a home health care provider.
This enhanced presence increases the likelihood of 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 may also 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 permits (1) 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 (2) the Company and
its clients benefit from broader geographic coverage for managed
care contracting.
Housecall also offers individual components of its
management services. Consulting for assessments, organizational
effectiveness, quality improvement, financial systems, specialty
programs, regulatory compliance, strategic planning, and staff
training are some of the services offered on an individual basis.
These services are billed on either a retainer or project basis.
In addition, Housecall offers management information systems that
utilize software to increase accountability, efficiency and cost-
effectiveness. See "Management Information Systems."
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.
16<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED JUNE 30, (PRO
FORMA YEAR ENDED
COMBINED)<F1> JUNE 30,
-------------------- -----------------------
1995 1996 1997
-------------------- ------- ------
<S> <C> <C> <C>
Medicare - cost based <F2> 60.7% 61.1% 60.7%
Medicare - charge based <F3> 5.1 4.8 7.6
Medicaid <F4> 1.5 1.6 2.4
TennCare <F5> 8.0 5.9 0.0
Managed care organizations <F4> 5.8 7.1 7.2
Other private payors 15.0 15.5 16.8
Management services contracts 3.9 4.0 5.3
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
<FN>
<F1> The above amounts for the twelve-month period of 1995 is presented
on a pro forma combined basis to reflect the results achieved by the
companies acquired by Housecall during 1995. See -- "Significant
Acquisitions", above.
<F2> Represents reimbursement for all nursing services (including related
products) to Medicare patients, except for any such services
provided in connection with hospice care.
<F3> Represents reimbursements for all home health care services
reimbursed by Medicare, except for nursing services.
<F4> Does not include TennCare payments.
<F5> The Company had no revenues in 1997 from TennCare as a result of the
Company's February 1996 cancellation of its contract with its
principal TennCare managed care organization.
</FN>
</TABLE>
OPERATIONS
The Company owns or manages nearly 200 location locations in twenty
states. The Company's branches are organized into seven geographical
regions, each of which receives support with respect to financial and
operating controls functions, and certain administrative support functions
- -- such as human resources, legal, compliance, and quality improvement --
from managers attached to the Company's Atlanta headquarters. Management
believes that such a decentralized model for day-to-day operational
responsibilities and related functions establishes each geographic market as
a regional business unit for all home health services offered by
the Company in that particular market. A Regional Vice President
oversees all home health services provided within the region's
business unit, with appropriate support from and reporting to corporate
headquarters. The Company's seven regional market structure will
periodically be evaluated to determine the need to add or
reconfigure designations in response to acquisition and other
expansion initiatives.
MANAGEMENT INFORMATION SYSTEMS
Information Systems is responsible for delivering tools that
monitor patient and clinical outcomes, generate accurate and
timely billing, and provide data analysis and reporting capable
of supporting a wide range of internal and external users of
information. At the present time, the Company's management information
17<PAGE>
systems are largely decentralized, reflecting significant
components of systems in place when Housecall made acquisitions.
Regional or other field-level information systems provide application
support for patient databases, scheduling, patient care, outcomes and
financial systems.
The Company's long-term objective is to deliver fully-integrated,
quality home care to patients in the southeastern United States
through a one-stop-shop delivery medium. In order to support that
business model, Information Systems has begun the task of implementing
a system that can efficiently process transactions across all lines of
business while providing management, at all levels, access to
data and information on a timely, accurate, and consistent basis.
COMPLIANCE AND QUALITY IMPROVEMENT
Housecall's Compliance and Quality Improvement Department
monitors all of the Company's home health service activities to
improve processes and performances, with the goals of ensuring
regulatory compliance and improving patient and client outcomes.
The Company's Compliance and Quality Improvement program operates
at two levels. At the corporate level, the Corporate Compliance
and Quality Improvement Department provides guidance and
recommends resources for regulatory and quality improvement
activities and assesses organization-wide activities. At the
agency level, the Department assists in the collection of data,
facilitates quality improvement activities, provides education
for implementing the quality improvement processes, and routinely
monitors operational activity to ensure compliance. State
Compliance Trainers 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. Housecall will be
surveyed for JCAHO renewal in fiscal year 1998. The renewal will
involve all Housecall service divisions.
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.
18<PAGE>
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 more 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 quality,
comprehensive home health services on a cost-effective basis.
COMPETITION
The home health care industry remains highly competitive.
Competitors are recognizing the benefits of the one-stop-shop
strategy identified early on by the Company. Over the past
twelve months, acquisitions and mergers have resulted in a
consolidation of some national competitors.
Also identifiable in the market is the emergence of disease
state management companies. These companies are positioned to
address the high cost of treating specific chronic conditions and
are willing to take financial risk for managing the care of a
specific population.
Emerging competitors include managed care providers and
physicians. Managed care providers are recognizing the benefit
of home care in managing the care and the cost for their
subscribers and are establishing home care operations.
Likewise, large physician groups are partnering with payors to
assume financial risk for patients under their care who are
subscribers to the payor's benefit plan.
The Company believes its strategy to focus on a regional
model to provide a realistic one-stop-shop approach will prove
to be attractive to their customers. Further, the Company
believes this model will allow the Company to meet the customers'
expectations when it comes to the principal competitive factors
in the home health care industry, 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 referrals sources
generally.
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.
19<PAGE>
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 Certificate of Need (CON) issued
by a state health planning agency. These CONs are granted when a
need for specific healthcare services can be shown for a
specified geographical area. 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.
During fiscal year 1997, the Company was awarded a
Certificate of Need to provide infusion services (pharmacy and
first dose nursing) covering several counties in Kentucky.
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.
20<PAGE>
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 remuneration 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
21<PAGE>
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.
In addition the government enacted the Healthcare
Portability and Accountability Act, a portion of which takes
effect this year, expanding the government's fraud and abuse
efforts. Specifically the act creates a federal healthcare fraud
and abuse trust fund to finance future law enforcement
activities; expands the government's efforts for prosecuting
fraud and abuse beyond Medicare and Medicaid to all payors;
empowers the Department of Justice and U.S. attorneys to subpoena
records relating to healthcare fraud; makes exclusion from the
Medicare and Medicaid programs mandatory for a minimum of five
years for any felony conviction relating to fraud; requires that
organization contracting with another organization or individual
be informed as to whether the organization or individual is
excluded from Medicare and Medicaid participation; enhances civil
penalties by increasing the amount of fines permitted; and
establishes civil penalties for physicians who negligently
certify the need for home care. To support provider
organizations, the Act requires the Office of Inspector General
("OIG") to issue advisory opinions on how the anti-kickback
prohibitions apply to specific business transactions (excluding
the Stark self-referral laws).
Numerous states have instituted the "Wedge Project" under
the Health Care Financing Administration's Operation Restore
Trust initiative. Under this process, an auditor representing
the state licensing body or fiscal intermediary randomly selects
a specific number of home care patients. The auditor will then
contact the selected patients and ask specific questions after
which the auditor will determine if the patients met the
eligibility requirements for "homebound". Similarly, the auditor
will review the patient's medical record to measure compliance
with Medicare coverage criteria. Should any determination be
made that any number of patients does not meet the eligibility
requirements, a formula is applied for all reimbursement received
during a specific time frame. Medicare, through its
intermediary, then recovers any amounts felt to be overpaid based
on the application of the formula on the total population of home
care patients receiving services from that Medicare provider
number. The Company can make no guarantees that reimbursement
from the Intermediary will not be affected by the "Wedge". It is
the Company's intent to confirm that patient's receiving home
care services meet the "homebound" and all other Medicare
eligibility requirements.
With the passage of the 1997 tax bill, anti-fraud and abuse
efforts were addressed through the enlistment of patients to
monitor costs paid by the Medicare program for services.
Effective, January 1, 1998, this is accomplished through the use
of an explanation of benefits form itemizing services billed to
Medicare. Any patient questioning the validity of the form may
22<PAGE>
receive a detailed statement from the provider. Any provider
failing to provide the itemization will be subject to a $100
civil monetary penalty per statement. Within 90 days of receiving
the statement, the patient may request an investigation by
Medicare into any irregularities. Any request for Medicare review
must be investigated. Also, providers contracting or arranging
for services or items from an individual excluded from Medicare
will be subjected to a civil monetary penalty.
Many states have also adopted statutes and regulations that
prohibit 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.
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) have been 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.
The Company maintains a corporate compliance program, which
serves as a mitigating factor under the federal sentencing guidelines.
This program, proactive in nature, has been established to monitor
internal practices for adherence to applicable federal, state and
local rules and regulations.
REIMBURSEMENT
The recently signed Budget Bill has provisions that will
impact reimbursement for home health care services. The current
cost reimbursement system for home health services will remain in
effect for the 2 year period after which the prospective payment
system will be instituted in October 1999.
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
23<PAGE>
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, the Budget Bill contains provisions
to eliminate the update schedule for DME for the years 1998
through 2002. The Bill also reduces the payment for oxygen to
75% of the 1997 rates for 1998 and 70% of the 1997 rates for 1999
and subsequent years.
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" below.
CURRENT DEVELOPMENTS
Political, economic, and regulatory influences are
subjecting the health care industry in the United States to
fundamental change. On August 5, 1997, the Budget Bill was signed
by the President. This comprehensive Bill is designed to achieve
$115 billion in savings from Medicare with projected saving from
home health of $16.2 billion over 5 years.
Major provisions of the bill that affect home health include
(a) the shift of the bulk of home health coverage from Part A to
Part B; (b) the implementation of a prospective payment system
("PPS") designed by HCFA by October 1, 1999; ( c) the
implementation of an interim cost reimbursement system with cost
limits based on 105% of median cost and a new per beneficiary
aggregate limit; (d) a further reduction of the limits by 15% on
October 1, 1999 regardless of whether PPS is implemented; (e)
elimination of partial interim payments by October 1, 1999;
and (f) elimination of coverage of home health services for
venipuncture.
The effect that these changes will ultimately have on home
health reimbursement cannot be quantified at this time. The
Company believes that these changes may have a material
effect on the reimbursement that will be received from federal
sources over the next five years. 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.
24<PAGE>
INSURANCE
The Company maintains a commercial general liability policy
with both a per-occurrence limit of $1,000,000 and annual
aggregate coverage limit of $3,000,000. In addition, the Company
has an umbrella liability or "excess" policy with a single per
occurrence limit of $20,000,000 and an annual aggregate limit of
$30,000,000 with a $10,000 per occurrence retention limit. The
Company maintains a 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 must provide evidence that they carry at least an equivalent
level of primary 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 September 1, 1997, the Company had approximately 2,338
full time equivalent 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.
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 incontestable, covering a
25<PAGE>
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.
Healthfirst will continue to use its registered trademark
and will employ efforts to protect the mark.
The Company also owns a federal trademark registration for
its Clinpen(R) mark used in connection with the Company's
proprietary management information system hardware and customized
software.
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.
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 September 1, 1997 are as follows:
NAME (AGE) POSITION WITH COMPANY
- ------------------------ --------------------
Daniel J. Kohl (40) President, Chief Executive Officer, and Director
Fred C. Follmer (55) Vice President, Chief Financial Office and Secretary
Charles R. Hunziker (35) Vice President, Sales & Marketing
Mr. Kohl joined the Company in March 1997 as President and Chief
Executive Officer, and a Director. Prior to joining the Company, Mr.
Kohl served as Senior Vice President and Group Executive in charge of the
Healthcare Information Services Group for Equifax healthcare business for
three and one-half years and Mr. Kohl was President and Chief Operating
Officer at HMSS, Inc., a home infusion therapy company from 1991 through
1993. Mr. Kohl has over 18 years of experience in the healthcare industry,
with approximately 14 years experience at a senior management level.
26<PAGE>
Mr. Follmer joined Housecall Medical Resources as Chief Financial
Officer in March of 1997 after having served for over twenty years as a
senior financial officer for publicly traded companies. Prior to his
appointment to Housecall, Mr. Follmer served from 1994 to 1996 as Chief
Financial Officer with Preferred Oncology Networks of America, Inc., an
oncology physician practice management group. From 1992 to 1994, he
served as Senior Executive Vice President, Chief Operating Officer and
Chief Financial Officer for Comprehensive Care Corporation, a national
leader in behavioral health care.
Mr. Hunizker joined the Company in January, 1997 as President of
Biomedical Housecall, Inc., the infusion therapy business of Housecall
Medical Resources, Inc. On August 28, 1997 the Board approved his
promotion to VP of Sales and Marketing for Housecall Medical Resources,
Inc. Prior to joining the Company, he was Vice President of Sales and
Marketing for ProMedical, Inc. from 1992 until 1997.
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 administrative offices in Knoxville, Tennessee, Louisville,
Kentucky, and Raleigh, North Carolina, and owns the offices
in Centreville, Alabama in which its Housecall Management Services
business is based. The terms typically range 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 110 owned and 85 managed
branch offices (the latter are marked with an asterisk (*)) as of September
1, 1997.
ALABAMA
Alexander City 1*
Albertville 2*
Anniston 1*
Atmore 1*
Brewton 1*
Camden 1*
Chatom 1*
Demopolis 1*
Eutaw 1*
Foley 1*
Gadsden 1*
Georgiana 1*
Grove Hill 1*
Haleyville 1*
Monroeville 1*
Moulton 1*
Opp 1*
Tallahassee 1*
Union Springs 1*
Wedowee 1*
Wetumpka 1*
Winfield 1*
CALIFORNIA
Merced 1*
Santa Cruz 1*
San Jose 1*
27<PAGE>
FLORIDA
Apollo Beach 1
Bartow 1
Bradenton 2
Bradenton East 1
Brandon 2
Clearwater 2
Crystal River 1
Daytona Beach 1
Deland 1
Eustis 1
Ft. Myers 1
Ft. Pierce 1
Gainesville 1
Haines City 1
Holiday 2
Holmes Beach 1
Jacksonville 1
Jay 1*
Lady Lake 1
Lakeland 1
Madison 1*
Melbourne 1
Naples 1
Ocala 2
Orlando 1
Port Charlotte 1
Riviera Beach 1
Sarasota 2
Sebring 1
Spring Hill 1
St. Augustine 1
St. Petersburg 2
Stuart 1
Tampa 3
Tampa South 1
Tavares 1
Vero Beach 1
West Palm Beach 1
Winter Park 2
Zephyrhills 1
GEORGIA
Atlanta 1*
Perry 1*
Statesboro 1*
ILLINOIS
West Frankfort 1*
INDIANA
Fort Wayne 1
Indianapolis 1
Mishawaka 1
New Albany 1
KENTUCKY
Bowling Green 1*
LaGrange 1
Lawrenceburg 1
Louisville 1
Maysville 1*
Somerset 1*
28<PAGE>
LOUISIANA
Bossier City 1*
Coushatta 1*
Mansfield 1*
Metairie 1*
Plain Dealing 1*
Shreveport 1*
Springhill 1*
MAINE
Calais 2*
Pittsfield 1*
Waterville 1*
MISSOURI
Columbia 1*
Boonville 1*
Fulton 1*
Jefferson City 1*
Kirksville 1*
Linn 1*
Macon 1*
Osage Beach 1*
Versailles 1*
NEBRASKA
Papilion 1*
NEVADA
Boulder City 1*
NORTH CAROLINA
Charlotte 1*
Chapel Hill 1*
Monroe 1*
New Bern 1
Raleigh 1
Raleigh 1*
Waystation 1*
Yadkinsville 1*
OHIO
Boardman 1*
Barberton 1*
PENNSYLVANIA
Erie 1*
SOUTH CAROLINA
Abbeville 1*
Greenwood 1*
TENNESSEE
Adamsville 1
Athens 1*
Bean Station 1
Bean Station 1*
Chattanooga 1
Chattanooga 2*
Clarksville 1
Cleveland 1*
Columbia 2
Cookeville 1
29<PAGE>
Covington 1
Dayton 1*
Dyersburg 1
Elizabethton 2
Greeneville 1
Hampton 1
Harriman 1
Harrogate 1
Jackson 1
Jasper 1*
Jefferson City 1
Johnson City 1
Kingsport 1
Knoxville 5
Knoxville 1*
Lenoir City 1
Lexington 1
Madisonville 1
Martin 1*
Maryville 1
Memphis 1
Morristown 2
Morristown 1*
Mountain City 2
Murfreesboro 2
Nashville 2
Newport 1
Newport 1*
New Tazewell 1
Oak Ridge 1
Rogersville 1
Sevierville 1
Shelbyville 1
Sneedville 1
Tullahoma 1
TEXAS
Bedford 1*
Tomball 1*
VIRGINIA
Chatham 1
Daleville 1
Grundy 1*
Jonesville 1
Martinsville 1
Richlands 1*
Roanoke 1
Rocky Mount 1
Salem 1
WEST VIRGINIA
Princeton 1*
Webster Springs 1*
None of the properties owned by the Company are subject to
encumbrances.
30<PAGE>
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. On September 12, 1996, Carl
H. Peterson, et al. v. Housecall Medical Resources, Inc., Civil
Action No. E-52883 was filed in the Superior Court for Fulton
County, Georgia. Carl H. Peterson, et al. v. Housecall Medical
Resources, Inc., et al., Civil Action No. 96-CV-2914-JEC (N.D.
Ga.) was filed on November 4, 1996. All four actions were filed
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 all four
cases alleged that they were induced to purchase the Company's
stock on the basis of misrepresentations about the Company and
its prospects. All four complaints asserted claims under
Sections 11, 12(2), and 15 of the Securities Act of 1933 (the
"1933 Act"). All four complaints named as defendants the Company,
its directors and certain of its officers, and the lead underwriters
associated with its public offering.
By an order dated December 5, 1996, the United States
District Court for the Northern District of Georgia consolidated
Civil Action Nos. 96-CV-2214-JEC, 96-CV-2220-JEC, and 96-CV-2914-
JEC. The state court suit, Civil Action No. E-52883, was subsequently
dismissed without prejudice. On March 13, 1997, the Company moved to
dismiss the consolidated action. Both sides submitted briefs
to the court. In the event that the action is not dismissed, the
Company will be required to file an answer to the complaint in the
consolidated action, and then the plaintiffs will be required to move
for class certification. The Company is vigorously defending the
consolidated lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 17, 1997, the security holders of the Company voted
to amend and restate the original 1996 Stock Option and Restricted
Stock Purchase Plan to increase the shares of Common Stock authorized
for issuance under the Plan from 500,000 shares to 1,300,000 shares.
The holders 5,463,677 shares were voted, with the holders of 5,460,327
shares voting for approval and 3,350 voting against approval. The number
of authorized stock options was increased to enable the Company to
attract, retain, and motivate key employees.
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 under the symbol "HSCL". Prior to
such date, there was no public trading market for the Common Stock.
31<PAGE>
The table below sets forth on a quarterly basis for the period from
April 14, 1996 through the end of the 1997 fiscal year the high and low
sales prices of the Company's Common Stock as reported by The Nasdaq
Stock Market.
Fiscal Year Prices
Ended June 30, 1996 High Low
- ------------------- ---- ---
Fourth Quarter $23 1/8 $16 1/2
Fiscal Year Ended
June 30, 1997
First Quarter $20 1/2 $ 5
Second Quarter 6 1/4 4
Third Quarter 6 3/4 4 5/8
Fourth Quarter 5 1/16 3 3/8
The Closing sale price of the Company's Common Stock as reported on
The Nasdaq Stock Market on October 2, 1997 was $4 1/4.
As of September 17, 1997, there were 92 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.
32<PAGE>
ITEM 6.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Year ended June 30,
-------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues $84,219 $205,389 $192,065
Operating expenses:
Patient care 42,879 95,688 85,225
General and administrative 34,069 94,940 100,925
Provision for doubtful accounts 3,395 6,074 5,498
Depreciation and amortization 1,568 3,262 3,529
------- ------- -------
Total operating expenses 81,911 199,964 195,177
------- ------- -------
Income (loss) from operations 2,308 5,425 (3,112)
Interest expense, net 902 4,331 2,699
------- ------- -------
Income (loss) before income taxes and extraordinary item 1,406 1,094 (5,811)
Provision (credit) for income taxes 709 895 (1,743)
------- ------- -------
Income (loss) before extraordinary item 697 199 (4,068)
Extraordinary loss from early extinguishment
of debt, net of $387,000 income tax benefit -- -- (902)
Cumulative dividends and accretion on
Series A Preferred Stock (redeemable) (1,327) (2,006) --
------- ------- ------
Net loss attributable to common stockholders $ (630) $ (1,807) $(4,970)
======= ======== =======
Net loss per common share:
Income (loss) before extraordinary item ($0.10) ($0.24) ($0.40)
Extraordinary item -- -- (0.09)
------- -------- -------
Net income (loss) attributable to common stockholders ($0.10) ($0.24) ($0.49)
======= ======== =======
Weighted average common shares outstanding 6,283 7,425 10,236
======= ======== =======
<CAPTION>
June 30,
---------------------------------------
1995 1996 1997
---- ------- ----
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 18,349 $ 7,785 $ 2,074
Working capital 19,302 18,646 18,140
Total assets 92,403 103,945 130,766
Long-term debt and capital lease obligations, less
current portion 41,480 11,720 45,267
Series A Preferred Stock (redeemable) 17,871 -- --
Stockholders' equity 8,096 66,751 61,847
</TABLE>
33
<PAGE>
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 110 owned and 85 managed branch offices in twenty states as of
September 1, 1997.
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, which was recently tripled in net revenue by the
acquisition of Healthfirst on May 13, 1997; the Home Care Affiliates
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; 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; and the Messick Homecare acquisition on October 31,
1996 rounded out the internal completion of the one-stop-shop by
significantly expanding the respiratory therapy and home medical
equipment services and products (RT/HME).
The Company is seeking to grow its home health care business in
geographic areas throughout the Southeast, 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
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:
34<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1995 <F1> 1996 1997
------- ---- ----
<S> <C> <C> <C>
Medicare -- cost based(2) 60.7% 61.1% 60.7%
Medicare -- charge based(3) 5.1 4.8 7.6
Medicaid(4) 1.5 1.6 2.4
TennCare(5) 8.0 5.9 -
Managed care organizations(4) 5.8 7.1 7.2
Other private payors 15.0 15.5 16.8
Management services contracts 3.9 4.0 5.3
----- ----- -----
Total 100.0% 100.0 % 100.0%
===== ===== =====
<FN>
<F1>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".
<F2>Represents reimbursement for all nursing services (including related
products) to Medicare patients, except for any such services
provided in connection with hospice care.
<F3>Represents reimbursements for all home health care services
reimbursed by Medicare, except for nursing services.
<F4>Does not include TennCare payments.
<F5>Contract with Access Medplus for TennCare participants canceled
February 1996.
</FN>
</TABLE>
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, except for nursing services provided to
hospice patients, are Medicare cost-based reimbursed. Hospice
care and all other home health care services (including non-
nursing related products) provided to Medicare patients are
Medicare charge-based reimbursed.
35<PAGE>
On August 5, 1997, the United States Congress passed into
law, the Balanced Budget Act of 1997, which included several key
provisions related to the Medicare reimbursement program for
providers of home health services. Provisions affecting the
providers of home health services include the establishment and
implementation of a prospective payment system in the Company's
fiscal year 2001 as well as establishing an interim payment
schedule prior to the implementation of the prospective payment
system in which the Company will be reimbursed on the lower of
its actual costs or a new reimbursement limit for services. The
interim payment schedule will be effective for the Company's 1999
fiscal year. The Company is studying the impact of the
forthcoming reimbursement changes on its Medicare nursing
business as it relates to the carrying value of its long-lived
assets.
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.
In connection with its management services, the Company is
typically paid a negotiated fixed fee per patient visit performed
and billed 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.
Results of Operation
As discussed above, Housecall acquired MSS, Home Care
Affiliates, and Biomedical during 1995 (the "1995 Acquisitions")
Messick Homecare in 1996 and Healthfirst in 1997, each of which
has had significant effects on the Company. See " General". The
aggregate effects of the above acquisitions, each of which was
accounted for as a purchase transaction, result in the
inclusion of certain of their operating results in some
historical periods but not in others, and 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.
36<PAGE>
<TABLE>
<CAPTION>
PERCENT OF NET REVENUE
YEAR ENDED JUNE 30,
-------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0 % 100.0 % 100.0 %
Operating expenses:
Patient care 50.9 46.6 44.4
General and administrative 40.5 46.2 52.5
Provision for doubtful accounts 4.0 3.0 2.9
Depreciation and amortization 1.9 1.6 1.8
----- ----- -----
Total operating expenses 97.3 97.4 101.6
----- ----- -----
Income(loss) from operations 2.7 2.6 (1.6)
Interest expense, net 1.1 2.1 1.4
----- ----- -----
Income (loss) before income taxes 1.6 0.5 (3.0)
Provision (benefit) for income taxes 0.8 0.4 (0.9)
----- ----- -----
Net Income (loss) before extraordinary item 0.8 0.1 (2.1)
Extraordinary loss from early extinguishment
of debt, net of $387,000 income tax benefit - - (0.5)
----- ----- -----
Net income (loss) 0.8% 0.1% (2.6)%
===== ===== =====
</TABLE>
FISCAL YEARS 1997 AND 1996
The Company's results of operations during the fiscal year
ended June 30, 1997 reflect the performance for the entire year
of MSS, Home Care Affiliates and Biomedical, companies acquired in
the 1995 Acquisitions, and only reflect the performance of
Messick Homecare for eight months and Healthfirst for two months.
This factor alone accounts for several significant changes in the
Company's period-to-period results discussed below.
NET REVENUES. In fiscal 1997, net revenues decreased 7% to
$192.1 million from $205.4 million in fiscal 1996. The decrease
was largely due to a $14.0 million decrease in nursing and related
care, which was partially off-set by $6.8 million of net revenues
in fiscal 1997 from Messick Homecare and $2.8 million of net
revenue from Healthfirst, both of which were acquired during fiscal
1997. The Company's operations attributable to its nursing division,
however, experienced a $8.9 million reduction in Medicare cost-
based revenues, which do not include a profit or net income
component for the Company, during fiscal 1997 from fiscal 1996
levels, primarily caused by cost and visit reductions at certain
agencies in Tennessee and Florida. Efforts were made during
fiscal 1997 to closely scrutinize utilization of services. This
resulted in a decrease in the number of visits per patient in
order for the agencies to be at or below national average
utilization. In addition, the Company closed ten unprofitable
branch offices in fiscal 1997.
37<PAGE>
Although the Company's net revenues decreased significantly
in fiscal 1997, net revenues for the fourth quarter of fiscal
1997 increased to $49.1 million from $46.5 million for the third
quarter. The acquisition of Healthfirst in May 1997 added $2.8
million to management services net revenue in the fourth 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 hospice care
program actually declined during the fourth quarter from the
third quarter level. As a result of this revenue shortfall and
certain other factors, the Company sustained a $1.9 million net
loss before income taxes in the fourth quarter of fiscal 1997.
The Company doubled its sales force and developed new
programs in an effort to increase net revenues in certain areas
of its operations. In particular, the Company is focused on
growing its private (non-Medicare) nursing, hospice care,
infusion therapy and RT/HME. In addition, the Company has hired
new or additional sales personnel for the Company as a whole.
The Company has restructured to a regional philosophy so that the
new sales force will sell across all product lines rather than
only one product line. The Company has introduced sales
incentive programs and has retained new management for the
hospice care program. While the volume of all 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 management services) represent the Company's
predominate sources of operating income.
PATIENT CARE COSTS. Patient care costs are comprised of
salaries and related benefits for patient care personnel and cost
of sales for respiratory therapy, home medical equipment,
infusion products, and medical supplies. In fiscal 1997, such
costs decreased 11% to $85.2 million from $95.7 million in fiscal
1996. The $10.5 million decrease is primarily attributable to
the decrease in nursing revenues of $14 million or 9%. As a
percentage of net revenue, patient care costs decreased from
46.6% to 44.4%. Much of this decrease is attributable to a
change in the Company's business mix. This decrease also reflects
the acquisition of Healthfirst and the resulting increase in
management services revenue, which do not generate any patient care
cost. In addition, the increase in net revenue, in amount and as a
percentage of total revenue, for RT/HME, which has a significantly
lower patient care cost percentage of net revenue than nursing
services, is a result of the acquisition of Messick Homecare in
October 1996. Net revenue for RT/HME increased 46% in fiscal
1997 over fiscal 1996.
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 1997 such
expenses increased 6.3% to $100.9 million from $94.9 million in
fiscal 1996. Substantially all of the increase is attributable
to the fiscal 1997 acquisitions. As a percentage of net revenues,
general and administrative expenses increased from 46.2% to
52.5%, reflecting higher corporate overhead and the presence of
Healthfirst management services as part of the Company's
operations for the last two months of fiscal 1997. Healthfirst
requires more administrative personnel to provide such services,
and all expenses are classified as general and administrative.
38<PAGE>
The Company has undertaken steps 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 has incurred certain one-
time severance costs in implementing those measures. In
addition, the Company may incur additional expenses in connection
with the defense of the investor litigation, which would increase
general and administrative expenses to the extent not reimbursed
by the Company's insurance carrier.
The anticipated 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 source
of net revenues (including Medicare cost-based) 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 on 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 nursing services. In addition, as management services
revenues increase as a percentage of total revenues, general and
administrative expenses.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful
accounts decreased to $5.5 million for fiscal 1997 from $6.1
million for fiscal 1996. As a percentage of net revenues, the
provision for doubtful accounts decreased slightly from 3.0% to
2.9%. In addition, the Company canceled a contract to provide
services under the TennCare program in fiscal 1996, which
required a higher provision for doubtful accounts due to the
amount of unpaid claims.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation is
provided on the Company's property and equipment. Amortization
expense includes the amortization, over a 40-year period, of the
excess of purchase price over fair market value of the net
identifiable assets acquired by the Company (goodwill) and the
amortization of other intangibles. Depreciation and amortization
expense was $3.5 million and $3.3 million in fiscal 1997 and
1996, respectively. The increase is primarily attributable to
the fiscal year 1997 acquisitions. Depreciation and amortization
expense increased slightly as a percentage of net revenues for
these periods from 1.6% to 1.8% mainly because of the increase in
furniture and equipment expenditures and the decrease in net
revenue from 1996 to 1997.
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 $4.3 million in fiscal 1996 and
decreased substantially to $2.7 million in fiscal 1997,
reflecting a substantial decrease in the Company's outstanding
indebtedness during fiscal 1997. In April 1996, the Company repaid
$37.6 million of its borrowings under its former NationsBank credit
facility from the proceeds of the initial public offering
(discussed below), which significantly reduced the interest
expense that the Company incurred during fiscal 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company generated a
tax net operating loss during the fiscal year ended June 30, 1997,
creating a current tax receivable of approximately $2.3 million.
39<PAGE>
In addition, the Company's deferred tax asset increased from approximately
$3.2 million in fiscal year 1996 to $3.9 million in fiscal year 1997,
primarily as a result of increases in nondeductible accruals and the
allowance for doubtful accounts. The Company has not recorded a valuation
allowance against the tax benefits associated with the deductible temporary
differences as they believe strategic initiatives including organizational
restructuring and the expansion of its management services business will
generate sufficient taxable income in the future that such amounts will
be used before expiration.
NET INCOME. The Company's decrease in net income from
$199,000 for fiscal 1996 to a loss of $4.1 million before
extraordinary item in fiscal 1997, reflects the substantial
decrease in private nursing and infusion revenues and the
increase in general and administrative costs for fiscal year 1997
over fiscal year 1996.
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. 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
Affiliates for one month. This factor alone accounts for several
significant changes in the Company's period-to-period results as
discussed below.
NET REVENUES. In fiscal 1996, net revenues increased 144%
to $205.4 million from $84.2 million in fiscal 1995. The $121.2
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 Affiliates and MSS over the amount attributable to them
for the relatively 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 Affiliates 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 business 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 of fiscal 1996. Following
the cancellation of that contract, Housecall was required by law
40<PAGE>
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 then-contemplated 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 of
fiscal 1996, 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'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.
PATIENT CARE COSTS. 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 acquisition of Home
Care Affiliates 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
Affiliates compared to the Company's predecessor.
GENERAL AND ADMINISTRATIVE EXPENSES. 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 requires 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 Affiliates compared to
the Company's predecessor. These factors were partially offset
by cost reduction initiatives achieved through consolidation of
41<PAGE>
certain of the Company's Tennessee operations following the
acquisition of Home Care Affiliates.
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 Access MedPlus
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 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, 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 business. In April 1996, however, the Company
repaid $37.6 million of its borrowings under its former NationsBank
credit facility, which significantly reduced the interest expense
that the Company incurred during the remainder of fiscal 1996.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for
expansion of the services provided through its existing
operations and working capital. The Company's near term growth
objectives will require that Housecall have available substantial
amounts of capital as the Company seeks to expand its presence
and market share in select geographic markets. Historically, the
Company has financed these requirements principally through
issuances of stock, subordinated notes (including to affiliates), and
borrowings under the Company's various agreements with banks.
At June 30, 1997, the Company had cash and cash equivalents
of $2.1 million and working capital of $18.1 million. As of
August 31, 1997, the Company had approximately $4.4 million of
cash and cash equivalents and $1.6 million ($3.0 million less
$1.4 million letters of credit) of borrowing capacity under its
Toronto-Dominion Amended and Restated Credit Agreement.
Net accounts receivable at June 30, 1997 increased
approximately $1.6 million from June 30, 1996, primarily as a
result of net revenues increasing $2.0 million in the fourth
quarter of fiscal 1997 over the fourth quarter of fiscal 1996.
Days sales outstanding of 53.1 at June 30, 1997 were
approximately one day higher than June 30, 1996. The Company has
42<PAGE>
placed significant importance on cash collections and as result,
108% of net revenues have been collected during the three months
ended August 31, 1997. Management believes that the Company will
generate positive cash flow from operations, which will enable the
Company to fund its operations and anticipated growth for at
least the next year. However, there are no assurances that such
sources of capital will be adequate to meet the Company's
requirements or that alternative financing sources will be
available on terms acceptable to the Company. 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 its NationsBank
credit facility.
ANALYSIS OF CASH FLOWS
At June 30, 1996, the Company had cash and cash equivalents
of $7.8 million and working capital of $18.6 million. At June
30, 1997, these amounts were $2.1 million and $18.1 million,
respectively. The change in these amounts from the end of fiscal
1996 reflects the acquisition of Messick Homecare and Healthfirst
as well as the Company's net loss for 1997. Cash used by
operating activities was $5.6 million for the fiscal year ended
June 30, 1997. A significant use of cash was a decrease in
accounts payable and other liabilities of $4.4 million. This
decrease in accounts payable and other liabilities, net of the
acquisition of Messick Homecare and Healthfirst, reflects the
Company's lower volume of business in fiscal 1997 and also the
timing of accruals at the respective year ends.
During the fiscal year ended June 30, 1997, the Company's
investing activities used $27.5 million in cash, with
approximately $25.6 million (net of cash acquired) used for the
acquisition of Messick Homecare and Healthfirst.
Financing activities provided $27.5 million of cash during
the fiscal year ended June 30, 1997. The net proceeds of
approximately $37.0 million from the Toronto Dominion Credit
Facility was used to (i) acquire Messick Homecare and
Healthfirst; (ii) repay $4.0 million of indebtedness to NationsBank;
(iii) repay $3.3 million of assumed debt in the above acquisitions;
and (iv) pay $1.5 million in bank financing fees.
CERTAIN ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 128
"Earnings per Share" ("SFAS 128"), which will change the current
method of computing earnings per share. The new standard
requires presentation of "basic earnings per share" and "diluted
earnings per share" amounts, as defined. SFAS 128 will be
effective commencing with the Company's second quarter of the
43
<PAGE>
year ending June 30, 1998, and upon adoption, all prior-period
earnings and per share data presented will be restated to conform
with the provisions of the new pronouncement. Earlier adoption
is not permitted. The Company does not believe such adoption
will materially impact its financial statements.
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-18 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 which if booked would
have a material impact on the financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained under the heading "Election of
Directors" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for the Company's 1997 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", "Ten Year Option/SAR Repricing",
"Directors' Compensation", "Employment Agreement and Severance
Agreements" in the definitive Proxy Statement to be used in connection
with solicitation of proxies for the Company's 1997 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 heading " Voting Securities
and Principal Shareholders" in the definitive Proxy Statement to be
used in connection with the solicitation of proxies for the Company's
1997 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.
44<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the headings "Certain
Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the definitive Proxy Statement to be
used in connection with the solicitation of proxies for the
Company's 1997 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, 1996 and June
30, 1997
Consolidated Statements of Operations for the years
ended June 30, 1995, June 30, 1996, and June 30, 1997
Consolidated Statements of Stockholders' Equity for the
Years ended June 30, 1995, June 30, 1996, and June 30, 1997
Consolidated Statements of Cash Flows for the Years
ended June 30, 1995, June 30, 1996, and June 30, 1997
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
The following financial statement schedule is included on
page S-1 of this Annual Report on Form 10-K. All other schedules have
been omitted because they are not applicable, not required, or the
information is included in the financial statements or notes
thereto.
45<PAGE>
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
- ------ -------------------------------------------------------------------------
<C> <S>
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(a) -- 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.*
10.2(b) -- Severance Agreement, dated April 10, 1997, by and between the Company
and George D. Shaunnessy.
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 -- Employment Agreement, dated March 11, 1997, by and between the Company
and Daniel J. Kohl, included as Exhibit 10 to the Company's 10-Q ,
File No. 0- 28134, previously filed with the Commission and incorporated herein by
reference*
10.7 -- Asset Purchase Agreement between the Company and Messick Homecare, Inc.
dated October 31, 1996, included as Exhibit 2 on the Company's 8-K, File No.
000-28134, previous filed with the Commission and incorporated herein by
reference.
46<PAGE>
10.8 -- 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.
10.9 -- Asset Purchase Agreement between the Company and Healthfirst, Inc. dated
May 13, 1997, included in the Company's Form 8-K, File No. 000-28134,
previously filed with the Commission on August 27, 1997, and incorporated
herein by reference.
10.10 -- 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.
10.11 -- 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 -- 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.*
10.13 -- 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.*
10.14 -- 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.*
10.15 -- 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.
10.16 -- 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.*
10.17 -- 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.*
10.18 -- 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.*
10.19 -- 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.
</TABLE>
47<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<C> <S>
10.19 (a) -- Acquisition Agreement by and among Housecall Medical Resources, Inc., HFI
Acquisition Corp., HFI Management, Inc., HFI Home Care Management, L.P.,
The Shareholders of HFI Management, Inc. and the Partners of HFI Homecare
Management, L.P., dated May 13, 1997 and included as Exhibit 2.1 to the
Company's Form 8-K, File No. 000-28134, previously filed with Commission and
incorporated herein by reference.
10.19(b) -- Share Purchase Agreement by and among HFI Acquisition Corp. Housecall
Medical Resources, Inc. HF Holdings, Inc., HTHF, Inc. and Home Technology
Healthcare, Inc., dated May 13, 1997 and included as Exhibit 2.2 to the
Company's File 8-K, File No. 000-28134, previously filed with Commission and
incorporated herein by reference.
10.19(c) -- First Amendment to Share Purchase Agreement and First Amendment to
Acquisition Agreement by and between Housecall Medical Resources, Inc.,
HFI Acquisition Corp., HFI Management, Inc., HFI Home Care Management,
L.P., The Shareholders of HFI Management, Inc. and the partners of HFI Homecare
Management, L.P., dated May 13, 1997 and included as Exhibit 2.3 to the
Company's Form 8-K, File No. 000-28134, previously filed with Commission and
incorporated herein by reference.
10.19(d) -- Securities Acquisition Agreement by and between Housecall Medical Resources,
Inc. and R. Steven Williams, dated as of May 13, 1997 and included as
Exhibit 2.4 to the Company's Form 8-K, File No. 000-28134, previously
filed with Commission and incorporated herein by reference.
10.20 -- Amended and Restated Credit Agreement with The Toronto-Dominion Bank dated
as of May 13, 1997
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 -- Draft of Proxy Statement, dated October 15, 1997
* 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
48<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................................F-2
Consolidated Balance Sheets at, June 30, 1996 and June 30, 1997............F-3
Consolidated Statements of Operations -
Year Ended June 30, 1995, June 30, 1996, and June 30, 1997.................F-4
Consolidated Statements of Stockholders' Equity --
Year Ended June 30, 1995, June 30, 1996, and June 30, 1997.................F-5
Consolidated Statements of Cash Flows --
Year Ended June 30, 1995, June 30, 1996, and June 30, 1997.................F-6
Notes to Consolidated Financial Statements.................................F-7
Schedule II -- Valuation and Qualifying Accounts...........................S-1
49<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Housecall Medical Resources, Inc.
We have audited the accompanying consolidated balance sheets of
Housecall Medical Resources, Inc. (the "Company") as of June 30, 1996 and
1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended June 30, 1997. 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 present fairly, in all material respects, the consolidated
financial position of the Company at June 30, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended June 30,1997, 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, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
September 8, 1997
F-2<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,785,000 $ 2,074,000
Accounts receivable -- less allowance for doubtful accounts of
$2,920,000 in 1996 and $6,394,000 in 1997 27,293,000 28,927,000
Income taxes receivable 940,000 2,368,000
Deferred income taxes 3,223,000 3,956,000
Inventory 1,067,000 1,144,000
Other current assets 920,000 1,125,000
-------------- -----------
Total current assets 41,228,000 39,594,000
Property and equipment:
Land 25,000 25,000
Building 1,411,000 1,526,000
Furniture and equipment 5,660,000 10,219,000
-------------- -----------
7,096,000 11,770,000
Less accumulated depreciation and amortization 1,927,000 2,738,000
-------------- -----------
Net property and equipment 5,169,000 9,032,000
Excess of cost of acquired businesses over fair values of net
acquired 55,575,000 80,192,000
Deferred financing costs 1,480,000 1,361,000
Other assets 493,000 587,000
-------------- -----------
$ 103,945,000 $130,766,000
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,455,000 $ 5,383,000
Accrued payroll and related expenses 7,749,000 7,965,000
Other accrued liabilities 2,632,000 3,830,000
Current portion of long-term debt 4,085,000 3,517,000
Current portion of capital lease obligations 661,000 759,000
-------------- -----------
Total current liabilities 22,582,000 21,454,000
Long-term debt 10,186,000 43,214,000
Capital lease obligations 1,534,000 2,053,000
Other long-term liabilities 1,887,000 1,370,000
Deferred income taxes 1,005,000 828,000
Commitments and contingencies
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, 10,218,900 and 10,285,400 shares issued and
outstanding in 1996 and 1997 102,000 103,000
Additional paid in capital on common stock 66,649,000 66,714,000
Retained earnings (deficit) -- (4,970,000)
-------------- -----------
Total stockholders' equity 66,751,000 61,847,000
-------------- -----------
$ 103,945,000 $130,766,000
============== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 84,219,000 $ 205,389,000 $ 192,065,000
Operating expenses:
Patient care 42,879,000 95,688 000 85,225,000
General and administrative 34,069,000 94,940,000 100,925,000
Provision for doubtful accounts 3,395,000 6,074,000 5,498,000
Depreciation and amortization 1,568,000 3,262,000 3,529,000
------------ ------------- -------------
Total operating expenses 81,911,000 199,964,000 195,177,000
------------ ------------- -------------
Income(loss) from operations 2,308,000 5,425,000 (3,112,000)
Other income (expense):
Interest income 180,000 348,000 219,000
Interest expense (1,082,000) (4,679,000) (2,918,000)
------------ ------------- -------------
Income (loss) before income taxes 1,406,000 1,094,000 (5,811,000)
Provision (benefit) for income taxes 709,000 895,000 (1,743,000)
------------ ------------- -------------
Net income (loss) before extraordinary item 697,000 199,000 (4,068,000)
Extraordinary loss from early extinguishment
of debt, net of $387,000 income tax benefit -- -- (902,000)
------------ ------------- -------------
Net income (loss) 697,000 199,000 (4,970,000)
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) $ (4,970,000)
Net loss per common share:
Loss before extraordinary item $ (0.10) $ (0.24) $ (0.40)
Extraordinary Item -- -- (0.09)
=========== ============= ==============
$ (0.10) $ (0.24) $ (0.49)
=========== ============= ==============
Weighted average common shares outstanding 6,283,000 7,425,000 10,326,000
=========== ============= ==============
</TABLE>
See accompanying notes
F-4<PAGE>
HOUSECALL MEDICAL RESOURCES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------------------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1994 - $ - $ - $ - $ -
Issuance of stock for cash 5,454,150 56,000 8,340,000 - 8,396,000
Issuance 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 - - - (27,000) (27,000)
Cumulative dividends on Series A
Preferred Stock - - (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
Issuance 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 - (26,000) (199,000) (225,000)
Cumulative dividends on Series A
Preferred Stock (redeemed April, 1996) - - (1,781,000) - (1,781,000)
---------- -------- ---------- ----------- -------------
Balance at June 30, 1996 10,218,900 102,000 66,649,000 66,751,000
Exercise of common stock options 66,500 1,000 65,000 - 66,000
Net loss - - - (4,970,000) (4,970,000)
---------- -------- ---------- ----------- -------------
Balance at June 30, 1997 10,285,400 $ 103,000 $66,714,000 $(4,970,000) $ 61,847,000
========== ========= =========== ========== ============
</TABLE>
See accompany notes.
F-5<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 697,000 $ 199,000 $ (4,970,000)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 1,568,000 3,262,000 3,529,000
Amortization of deferred financing costs -- 433,000 442,000
Deferred income taxes 489,000 (98,000) (613,000)
Extraordinary item -- -- 902,000
Changes in operating assets and liabilities, net of
businesses:
Accounts receivable (750,000) (5,455,000) (21,000)
Other current assets and inventory (577,000) 386,000 515,000
Accounts payable 1,624,000 (395,000) (2,876,000)
Accrued payroll and related expenses (1,143,000) 912,000 (235,000)
Other accrued liabilities 792,000 (1,769,000) (1,297,000)
Income taxes payable/receivable (1,803,000) 38,000 (1,042,000)
----------- ----------- -----------
Net cash provided (used) by operating activities 897,000 (2,487,000) (5,666,000)
INVESTING ACTIVITIES
Payments for business acquisitions, net of cash acquired (42,198,000) (9,178,000) (25,622,000)
Additions to property and equipment (118,000) (1,039,000) (2,169,000)
Other, net (99,000) (1,010,000) 261,000
----------- ----------- -----------
Net cash used in investing activities (42,415,000) (11,227,000) (27,530,000)
FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit agreement (793,000) -- --
Repayment of long-term debt -- (41,731,000) (123,000)
Proceeds from issuance of long-term debt 44,576,000 9,171,000 36,999,000
Refinancing of long-term debt (5,524,000) (3,713,000) (7,307,000)
Repayment of Series A Preferred Stock -- (19,877,000) --
Proceeds from issuance of Series A Preferred Stock 15,884,000 -- --
Proceeds from issuance of common stock 8,396,000 60,462,000 66,000
Principal payments under capital lease obligations (868,000) (1,064,000) (663,000)
Deferred financing costs (1,804,000) (98,000) (1,487,000)
----------- ---------- ----------
Net cash provided by financing activities 59,867,000 3,150,000 27,485,000
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 18,349,000 (10,564,000) (5,711,000)
Cash and cash equivalents at beginning of year -- 18,349,000 7,785,000
----------- ---------- ----------
Cash and cash equivalents at end of year $ 18,349,000 $ 7,785,000 $ 2,074,000
=========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 856,000 $ 4,341,000 $ 2,473,000
=========== ========== =========
Income taxes paid (received) $ 1,463,000 $ 2,294,000 $ (574,000)
=========== ========== =========
</TABLE>
See accompanying notes.
F-6<PAGE>
HOUSECALL MEDICAL RESOURCES, 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 and products including, home nursing and
related care, infusion therapy, respiratory therapy, home medical
equipment and hospice care. 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, 1997, the Company had operations in twenty states and the
District of Columbia. 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 its 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 70%, 67% and 71% of net revenues for
the years ended June 30, 1995, 1996 and 1997, 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 $23,331,000, $58,407,000 and $44,234,000 in 1995, 1996, and
1997, 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 one to five years. The Company is generally
compensated based on the number of visits performed and billed by the
managed agencies. Renewal of the agreements is subject to negotiation at
their expiration. Management services revenues were $2,600,000,
$8,100,000, and $10,100,000 1995, 1996 and 1997, respectively.
F-7<PAGE>
CASH EQUIVALENTS
All highly liquid investments with maturities of three months or
less are considered to be cash equivalents.
INVENTORY
Inventory, which is comprised primarily of medical supplies held for
sale and durable medical equipment, is valued at the lower of cost
(determined by the first-in, first-out method) or market.
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:
Buildings 30 to 35 years
Furniture 3 to 7 years
Leasehold improvements 5 to 10 years
Depreciation expense of $1,039,000, $1,854,000 and $1,850,000
includes amortization of assets recorded under capital leases for years
ended June 30, 1995, 1996 and 1997, respectively.
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. Accumulated amortization at June 30, 1996 and 1997 was $1,855,000
and $3,481,000, 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.
In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ("Statement No. 121"), the Company records impairment losses on long-
lived assets used in operations when events and circumstances indicate
that such assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than assets' net book
values. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Based on the Company's
estimate of future undiscounted cash flows, the Company expects to
recover the carrying amounts of its long-lived assets. Nonetheless, it is
reasonably possible that estimates of undiscounted cash flows may change
in the near term resulting in the need to write-down certain assets to
their fair values.
On August 5, 1997, the United States Congress passed into law, the
Balanced Budget Act of 1997, which included several key provisions
related to the Medicare reimbursement program for providers of home
health services. Provisions affecting the providers of home health
services include the establishment and implementation of a prospective
payment system in the Company's fiscal year 2001 as well as establishing
an interim payment schedule prior to the implementation of the
prospective payment system in which the Company will be reimbursed on the
F-8<PAGE>
lower of its actual costs or a new reimbursement limit for services. The
interim payment schedule will be effective for the Company's 1999 fiscal
year. The Company is studying the impact of the forthcoming
reimbursement changes on its Medicare nursing business as it relates to
the carrying value of its long-lived assets.
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, 1996 and 1997 was $423,000 and $331,000, 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 (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
$(.26) and $(.12) for the years ended June 30, 1996 and 1995,
respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 "Earnings per Share"
("SFAS 128"), which will change the current method of computing earnings
per share. The new standard requires presentation of "basic earnings per
share" and "diluted earnings per share" amounts, as defined. SFAS 128
will be effective commencing with the Company's second quarter of the
year ending June 30, 1998, and upon adoption, all prior-period earnings
and per share data presented will be restated to conform with the
provisions of the new pronouncement. Earlier adoption is not permitted.
The Company does not believe such adoption will materially impact the
financial statements.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, income tax receivable,
deferred income taxes, other current assets, other assets, accounts
payable, accrued payroll and related expenses, and other accrued
liabilities approximate their fair values. The carrying amounts reported
in the consolidated balance sheets for the term loan, revolver and
capital lease obligations approximate fair value since the debt and
capital leases bear interest at rates which approximate current market
rates.
F-9<PAGE>
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, 1996 and 1997, $13,475,000 and $12,611,000, 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. Approximately 82% of the Company's net revenues
in fiscal year 1997 were derived from its operations in Tennessee and
Florida.
RECLASSIFICATIONS
Reclassifications of certain 1995 and 1996 financial statement
amounts have been made to conform to the 1997 presentation.
2. ACQUISITIONS
On July 1, 1994, the Company acquired all of the outstanding stock
of its predecessor entity Housecall, Inc. (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, 1997, 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). The selling shareholder exercised the option in March
1997.
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 of accounts
receivable of HCAI, and using its regular systematic approach, concluded
F-10<PAGE>
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 Affiliates, 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.
On October 31, 1996, the Company acquired all of the outstanding
stock of Messick Homecare, Inc. ("Messick"), a respiratory therapy and
home medical equipment company primarily operating in Tennessee, for
consideration of approximately $5,500,000 in cash and $2,100,000 in
assumed debt. Approximately $850,000 of the merger consideration was
placed in an escrow account at the closing; up to $750,000 of that escrow
fund may be repayable to the Company depending on developments over the
next 17 months with respect to decreases in the Medicare reimbursement
rate for oxygen therapy and related services; the remaining $100,000 of
the escrow amount comprises an indemnification fund. At June 30, 1997,
the entire $850,000 remains in the escrow account.
On May 13, 1997, the Company acquired all of the outstanding stock
of the Healthfirst Entities, a group of companies related through common
control and management, ("Healthfirst"), a group of management services
companies that operate in nineteen states, for consideration of
approximately $21,800,000 in cash and, $1,200,000 in assumed debt. In
connection with the acquisition, the Company has agreed to issue
approximately 63,000 shares of common stock in accordance with an
employment agreement with one of the selling shareholders.
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, 1996 is presented as if Messick, Healthfirst and R.N. Registry
had been acquired on July 1, 1995 and such information for the year ended
June 30, 1997 is presented as if Messick and Healthfirst had been
acquired on July 1, 1996. 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>
1996 1997
---- ----
<S> <C> <C>
Net revenue $228,858,000 $207,837,000
Net loss (422,000) (4,573,000)
Net loss attributable to common stockholders (2,428,000) (4,573,000)
Net loss per common share (0.32) (0.45)
F-11<PAGE>
3. LONG-TERM DEBT
At June 30, 1996 and 1997, long-term debt consisted of:
1996 1997
---- ----
Revolving credit and term loan agreement $4,000,000 $37,000,000
Subordinated notes payable 9,645,000 9,714,000
Other 626,000 17,000
---------- -----------
14,271,000 46,731,000
Current portion 4,085,000 3,517,000
---------- ----------
$10,186,000 $43,214,000
========== ==========
In May 1995, the Company entered into a Credit Agreement (the
"Agreement") with NationsBank, N.A.. The Agreement provided 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 was no longer available for borrowings by the Company. As
of June 30, 1996, the Company had borrowings of $4,000,000 under the
revolving credit facility.
In October 1996, the Company entered into a loan (the "Bridge Loan")
with a bank. The Bridge Loan provided for a $15,000,000 revolving credit
facility. Borrowings under the Bridge Loan were used to repay the
remaining indebtedness under the NationsBank Credit Facility and for the
acquisition of Messick in October 1996. Borrowings outstanding under the
Bridge Loan bear interest, at the Company's option, at either the bank's
prime rate plus .75% or LIBOR plus 2.25%. Commitment fees of .5% are
payable quarterly on the unused portion. The Company recorded charges in
connection with the write-off of certain deferred financing costs related
to the NationsBank Credit Facility. These items, totaling $1,289,000,
have been reported as an extraordinary item, net of income taxes of
$387,000 during the year ended June 30, 1997.
On May 13, 1997 the Company entered into an Amended and Restated
Credit Agreement (the "Restated Agreement") that provides for a
$22,000,000 term loan and an $18,000,000 revolver. The proceeds of the
term loan were used to acquire Healthfirst. Approximately $15,000,000
was drawn on the revolver to repay the Bridge Loan.
Borrowings outstanding under the Restated Agreement bear interest,
at the Company's option, at either the bank's prime rate (8.5% at June
30, 1997) plus 2.0% or an adjusted eurodollar rate, as defined by the
Restated Agreement (5.8125% at June 30, 1997) plus 3.0%. Commitment fees
of .375% are payable quarterly on the unused portion of the funds
available under the Restated Agreement. In addition, in connection with
the Restated Agreement, warrants for 150,000 shares of the Company's
common stock were issued to the lender at a exercise price of $5.00 per
share. The warrants are exercisable at any time through May 13, 2002.
The outstanding balance under the term loan is due in nine quarterly
installments comprising currently earned interest and principal payments
ranging from $1,500,000 to $3,500,000. The remaining outstanding balance
under the revolving credit facility is due in full on May 1, 2000.
Borrowings under the Restated Agreement are secured by substantially all
of the assets of the Company and its subsidiaries. As of June 30, 1997,
the Company had borrowed $15,000,000 under the revolving credit facility.
The Company has standby letters of credit of approximately $1,400,000 as
of June 30, 1997.
F-12<PAGE>
On June 23, 1997, the Company entered into interest rate swap
transactions with the bank under which the Company effectively fixed the
interest rate on $22,000,000 of its borrowings under the Restated
Agreement at approximately 9.17% for the period from June 23, 1997 to
May 1, 1999.
The Restated Agreement requires prepayment of the borrowings for the
amount of any excess cash flows, as defined, beginning in July 1998, 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 Restated 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 aggregate annual maturities of long-term debt at June 30, 1997
are:
YEAR ENDED JUNE 30,
1998 $ 3,517,000
1999 7,500,000
2000 26,000,000
2001 4,857,000
Thereafter 4,857,000
--------------
$ 46,731,000
==============
4. LEASE COMMITMENTS
CAPITAL LEASES
The Company leases equipment under capital leases. During 1996 the
Company entered into capital lease obligations with original principal
amounts of approximately $225,000. During 1997, except for capital
leases assumed in acquisitions, the Company did not enter into any new
capital leases. At June 30, 1996 and 1997 property under capital leases
consist of:
1996 1997
---- ----
Building $ 662,000 $ 1,764,000
Furniture and equipment 1,389,000 2,608,000
---------- -----------
2,051,000 4,372,000
Less Accumulated amortization 811,000 1,566,000
---------- -----------
$ 1,240,000 $ 2,806,000
========== ===========
F-13<PAGE>
The aggregate future minimum lease payments under capital leases are:
YEAR ENDED JUNE 30,
1998 $ 1,004,000
1999 835,000
2000 614,000
2001 370,000
2002 308,000
Thereafter 308,000
-----------
Total future minimum lease payments 3,439,000
Less amount representing interest 627,000
-----------
Present value of minimum lease
payments at June 30, 1997 $ 2,812,000
===========
OPERATING LEASES
The Company leases equipment and office facilities under operating
leases expiring through 2002. At June 30, 1997, the future minimum
rentals under these operating leases are:
YEAR ENDED JUNE 30,
1998 $ 7,620,000
1999 5,296,000
2000 3,501,000
2001 1,505,000
2002 404,000
Thereafter --
------------
$ 18,326,000
============
Rental expense under operating leases amounted to approximately
$1,953,000, $6,347,000 and $10,659,000 for 1995, 1996 and 1997,
respectively.
5. EQUITY
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 all of
the 167,960 shares of the Series A Preferred Stock and related
accumulated and unpaid Series A Preferred Stock dividends for
approximately $19,877,000. The difference between the carrying value of
the Series A Preferred Stock and its 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.
F-14<PAGE>
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 current policy expires on August 1, 1998. 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, 1997, 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. In September and November 1996 two additional
lawsuits were filed with similar representations. The individual
plaintiffs in all four cases allege that they were induced to purchase
the Company's stock on the basis of misrepresentations about the Company
and its prospects. The complaints assert claims under Sections 11, 12(2)
and 15 of the Securities Act of 1933. The complaints name as the
defendants the Company, its directors and certain of its officers, and
the lead underwriters associated with the public offering. By an order
dated December 5, 1996, The United States District Court for the Northern
District of Georgia consolidated all four actions. In January 1997 a
Consolidated Amended Complaint was filed in the Northern District of
Georgia. On March 13, 1997, the Company moved to dismiss the
Consolidated Amended Complaint. The Company intends to vigorously defend
this lawsuit.
7. INCOME TAXES
The components of the provision (benefit) for income taxes for 1995,
1996 and 1997 consist of:
1995 1996 1997
Current:
Federal $ 185,000 $ 1,400,000 $ (1,231,000)
State 35,000 123,000 (106,000)
-------- --------- ----------
Total current 220,000 1,523,000 (1,337,000)
Deferred:
Federal 411,000 (529,000) (342,000)
State 78,000 (99,000) (64,000)
------- --------- ---------
Total deferred 489,000 (628,000) (406,000)
------- --------- ---------
$ 709,000 $ 895,000 $ (1,743,000)
F-15<PAGE>
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, 1996 and 1997
are:
1996 1997
---- ----
Deferred tax assets
Nondeductible accruals and allowances $ 3,223,000 $ 3,956,000
---------- ----------
Total deferred tax assets 3,223,000 3,956,000
Deferred tax liabilities
Amortization (381,000) (395,000)
Depreciation (414,000) (428,000)
Other (210,000) (5,000)
---------- --------
(1,005,000) (828,000)
---------- ----------
Net deferred income taxes $ 2,218,000 $ 3,128,000
=========== ==========
A reconciliation of the provision (benefit) for income taxes to the
federal statutory rate of 34% for 1995, 1996 and 1997 is:
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) $ 478,000 $ 372,000 $ (1,976,000)
State income taxes, net of federal expense 65,000 44,000 (113,000)
(benefit)
Non-deductible amortization of intangible
assets 150,000 393,000 499,000
Other 16,000 86,000 (153,000)
--------- -------- -----------
Provision (benefit) for income taxes $ 709,000 $ 895,000 $ (1,743,000)
</TABLE>
8. RETIREMENT PLANS
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, $883,000 and $655,000 to these benefit plans
for 1995, 1996 and 1997, respectively.
9. STOCK OPTION PLANS
The Company has adopted three stock option and restricted stock
purchase plans (the "Plans"). Under the Plans, an aggregate of 2,517,702
shares have been reserved for issuance to employees, officers and
directors of the Company. On May 1, 1997 the 1996 Restricted Stock and
Stock Option Plan ("1996 Plan") was amended and restated to increase the
number of options from 500,000 to 1,300,000 that may be issued. 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 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 is as
follows:
F-16<PAGE>
OPTION WEIGHTED
NUMBER OF PRICE AVERAGE
SHARES PER SHARE PRICE
Balance, July, 1994 $ - $ - $ -
Granted 1,157,220 1.00-4.00 1.81
Canceled (23,000) 1.00-4.00 1.00
--------- ----------- --------
Balance, July, 1995 1,134,220 1.00-4.00 1.83
Granted 428,625 8.00-13.00 11.06
Canceled (42,425) 1.00-13.00 6.87
--------- ----------- --------
Balance, July, 1996 1,520,420 1.00-13.00 4.29
Granted 946,000 4.00-4.50 4.08
Canceled (694,557) 1.00-13.00 5.86
Exercised (66,481) 1.00-4.00 1.15
--------- ----------- --------
Balance, July, 1997 $ 1,705,382 $ 1.00-13.00 3.65
========= =========== ========
The stock options granted under the Plans during 1996 and 1997 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. No compensation expense
was recognized for the options granted in 1996 and 1997. Options under
the incentive plan generally will vest over a five-year period. Options
to purchase 250,000 shares were granted under a performance plan with
accelerated vesting at the achievement of certain stock price targets.
Effective May 22, 1997, the Company approved a plan to reprice
options to purchase 667,400 shares of common stock granted to employees
pursuant to the 1996 Plan. Options originally priced from $5.69 to $13.00
per share were repriced at $4.00 per share, the closing market price on
May 22, 1997. None of the repriced options were fully vested prior to the
repricing. The vesting schedule of the repriced options did not change as
a result of the repricing.
Options under the Plans generally vest ratably over one to five year
service periods from the date of grant. All options have a term of ten
years.
Options for the purchase of 361,369 and 561,636 shares of common
stock were exercisable at June 30, 1996 and 1997, respectively. The
following table summarizes information concerning outstanding and
exercisable options at June 30, 1997:
F-17<PAGE>
<TABLE>
<CAPTION>
Options outstanding Options Exercisable
------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Range of Number remaining Average Number Average
Exercise Options Contractual Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00-$4.50 1,610,932 8.69 $ 3.14 510,746 $ 1.90
$8.00-$13.00 94,450 8.47 $ 12.50 50,890 $ 12.81
------------------------------------ ------------------------
1,705,382 8.67 $ 3.65 561,636 $ 2.89
------------------------------------ ------------------------
</TABLE>
In July 1996, the Company adopted FASB Statement No. 123, "Accounting
for Stock-Based Compensation." Under Statement No. 123, the Company may
continue following existing accounting rules or adopt a new fair value
method of valuing stock-based awards. The Company has elected to
continue to follow APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations in accounting for its
employee stock options and not adopt the alternative fair value method of
accounting provided under Statement No. 123. Under APB 25, because the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro Forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for both 1996 and 1997: risk free interest
rates of 5.39% to 6.40% depending on the date of grant; a dividend yield
of 0%; volatility factors of the expected market price of the Company's
common stock of 0.795; a weighted-average expected life of the options of
six years and a weighted average expected life of the warrants of five
years.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods.
The Company's pro forma information follows (in thousands, except for
earnings per share information):
Year Ended June 30,
----------------------
1996 1997
---- ----
Pro forma net loss $(1,880,000) $(6,216,000)
Pro forma loss per share $ (0.25) $ (0.61)
The weighted-average fair value of options granted during 1996 and
1997 is $7.07 and $2.31, respectively. The weighted average fair value
of warrants granted during 1997 is $4.16. Because Statement 123 is
applicable only to options granted subsequent to June 30, 1995, its pro
forma effect will not be fully reflected until 2000.
F-18<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II---VALUATION AND QUALIFYING ACCOUNTS
HOUSECALL MEDICAL RESOURCES, INC.
June 30, 1997
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------
Balance at
Beginning of Charged to Charged to Balance at End
Description Period and Expenses Accounts- Deductions-Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended June 30, 1997:
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 2,920,000 $ 5,498,000 $ 2,024,000<F1> $ 6,394,000
============ =========== =============== ==============
Year Ended June 30, 1996:
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 2,510,000 $ 6,074,000 $ 5,664,000 <F1> $ 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 <F1> $ 2,510,000
=========== ========== ================= =============
<FN>
<F1> Uncollectible accounts written off, net of recoveries
</TABLE>
S-1<PAGE>
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 7th day of October, 1997.
HOUSECALL MEDICAL RESOURCES, INC.
(Registrant)
By: /s/ DANIEL J. KOHL
-----------------------------------
Daniel J. Kohl
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 Daniel J. Kohl or Fred C. Follmer, 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 7th day of October, 1996.
SIGNATURE TITLE
- -------------------------------------------- ---------------------------------
/s/ DANIEL J. KOHL President, Chief Executive
- -------------------------------------------- Officer, and Director
Daniel J. Kohl (Principal Executive Officer)
/s/ FRED C. FOLLMER Vice President, Chief Financial
- -------------------------------------------- Officer, and Secretary (Principal
Fred C. Follmer Financial and Accounting 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
- ---------------------------------------------
Dale Ross
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.2(b) Severance Agreement, dated April 10, 1997, by and between
the Company and George D. Shaunnessey
10.20 Amended and Restated Credit Agreement with The Toronto-Dominion
Bank dated as of May 13, 1997
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)
99 Draft of Proxy Statement dated October 15, 1997
<PAGE>
APPENDIX E
FORMS 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997,
THE SIX MONTHS ENDED DECEMBER 31, 1997, AND
THE NINE MONTHS ENDED MARCH 31, 1998<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-28134
HOUSECALL MEDICAL RESOURCES, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2114917
- ---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1000 Abernathy Road, Building 400, Suite 1825, Atlanta, Georgia 30328
----------------------------------------------------------------------
(Address of principal executive offices and zip code)
(770) 379-9000
--------------------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
Shares outstanding of each of the issuer's classes of common stock at
November 12, 1997: 10,399,915 shares of Common Stock, $0.01 par value
share.
<PAGE>
INDEX
Housecall Medical Resources, Inc.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 1997
and March 31, 1998
Condensed consolidated statements of operations -
Three months ended March 31, 1998 and 1997; Nine months
ended March 31, 1998 and 1997
Condensed consolidated statements of stockholders'
equity - Nine months ended March 31, 1998
Condensed consolidated statements of cash flows
- Nine months ended March 31, 1998 and 1997
Notes to condensed consolidated financial statements
- March 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K
Signatures
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March, 31
1997 1998
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,074,000 $ 77,000
Accounts receivable -- less allowance for doubtful accounts of
$6,394,000 at June 30, 1997 and $6,052,000 at March 31, 1998 28,927,000 27,550,000
Income taxes receivable 2,368,000 2,820,000
Deferred income taxes 3,956,000 5,313,000
Inventory 1,144,000 1,151,000
Other current assets 1,125,000 1,387,000
--------------- ------------
Total current assets 39,594,000 38,298,000
Property and equipment, net 9,032,000 9,078,000
Excess of cost of acquired businesses over fair values of net assets acquired 80,192,000 76,105,000
Deferred financing costs 1,361,000 1,079,000
Other assets 587,000 610,000
--------------- ------------
$ 130,766,000 $ 25,170,000
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,383,000 $ 4,878,000
Accrued payroll and related expenses 7,965,000 7,355,000
Other accrued liabilities 3,830,000 2,701,000
Current portion of long-term debt 3,517,000 9,503,000
Current portion of capital lease obligations 759,000 556,000
--------------- ------------
Total current liabilities 21,454,000 24,993,000
Long-term debt 43,214,000 37,943,000
Capital lease obligations 2,053,000 1,648,000
Other long-term liabilities 1,370,000 936,000
Deferred income taxes 828,000 828,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized,
10,285,000 and 10,400,000 shares issued and outstanding 103,000 104,000
Additional paid-in capital on common stock 66,714,000 66,882,000
Retained earnings (deficit) (4,970,000) (8,164,000)
--------------- ------------
Total stockholders' equity 61,847,000 58,822,000
--------------- ------------
$ 130,766,000 $125,170,000
=============== ============
</TABLE>
See accompanying notes.
2<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1997 1998 1997 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 46,457,000 $ 42,035,000 $ 143,010,000 $ 135,182,000
Operating expenses:
Patient care 21,184,000 17,797,000 64,303,000 54,257,000
General and administrative 26,513,000 22,333,000 74,878,000 74,590,000
Provision for doubtful accounts 2,585,000 1,084,000 3,645,000 3,228,000
Depreciation and amortization 867,000 1,097,000 2,468,000 3,364,000
------------- ------------- ------------
- -- --------------
Total operating expenses 51,149,000 42,311,000 145,294,000 135,439,000
------------- ------------- -------------- -------------
Income (loss) from operations (4,692,000) (276,000) (2,284,000) (257,000)
Interest expense, net 615,000 1,517,000 1,676,000 4,309,000
------------- ------------- -------------- -------------
Income (loss) before income taxes and
extraordinary item (5,307,000) (1,793,000) (3,960,000) (4,566,000)
Provision (benefit) for income taxes (1,737,000) (537,000) (1,188,000) (1,372,000)
------------- ------------- -------------- -------------
Income (loss) before extraordinary item (3,570,000) (1,256,000) (2,772,000) (3,194,000)
Extraordinary loss from early extinguishment of
debt, net of $554,000 income tax benefit 167,000 - 902,000 -
------------- ------------- -------------- -------------
Net income (loss) $ (3,737,000) $ (1,256,000) $ (3,674,000) $ (3,194,000)
============= ============= =============== =============
Basic and Diluted Earnings Per Common Share:
Income (loss) per common share:
Income (loss) before extraordinary item $ (0.35) $ (0.12) $ (0.27) $ (0.31)
Extraordinary item (0.02) - (0.09) -
-------------- -------------- --------------- -------------
Net income (loss) $ (0.37) $ (0.12) $ (0.36) $ (0.31)
============= ============= =============== =============
Weighted average common and common
equivalent shares outstanding 10,223,000 10,400,000 10,220,000 10,384,000
============= ============= =============== =============
</TABLE>
See accompanying notes.
3<PAGE>
<TABLE>
<CAPTION>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 10,285,000 $ 103,000 $ 66,714,000 $ (4,970,000) $ 61,847,000
Exercise of common stock options 115,000 1,000 168,000 169,000
Net loss (3,194,000) (3,194,000)
---------- ---------- ------------ ------------- --------------
Balance at March 31, 1998 10,400,000 $ 104,000 $ 66,882,000 $ (8,164,000) $ 58,822,000
========== ========== ============ ============= ==============
</TABLE>
See accompanying notes.
4<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
1997 1998
<S> <C> <C>
Operating activities
Net income (loss) $ (3,674,000) $ (3,194,000)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 2,470,000 3,365,000
Amortization of deferred financing costs 289,000 520,000
Deferred income taxes (1,373,000) (1,372,000)
Extraordinary item 902,000 -
Changes in operating assets and liabilities:
Accounts receivable 1,176,000 948,000
Other current assets and inventory (93,000) (269,000)
Accounts payable (3,048,000) (505,000)
Accrued payroll and related expenses and other accrued liabilities 1,057,000 (571,000)
Income taxes payable / receivable (96,000) (437,000)
-------------- -------------
Net cash provided (used) by operating activities (2,390,000) (1,515,000)
Investing activities
Payments for business acquisitions, net of cash acquired (5,448,000) -
Additions to property and equipment (1,216,000) (1,927,000)
Settlement with sellers of acquired companies - 2,670,000
Other, net (618,000) (597,000)
-------------- -------------
Net cash provided (used) by investing activities (7,282,000) 146,000
Financing activities
Repayments of long-term debt (67,000) -
Proceeds from issuance of long-term debt 13,588,000 -
Refinancing of long-term debt (6,708,000) -
Proceeds from issuance of common stock 53,000 169,000
Principal payments under capital lease obligations (563,000) (608,000)
Deferred financing costs (804,000) (189,000)
-------------- -------------
Net cash provided (used) by financing activities 5,499,000 (628,000)
-------------- -------------
Net increase (decreased) in cash and cash equivalents (4,173,000) (1,997,000)
Cash and cash equivalents at beginning of period 7,785,000 2,074,000
-------------- -------------
Cash and cash equivalents at end of period $ 3,612,000 $ 77,000
============== =============
</TABLE>
See accompanying notes.
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 1O-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods
ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1998. For further
information, refer to the company's consolidated financial statements
and footnotes thereto for the year ended June 30, 1997.
2. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented in
accordance with Statement 128 requirements.
3. Acquisitions
The following unaudited pro forma information for the nine months ended
March 31, 1997 is presented as if the fiscal 1997 acquisitions of
Messick Homecare and Healthfirst, described in Note 2 to the Company's
consolidated financial statements for the year ended June 30, 1997,
had been effected as of July 1, 1996. The pro forma information is
in thousands, (except per share amounts):
Nine months ended
March 31, 1997
-----------------
Net revenues $157,230
Income (loss) before extraordinary item (3,106)
Net income (loss) (4,008)
Net income (loss) per common share (0.36)
4. Commitments and Contingencies
At July 1, 1997 the Company maintained general and professional liability
insurance with independent insurance carriers primarily on an occurrence
basis. Beginning August 1, 1997, the Company purchased professional liability
insurance with terms which are similar. Prior to August 1, 1996, the Company
maintained general and professional liability insurance primarily on a
claims made basis. 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 March 31, 1998, would not be
material to the Company's financial position or its 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 after
market. In September and November 1996 two additional lawsuits were filed
with similar representations. The individual plaintiffs in all four cases
allege that they were induced to purchase the Company's stock on the basis
of misrepresentations about the Company and its prospects. The complaints
assert claims under Section 11, 12(2), and 15 of the Securities Act of 1933.
The complaints name as the defendants the Company, its Directors and
certain of its then existing officers, and the lead underwriters associated
with the public offering. By an order dated December 5, 1996, The
United States District Court for the Northern District of Georgia
consolidated all four actions. In January 1997 a Consolidated
Amended Complaint was filed in the Northern District of Georgia.
On March 13, 1997, the Company moved to dismiss the Consolidated
Amended Complaint. On March 30,1998, the Court granted the
Company's Joint Motion to Dismiss allowing Plaintiffs leave to
reopen this case by filing an amended complaint within
Thirty (30) days. On April 29,1998, the Plaintiffs filed the Second
Amended Class Action Complaint with the Court. The Company
intends to vigorously defend this lawsuit.
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.
5. Intangible Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("Statement No. 121"), the Company records impairment losses on
long-lived assets used in operations when events and circumstances
indicate that such assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
net book values. Due to the upcoming changes in the Medicare
reimbursement program for providers of home health services and the
Company's recording of significant recurring losses, the Company is
continuing the study to determine the impact as it relates to the carrying
value of its long-lived assets. Management expects to complete
this study during the next several months. It is reasonably possible
that the study may conclude that it is necessary to write down certain
assets to their fair market value.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 to the historical information contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
certain matters set forth below may contain forward-looking statements.
Such forward-looking statements involve a number of risks and uncertainties
that could cause results to differ materially from any such statements,
including the risk and uncertainties discussed in the Company's annual report
on Form 10-K for its fiscal year ended June 30, 1997 under the caption
"Certain Factors Affecting Forward-Looking Statements" Item 1, Business,
which discussion is incorporated herein by this reference.
Results of Operations
Housecall's results of operations during the three and nine month periods
ended March 31, 1998 reflect the performance of the Messick Homecare and
Healthfirst acquisitions (collectively referred to as the "Fiscal 1997
Acquisitions") for the entire period, but Housecall's results of operations
during the three and nine month periods ended March 31, 1997 reflect the
performance of Messick Homecare (which was acquired in November 1996) since
acquisition, and does not reflect the performance of Healthfirst
(which was acquired in May 1997).
The following table sets forth, for the periods indicated, selected financial
information as a percentage of net revenue:
<TABLE>
<CAPTION>
Percentage of Net Revenue
-------------------------------------------------------
Three months ended Nine months ended
March 31, March 31,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue 100.0 % 100.0 % 100.0 % 100.0%
Operating expenses:
Patient care 45.6 42.3 45.0 40.1
General and administrative 57.0 53.1 52.4 55.2
Provision for doubtful accounts 5.6 2.6 2.5 2.4
Depreciation and amortization 1.9 2.6 1.7 2.5
------- ------- ------- -------
Total operating expenses 110.1 100.6 101.6 100.2
------- ------- ------- -------
Income (loss) from operations (10.1) (0.6) (1.6) (0.2)
Interest expense, net 1.3 3.6 1.2 3.2
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item (11.4) (4.2) (2.8) (3.4)
Provision (benefit) for income taxes (3.7) (1.3) (0.8) (1.0)
------- ------- ------- -------
Income (loss) before extraordinary item (7.7) (2.9) (2.0) (2.4)
Extraordinary item 0.4 0.0 0.6 0.0
------- ------- ------- -------
Net income (loss) (8.1)% (2.9)% (2.6)% (2.4)%
======= ======= ======= =======
</TABLE>
Net Revenue. Net revenue decreased 9.5% in the third quarter of fiscal
1998 to $42.0 million compared to $46.5 million for the third quarter of
fiscal 1997. For the first nine months of fiscal 1998, net revenue of
$135.2 million was 5.5% lower than the same period in fiscal 1997.
The decrease in net revenue for the third quarter and the first nine
months of fiscal 1998 is primarily attributable to a decline in Medicare
nursing visits and Medicare cost-based reimbursement resulting from
venipuncture being disallowed as a reimbursable procedure and the Company's
continuing efforts to reduce costs. The majority of the decrease in nursing
net revenue was offset by increases in respiratory therapy/home medical
equipment (RT/HME) and management services for the third quarter and the
first nine months of fiscal 1998. Infusion therapy revenue for the first
nine months of fiscal 1998 was 4.1% below the first nine months of fiscal 1997;
however, for the third quarter of fiscal 1998, infusion therapy revenue
increased 4.5% over the same period in the prior year.
Patient Care Costs. Patient care costs decreased 16.0% in the third quarter
of fiscal 1998 to $17.8 million compared to $21.2 million for the
third quarter of fiscal 1997. Patient care costs also decreased 15.6% in
the first nine months of fiscal 1998 to $54.3 million from $64.3 million
for the same period of fiscal 1997. In each case, the decrease is primarily
attributable to the same factors mentioned above with respect to the
decrease in net revenue during the period, and the decrease in Medicare
nursing visits. As a percentage of net revenue, the decrease in patient
care cost reflects the change in the Company's business mix.
RT/HME has a significantly lower patient care cost percentage of
net revenue than nursing services, and the management services
segment (which experienced increased volume primarily as a result
of the May 1997 acquisition of Healthfirst) does not generate any
patient care cost.
General and Administrative Expenses. General and administrative
expenses decreased 15.8% in the third quarter of fiscal 1998 to
$22.3 million compared to $26.5 million for the third quarter of
fiscal 1997. For the first nine months of fiscal 1998, general and
administrative expenses decreased slightly to $74.6 million from
$74.9 million for the comparable period of fiscal 1997, or .4%.
Part of the decrease for the three months ended March 31, 1998 and the
first nine months of fiscal 1998 is attributable to staff reductions and
cost cutting that was implemented during the first two quarters of fiscal
year 1998. Most of that decrease, however, is offset by the fact that all
management services expenses are classified as general and
administrative and the segment increased as a percentage of net
revenues from 3.9% to 10.3% for the nine months ended
March 31, 1998, compared to the period ended March 31, 1997,
reflecting the acquisition of Healthfirst.
Provision for Doubtful Accounts. The provision for doubtful accounts for the
third quarter and the first nine months of fiscal 1998 was 2.6% and 2.4% of
revenues, respectively. The provision was substantially higher in the
fiscal 1997 third quarter as a result of the Company's change in business
mix whereby cost-based nursing revenue decreased while RT/HME and
management services revenue (which incur a higher incident of bad debt)
increased. For the nine months ended March 31, 1998
and 1997, the provision for doubtful accounts was comparable.
Depreciation and Amortization Expenses. Depreciation and amortization expense
increased to $3.4 million and $1.1 million for the nine months and the third
quarter of fiscal 1998, respectively, from $2.5 million and $.9 million in the
nine months and the third quarter of fiscal 1997, respectively, primarily due
to the Fiscal 1997 Acquisitions.
Interest Expense, Net. Interest expense increased in the third quarter of
fiscal 1998 to $1.5 million compared to $.6 million in the third quarter
of fiscal 1997. Interest expense increased in the first nine months of
fiscal 1998 to $4.3 million compared to $1.7 million for the first nine
months of fiscal 1997. The increases are primarily due to additional
borrowings incurred in connection with the Fiscal 1997 Acquisitions.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project within 12 to 15 months but not
later than June 30, 1999, which is prior to any anticipated impact on its
operating systems. The total cost of the Year 2000 project has not been
determined and is anticipated to be funded through operating cash flows.
Except for purchases of new software, these costs will be expensed as incurred.
There is no assurance that these costs will not have a material effect on
the results of operations.
Liquidity and Capital Resources
Management believes that cash flow generated from operations, and available
credit lines, will be adequate to enable the Company to fund its operations
for at least the next year. In the event operations do not provide
sufficient cash flow to fund operations, management intends to obtain
financing from alternate sources. Management also recognizes that scheduled
debt service payments over the next twelve months will not be achieved in
the absence of additional sources of cash. Strategic alternatives are presently
being reviewed in order to remedy this situation, and accordingly, management
has not included its long-term borrowings in current liabilities.
No assurance can be given that alternative sources of financing will be
available or that management will be able to remedy the scheduled
debt payment requirements. 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 reimbursement) may cause
working capital constraints.
At June 30, 1997, the Company had cash and cash equivalents of $2.1 million and
working capital of $18.1 million. At March 31, 1998, these amounts were
$.1 million and $13.3 million, respectively. Cash used by operating
activities was $1.5 million for the nine months ended March 31, 1998.
The Company's investing activities provided $.1 million cash during the nine
months ended March 31, 1998. The investing activities primarily consisted of
the settlement with sellers of acquired companies for $2.7 million in cash,
and the Company used approximately $1.9 million for additions to property,
plant and equipment.
Financing activities used $.6 million of cash during the nine months ended
March 31 1998. The most significant component of financing activities were
the payments of principal on capital leases.
Part 11. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Housecall Medical Resources, Inc.
(Registrant)
Date: May 20, 1998 by: /s/ Fred C. Follmer
---------------------------------
Fred C. Follmer
Chief Financial Officer
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-28134
HOUSECALL MEDICAL RESOURCES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2114917
- ---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1000 Abernathy Road, Building 400, Suite 1825, Atlanta, Georgia 30328
----------------------------------------------------------------------
(Address of principal executive offices and zip code)
(770) 379-9000
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
Shares outstanding of each of the issuer's classes of common stock at
February 11, 1998: 10,399,915 shares of Common Stock, $0.01 par value share.<PAGE>
INDEX
Housecall Medical Resources, Inc.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 1997 and December 31, 1997
Condensed consolidated statements of operations - Three months ended
December 31, 1997 and 1996; Six months ended December 31, 1997 and 1996
Condensed consolidated statement of stockholders' equity - Six months
ended December 31, 1997
Condensed consolidated statements of cash flows - Six months ended
December 31, 1997 and 1996
Notes to condensed consolidated financial statements - December 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K
Signatures<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,074,000 $ 2,082,000
Accounts receivable -- less allowance for doubtful accounts of
$6,394,000 in June 30, 1997 and $ 7,143,000 at December 31, 1997 28,927,000 27,241,000
Income taxes receivable 2,368,000 2,658,000
Deferred income taxes 3,956,000 4,775,000
Inventory 1,144,000 1,108,000
Other current assets 1,125,000 1,738,000
-------------- -------------
Total current assets 39,594,000 39,602,000
Property and equipment, net 9,032,000 9,145,000
Excess of cost of acquired businesses over fair values of net assets 80,192,000 77,001,000
acquired
Deferred financing costs 1,361,000 1,243,000
Other assets 587,000 663,000
-------------- -------------
$ 130,766,000 $ 127,654,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,383,000 $ 4,806,000
Accrued payroll and related expenses 7,965,000 7,824,000
Other accrued liabilities 3,830,000 3,203,000
Current portion of long-term debt 3,517,000 7,500,000
Current portion of capital lease obligations 759,000 708,000
-------------- -------------
Total current liabilities 21,454,000 24,041,000
Long-term debt 43,214,000 39,933,000
Capital lease obligations 2,053,000 1,703,000
Other long-term liabilities 1,370,000 1,071,000
Deferred income taxes 828,000 828,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized, and
10,285,000 and 10,400,000 shares issued and outstanding 103,000 104,000
Additional paid-in capital on common stock 66,714,000 66,882,000
Retained earnings (deficit) (4,970,000) (6,908,000)
-------------- -------------
Total stockholders' equity 61,847,000 60,078,000
-------------- -------------
$ 130,766,000 $ 127,654,000
============== =============
</TABLE>>
See accompanying notes.<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $48,027,000 $44,976,000 $ 96,552,000 $ 93,147,000
Operating expenses:
Patient care 21,298,000 18,019,000 43,118,000 36,460,000
General and administrative 23,682,000 25,398,000 48,365,000 52,257,000
Provision for doubtful accounts 491,000 1,057,000 1,060,000 2,144,000
Depreciation and amortization 831,000 1,127,000 1,601,000 2,267,000
----------- ----------- ----------- -----------
Total operating expenses 46,302,000 45,601,000 94,144,000 93,128,000
----------- ----------- ----------- -----------
Income (loss) from operations 1,725,000 (625,000) 2,408,000 19,000
Interest expense, net 567,000 1,502,000 1,061,000 2,792,000
----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item 1,158,000 (2,127,000) 1,347,000 (2,773,000)
Provision (benefit) for income taxes 468,000 (639,000) 549,000 (835,000)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item 690,000 (1,488,000) 798,000 (1,938,000)
Extraordinary loss from early extinguishment
of debt, net of $554,000 income tax benefit 735,000 - 735,000 -
----------- ----------- ----------- ------------
Net income (loss) $ (45,000) $(1,488,000) $ 63,000 $(1,938,000)
=========== =========== =========== ===========
Earnings Per Common Share:
Income (loss) per common share
Income (loss) before extraordinary item $ 0.06 $ (0.14) $ 0.07 $ (0.19)
Extraordinary item (0.06) - (0.06) -
=========== =========== =========== ===========
Net income (loss) $ (0.00) $ (0.14) $ 0.01 $ (0.19)
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 10,921,000 10,400,000 11,055,000 10,377,000
=========== =========== =========== ===========
Earnings Per Common Share - Assuming Dilution:
Income (loss) per common share
Income (loss) before extraordinary item $ 0.06 $ (0.14) $ 0.07 $ (0.19)
Extraordinary item (0.06) - (0.06) -
=========== =========== =========== ===========
Net income (loss) $ (0.00) $ (0.14) $ 0.01 $ (0.19)
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 11,033,000 10,400,000 11,111,000 10,377,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes<PAGE>
<TABLE>
<CAPTION>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Retained
----------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 10,285,000 $ 103,000 $ 66,714,000 $ (4,970,000) $ 61,847,000
Exercise of common stock 115,000 1,000 168,000 169,000
Net loss (1,938,000) (1,938,000)
---------- ----------- ------------ ------------ ------------
Balance at December 31, 1997 10,400,000 $ 104,000 $ 66,882,000 $ (6,908,000) $ 60,078,000
========== =========== ============ ============ ===========
See accompanying notes.
</TABLE>
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
1996 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 63,000 $(1,938,000)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 1,601,000 2,267,000
Amortization of deferred financing costs 202,000 334,000
Deferred income taxes - (835,000)
Extraordinary items 735,000 -
Changes in operating assets and liabilities:
Accounts receivable (2,108,000) 1,257,000
Other current assets and inventory (376,000) (577,000)
Accounts payable (1,749,000) (577,000)
Accrued payroll and related expenses (567,000) (122,000)
Other accrued liabilities - 525,000
Income taxes payable / receivable 459,000 (274,000)
---------- ----------
Net cash provided (used) by operating activities (1,740,000) 60,000
INVESTING ACTIVITIES
Payments for business acquisitions, net of cash acquired (5,448,000) -
Additions to property and equipment ( 786,000) (1,431,000)
Settlement with sellers of acquired company - 2,300,000
Other, net (344,000) (505,000)
---------- ----------
Net cash used by investing activities (6,578,000) 364,000
FINANCING ACTIVITIES
Repayments of long-term debt (46,000) -
Proceeds from issuance of long-term debt 11,988,000 -
Refinancing of long-term debt (6,708,000) -
Proceeds from issuance of common stock - 169,000
Principal payments under capital lease obligations (390,000) (402,000)
Deferred financing costs (763,000) (183,000)
---------- ----------
Net cash used by financing activities 4,081,000 (416,000)
---------- ----------
Net increase in cash and cash equivalents (4,237,000) 8,000
Cash and cash equivalents at beginning of period 7,785,000 2,074,000
---------- ----------
Cash and cash equivalents at end of period $3,548,000 $ 2,082,000
============== =============
</TABLE>
See accompanying notes. <PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, considered necessary for a
fair presentation have been included. Operating results for the three
and six-month periods ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending
June 30, 1998. For further information, refer to the company's
consolidated financial statements and footnotes thereto for the year
ended June 30, 1997.
2. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented in
accordance with Statement 128 requirements.
3. ACQUISITIONS
The following unaudited pro forma information for the six
months ended December 31, 1996 is presented as if the fiscal 1997
acquisitions of Messick Homecare and Healthfirst, described in
Note 2 to the Company's consolidated financial statements for the
year ended June 30, 1997, had been effected as of July 1, 1996.
The pro forma information is in thousands, (except per
share amounts):
Six MONTHS ENDED
DECEMBER 31,
1996
-------------
Net revenue $ 106,267
Income (loss) before extraordinary item 460
Net loss (loss) (275)
Net loss (loss) per common share (0.02)
4. COMMITMENTS AND CONTINGENCIES
At July 1, 1997, the Company maintained general and professional
liability insurance with independent insurance carriers primarily on
an occurrence basis. Beginning August 1, 1997, the Company purchased
professional liability insurance with terms which are similar.
Prior to August 1, 1996, the Company maintained general and
professional liability insurance primarily on a claims made basis.
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 December 31, 1997, would not
be material to the Company's financial position or its
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 after market. In September and November 1996 two additional
lawsuits were filed with similar representations. The individual
plaintiffs in all four cases allege that they were induced to purchase
the Company's stock on the basis of misrepresentations about the
Company and its prospects. The complaints assert claims under
Section 11, 12(2), and 15 of the Securities Act of 1933. The complaints
name as the defendants the Company, its Directors and certain of its
officers, and the lead underwriters associated with the public
offering. By an order dated December 5, 1996, The United States
District Court for the Northern District of Georgia consolidated all
four actions. In January 1997 a Consolidated Amended Complaint was
filed in the Northern District of Georgia. On March 13, 1997, the
Company moved to dismiss the Consolidated Amended Complaint.
The Company intends to vigorously defend this lawsuit.
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.
5. Intangible Assets
In accordance with FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("Statement No. 121"), the Company records
impairment losses on long-lived assets used in operations when
events and circumstances indicate that such assets might be
impaired and the undiscounted cash flows estimated to be generated
by those assets are less than assets' net book values. Due to the
upcoming changes in the Medicare reimbursement program for providers
of home health services and the Company's recording of significant
recurring losses, the Company plans to begin a study to determine the
impact as it relates to the carrying value of its long-lived assets.
Management expects to complete this study during the next three to six
month period. It is reasonably possible that the study may conclude
that it is necessary to write down certain assets to their fair
market value.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 to the historical information contained in this
Management's Discussion and Analysis of Financial Condition and
Results of Operations, certain matters set forth below may
contain forward-looking statements. Such forward-looking
statements involve a number of risks and uncertainties that could
cause results to differ materially from any such statements,
including the risk and uncertainties discussed in the Company's
annual report on Form 10-K for its fiscal year ended June 30,
1997 under the caption "Certain Factors Affecting Forward-Looking
Statements" Item 1, Business, which discussion is incorporated
herein by this reference.
RESULTS OF OPERATIONS
Housecall's results of operations during the three and six month
periods ended December 31, 1997 reflect the performance of the
Messick Homecare and Healthfirst acquisitions (collectively
referred to as the "1997 Acquisitions") for the entire period,
but Housecall's results of operations during the three and six month
period ended December 31, 1996 reflect the performance of Messick
acquisition for the months of November and December and do not reflect
the performance of the Healthfirst acquisition.
The following table sets forth, for the periods indicated,
selected financial information as a percentage of net revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUE PERCENTAGE OF NET REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Patient care 44.4 40.1 44.6 39.1
General and administrative 49.3 56.5 50.1 56.2
Provision for doubtful accounts 1.0 2.4 1.1 2.3
Depreciation and amortization 1.7 2.5 1.7 2.4
----- ----- ----- -----
Total operating expenses 96.4 101.5 97.5 100.0
----- ----- ----- -----
Income (loss) from operations 3.6 (1.5) 2.5 (0.0)
Interest expense, net 1.2 3.3 1.1 3.0
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item 2.4 (4.8) 1.4 (3.0)
Provision (benefit) for income taxes 1.0 (1.5) 0.6 (0.9)
----- ----- ----- -----
Income (loss) before extraordinary item 1.4 (3.3) 0.8 (2.1)
Extraordinary item 1.5 0.0 0.7 0.0
----- ----- ----- -----
Net income (loss) (0.1)% (3.3)% 0.1% (2.1)%
===== ====== ===== ======
</TABLE>
NET REVENUE. Net revenue decreased 6.3% in the second quarter of
fiscal 1998 to $45.0 million compared to $48.0 million for the second
quarter of fiscal 1997. For the first six months of fiscal 1998, net
revenue of $93.1 million was 3.5% lower than the same period in
fiscal 1997. The decrease in net revenue for the second quarter and
the first six months of fiscal 1998 is primarily attributable
to a decline in Medicare nursing visits and Medicare cost-based
reimbursement resulting from the Company's continuing efforts
to reduce costs. The majority of the decrease in nursing net
revenue was offset by increases in respiratory therapy/home
medical equipment (RT/HME) and management services for the second
quarter of fiscal 1998 and the first six months of fiscal 1998.
Infusion therapy revenue for the first six months of fiscal 1998
was 7.8% below the first six months of fiscal 1997, however, for
the second quarter of fiscal 1998 infusion therapy revenue
increased 2.7% over the same period in the prior year.
PATIENT CARE COSTS. Patient care costs decreased 15.4% in the
second quarter of fiscal 1998 to $18.0 million compared to $21.3 million
for the second quarter of fiscal 1997. Patient care costs also
decreased 15.4% in the first six months of fiscal 1998 to $36.5
million from $43.1 million for the same period of fiscal 1997.
In each case, the decrease is primarily attributable to the same
factors mentioned above with respect to the decrease in net revenue
during the period, and the decrease in Medicare nursing visits.
As a percentage of net revenue, the decrease in patient care cost
reflects the change in the Company's business mix. RT/HME has a
significantly lower patient care cost percentage of net revenue
than nursing services and the management services segment does not
generate any patient care cost.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 7.3% in the second quarter of fiscal 1998 to
$25.4 million compared to $23.7 million for the second quarter of
fiscal 1997. For the first six months of fiscal 1998 general and
administrative expenses increased to $52.3 million from $48.4 million
for the comparable period of fiscal 1997, or 8.1%. Part of the
increase for the first six months of fiscal 1998 is attributable to
the addition of marketing and sales staff during fiscal 1998 to
support implementation of the Company's expansion and growth plans,
which affected expenses before the benefits of increased net revenue
is achieved. In addition, much of the increase is attributable to
the fact that all management services expenses are classified as
general and administrative and the segment increased as a
percentage of net revenues from 2% to 91% for the six months
ended December 31, 1996 and 1997, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful
accounts for the second quarter and the first six months of
fiscal 1998 was 2.4% and 2.3% of revenues, respectively. The
provision was substantially lower in fiscal 1997 as a result of
the Company's change in business mix whereby the decrease in
cost-based nursing revenue has shifted to increased RT/HME and
management services revenue which incur a higher incident of bad debt.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and
amortization expense increased to $2.3 million and $1.1 million
in the six months and the second quarter of fiscal 1998 from
$1.6 million and $.8 million in the six months and the second
quarter of fiscal 1997, respectively, primarily due to the
fiscal year 1997 acquisitions.
INTEREST EXPENSE, NET. Interest expense increased in the
second quarter of fiscal 1998 to $1.5 million compared to
$.6 million in the second quarter of fiscal 1997. Interest
expense increased in the first six months of fiscal 1998 to
$2.8 million compared to $1.1 million for the first six months
of fiscal 1997. This increase is also primarily due to the
fiscal year 1997 acquisitions.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs
that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices,
or engage in similar normal business activities.
Based on a recent assessment, the Company determined that
it will be required to modify or replace significant portions
of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter.
The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will
not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 Issue could have a material impact
on the operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large third party payors, including the
Medicare Program, to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issues. There can be no guarantee that
the systems of other companies on which the Company's systems rely
will be timely converted and would not have an adverse effect on the
Company's systems. The Company has determined it has no exposure to
contingencies related to the Year 2000 Issue for services it has provided.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications.
The Company anticipates completing the Year 2000 project within 12 to 18
months but not later than June 30, 1999, which is prior to any anticipated
impact on its operating systems. The total cost of the Year 2000 project
has not been determined and is anticipated to be funded through operating
cash flows. Except for purchases of new software, these costs will be
expensed as incurred. There is no assurance that these costs will not
have a material effect on the results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that cash flow generated from operations,
will be adequate to enable the Company to fund its operations and
scheduled debt payments, for at least the next year. In the event
operations do not provide sufficient cash flow to fund operations and
scheduled debt payments, management intends to obtain financing
from alternate sources. However, no assurance can be given that
alternative sources of financing will be available. 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 reimbursement) 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 such occurrence.
At June 30, 1997, the Company had cash and cash equivalents
of $2.1 million and working capital of $18.1 million. At
December 31, 1997, these amounts were $2.1 million and $15.5 million,
respectively. Cash provided by operating activities was $.1 million
for the six months ended December 31, 1997.
The Company's investing activities provided $.4 million
cash during the six months ended December 31, 1996. The investing
activities primarily consisted of the settlement with sellers of an
acquired company for $2.3 million in cash and the Company used
approximately $1.4 million for additions to property,
plant and equipment.
Financing activities used $.4 million of cash during the
six months ended December 31 1997. The most significant
components of financing activities were the payments of principal
on capital leases and deferred financing costs.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Housecall Medical Resources, Inc.
(Registrant)
Date: February 14, 1998 by: /s/ Fred C. Follmer
--------------------------------------
Fred C. Follmer
Chief Financial Officer
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-28134
HOUSECALL MEDICAL RESOURCES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2114917
- ---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1000 Abernathy Road, Building 400, Suite 1825, Atlanta, Georgia 30328
----------------------------------------------------------------------
(Address of principal executive offices and zip code)
(770) 379-9000
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
Shares outstanding of each of the issuer's classes of common stock at
November 12, 1997: 10,399,915 shares of Common Stock, $0.01 par value
share.
<PAGE>
INDEX
Housecall Medical Resources, Inc.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 1997 and September 30,
1997
Condensed consolidated statements of operations - Three months ended
September 30, 1996 and 1997
Condensed consolidated statement of stockholders' equity - Three
months ended September 30, 1997
Condensed consolidated statements of cash flows - Three months ended
September 30, 1996 and 1997
Notes to condensed consolidated financial statements - September 30,
1997
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K
Signatures
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1997 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,074,000 $ 3,048,000
Accounts receivable -- less allowance for doubtful accounts of
$6,394,000 in June 30, 1997 and $ 6,541,000 at September 30, 1997 28,927,000 24,234,000
Income taxes receivable 2,368,000 3,147,000
Deferred income taxes 3,956,000 4,152,000
Other current assets 2,269,000 2,988,000
-------------- -------------
Total current assets 39,594,000 37,569,000
Property and equipment, net 9,032,000 9,373,000
Excess of cost of acquired businesses over fair values of net assets 80,192,000 79,817,000
acquired
Deferred financing costs 1,361,000 1,264,000
Other assets 587,000 587,000
-------------- -------------
$ 130,766,000 $ 128,610,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,383,000 $ 5,119,000
Accrued payroll and related expenses 7,965,000 7,434,000
Other accrued liabilities 3,830,000 2,887,000
Current portion of long-term debt 3,517,000 5,507,000
Current portion of capital lease obligations 759,000 1,076,000
-------------- -------------
Total current liabilities 21,454,000 22,023,000
Long-term debt 43,214,000 41,230,000
Capital lease obligations 2,053,000 1,751,000
Other long-term liabilities 1,370,000 1,212,000
Deferred income taxes 828,000 828,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized, and
10,285,000 and 10,400,000 shares issued and outstanding 103,000 104,000
Additional paid-in capital on common stock 66,714,000 66,882,000
Retained earnings (deficit) (4,970,000) (5,420,000)
-------------- -------------
Total stockholders' equity 61,847,000 61,566,000
-------------- -------------
$ 130,766,000 $ 128,610,000
============== =============
</TABLE>
See accompanying notes.
2<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1997
----------- -----------
<S> <C> <C>
Net revenue $48,525,000 $48,171,000
Operating expenses:
Patient care 21,820,000 18,441,000
General and administrative 24,683,000 26,859,000
Provision for doubtful accounts 569,000 1,087,000
Depreciation and amortization 770,000 1,140,000
----------- -----------
Total operating expenses 47,842,000 47,527,000
----------- -----------
Income from operations 683,000 644,000
Interest expense, net 494,000 1,290,000
----------- -----------
Income (loss) before income taxes 189,000 (646,000)
Provision (benefit) for income taxes 81,000 (196,000)
----------- -----------
Net income (loss) attributable to common
stockholders $ 108,000 $ (450,000)
=========== ===========
Income (loss) per common share $0.01 $(0.04)
=========== ===========
Weighted average common and common
equivalent shares outstanding 11,186,000 10,353,000
=========== ===========
</TABLE>
See accompanying notes
3<PAGE>
<TABLE>
<CAPTION>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Retained
----------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
---------- ---------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 10,285,000 $ 103,000 $ 66,714,000 $ (4,970,000) $ 61,847,000
Exercise of common stock 115,000 1,000 168,000 169,000
Net loss (450,000) (450,000)
---------- ----------- ------------ ------------ ------------
Balance at September 30, 1997 10,400,000 $ 104,000 $ 66,882,000 $ (5,420,000) $ 61,566,000
========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
4<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 108,000 $ (450,000)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 770,000 1,140,000
Amortization of deferred financing costs 110,000 150,000
Deferred income taxes 6,000 (196,000)
Changes in operating assets and liabilities:
Accounts receivable 2,119,000 4,693,000
Other current assets and inventory (398,000) (719,000)
Accounts payable (1,127,000) (264,000)
Accrued payroll and related expenses 458,000 (531,000)
Other accrued liabilities 173,000 (942,000)
Income taxes payable / receivable 67,000 (779,000)
---------- ----------
Net cash provided by operating activities 2,286,000 2,102,000
INVESTING ACTIVITIES
Additions to property and equipment (231,000) (994,000)
Other, net (372,000) (112,000)
---------- ----------
Net cash used by investing activities (603,000) (1,106,000)
FINANCING ACTIVITIES
Repayments of long-term debt (27,000) -
Proceeds from issuance of common stock - 169,000
Principal payments under capital lease obligations (198,000) 14,000
Deferred financing costs (106,000) (47,000)
Decrease in other long-term liabilities (185,000) (158,000)
---------- ----------
Net cash used by financing activities (516,000) (22,000)
---------- ----------
Net increase in cash and cash equivalents 1,167,000 974,000
Cash and cash equivalents at beginning of period 7,785,000 2,074,000
---------- ----------
Cash and cash equivalents at end of period $8,952,000 $3,048,000
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the three
month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year
ending June 30, 1998. For further information, refer to the
company's consolidated financial statements and footnotes thereto
for the year ended June 30, 1997.
2. ACQUISITIONS
The following unaudited pro forma information for the three
months ended September 30, 1996 is presented as if the fiscal 1997
acquisitions of Messick Homecare and Healthfirst, described in
Note 2 to the Company's consolidated financial statements for the
year ended June 30, 1997, had been effected as of July 1, 1996.
The pro forma information is in thousands, (except per share
amounts):
THREE MONTHS ENDED
SEPTEMBER 30,
1996
-------------
Net revenue $ 54,242
Net loss (430)
Net loss per common share (0.04)
3. COMMITMENTS AND CONTINGENCIES
At July 1, 1997, the Company maintained general and
professional liability insurance with independent insurance
carriers primarily on an occurrence basis. Beginning August 1,
1997, the Company purchased professional liability insurance with
terms which are similar. Prior to August 1, 1996, the Company
maintained general and professional liability insurance primarily
on a claims made basis. 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
September 30, 1997, would not be material to the Company's
financial position or its results of operations.
6
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 after market. In September
and November 1996 two additional lawsuits were filed with similar
representations. The individual plaintiffs in all four cases
allege that they were induced to purchase the Company's stock on
the basis of misrepresentations about the Company and its
prospects. The complaints assert claims under Section 11, 12(2),
and 15 of the Securities Act of 1933. The complaints name as the
defendants the Company, its Directors and certain of its
officers, and the lead underwriters associated with the public
offering. By an order dated December 5, 1996, The United States
District Court for the Northern District of Georgia consolidated
all four actions. In January 1997 a Consolidated Amended
Complaint was filed in the Northern District of Georgia. On
March 13, 1997, the Company moved to dismiss the Consolidated
Amended Complaint. The Company intends to vigorously defend this
lawsuit.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 to the historical information contained in this
Management's Discussion and Analysis of Financial Condition and
Results of Operations, certain matters set forth below may
contain forward-looking statements. Such forward-looking
statements involve a number of risks and uncertainties that could
cause results to differ materially from any such statements,
including the risk and uncertainties discussed in the Company's
annual report on Form 10-K for its fiscal year ended June 30,
1997 under the caption "Certain Factors Affecting Forward-Looking
Statements" Item 1, Business, which discussion is incorporated
herein by this reference.
RESULTS OF OPERATIONS
Housecall's results of operations during the three-month
period ended September 30, 1997 reflect the performance of the
Messick Homecare and Healthfirst acquisitions (collectively
referred to as the "1997 Acquisitions") for the entire period,
but Housecall's results of operations during the three-month
period ended September 30, 1996 do not reflect the performance by
these companies.
7<PAGE>
The following table sets forth, for the periods indicated,
<font size=2>selected financial information as a percentage of net revenue:
PERCENTAGE OF NET REVENUE
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1997
Net revenue 100.0% 100.0%
Operating expenses:
Patient care 45.0 38.3
General and administrative 50.9 55.8
Provision for doubtful accounts 1.1 2.3
Depreciation and amortization 1.6 2.3
----- -----
Total operating expenses 98.6 98.7
----- -----
Income from operations 1.4 1.3
Interest expense, net 1.0 2.6
----- -----
Income (loss) before income taxes 0.4 (1.3)
Provision (benefit for income taxes 0.2 (0.4)
----- -----
Net income (loss) attributable to common
stockholders 0.2% (0.9)%
===== ======
</font> NET REVENUE. Net revenue decreased 1% in the first quarter
of fiscal 1998 to $48.2 million compared to $48.5 million for the
first quarter of fiscal 1997. The decrease in net revenue is
mainly due to the decline in Medicare visits. This decline
caused Medicare cost-based nursing net revenue to decrease $4.8
million or 15.3%. This decline was offset by the increases in
respiratory therapy/home medical equipment (RT/HME) and
management services net revenue. The decrease in Medicare visits
is due to efforts by management to closely review patient
admissions in order to ensure that the patients meet the
homebound criteria for program benefits; increased Government
scrutiny of the home health care industry; and closure of branch
offices that do not have sufficient activity to provide cost
efficient services. The acquisition of Messick Homecare on
October 31, 1996 accounted for the increase in the RT/HME segment
from 1.5% to 5.4% of net revenue for the quarters ended September
30, 1996 and 1997, respectively. The Healthfirst acquisition on
May 13, 1997 accounted for the increase in management services as
a percent of net revenue from 3.7% to 12.6% for the first
quarters ended September 30, 1996 and 1997, respectively.
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. Patient care costs decreased 16% in the first quarter
of fiscal 1998 to $18.4 million compared to $21.8 million for the
first quarter of fiscal 1997. The decrease in patient care costs
is primarily attributable to the same factors mentioned above
with respect to the decline in Medicare visits. As a percentage
of net revenue, patient care cost decreased significantly
reflecting the change in the Company's business mix. RT/HME has
a significantly lower patient care cost percentage of net revenue
than nursing services and the management services segment does
not generate any patient care cost.
8<PAGE>
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. General and
administrative expenses increased 9% in the first quarter of
fiscal 1998 to $26.9 million compared to $24.7 million for the
first quarter of fiscal 1997. As mentioned above, much of the
increase is attributable to the fact that all management services
expenses are classified as general and administrative and this
segment increased as a percentage of net revenues from 3.7% to
12.6% for the first quarters ended September 30, 1996 and 1997,
respectively. Also, part of the increase is attributable to the
addition of marketing and sales staff to support implementation
of the Company's expansion and growth plans.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful
accounts increased in the first quarter of fiscal 1998 to $1
million compared to $.6 million for the first quarter of fiscal
1997. The increase is primarily a result of the Company's change
in business mix whereby the decrease in cost-based nursing
revenue has been shifted to increased RT/HME revenues which incur
a higher incident of bad debt.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation is
provided 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 increased in the first quarter of fiscal
1998 to $1.1 million compared to $.8 million for the first
quarter of fiscal 1997. The increase is the result of the fiscal
year 1997 acquisitions.
INTEREST EXPENSE, NET. Interest expense, net, reflects the
net result of interest income earned from short-term investments
of cash and the interest paid by the Company on indebtedness. Net
interest expense increased in the first quarter of fiscal 1998 to
$1.3 million compared to $.5 million for the first quarter of
fiscal 1997. The increase is the result of the fiscal year 1997
acquisitions, which were financed by debt.
NET INCOME. The Company had a net loss of $450,000 for the
first quarter of fiscal 1998 compared to net income of $108,000
for the first quarter of fiscal 1997. The $558,000 decrease is
attributable to the above factors, primarily increased interest,
depreciation and amortization expenses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and cash equivalents
of $2.1 million and working capital of $18.1 million. At
September 30, 1997, these amounts were $3.0 million and $15.5
million, respectively. Cash provided by operating activities was
$2.1 million for the three months ended September 30, 1997. Cash
provided by operations was positively affected by a decrease in
accounts receivable of $4.7 million. The decrease in receivables
is a result of increased collections from payors and the timing
of Medicare reimbursement under the periodic interim payments
system. Current portion of long-term debt increased $2.0 million
as a result of maturities scheduled for September 30, 1998.
9
<PAGE>
During the three months ended September 30, 1997, the
Company's investing activities used $1.1 million in cash. The
investing activities consisted of both additions to property,
plant and equipment as well as other assets. Financing activities
used $22,000 of cash during the three months ended September 30,
1997.
As of October 31, the Company had approximately $1.6
million of available borrowing capacity under its $18 million
Credit Line with Toronto - Dominion Bank.
10
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Form 8-K/A filed August 27, 1997 with respect to the
Acquisition of Healthfirst, Inc. Including:
The Report of Independent Auditors, Audited Combined
Balance Sheet as of December 31, 1996, and
Unaudited Combined Balance Sheet as of March 31, 1997.
Audited Combined Statement of Income for the year
ended December 31, 1996 and Unaudited Combined
Statement of Income for the three months ended as of
March 31, 1996 and 1997.
Audited Combined Statement of Owners' Capital
Deficiency for the Three months ended March 31, 1997.
Audited Combined Statement of Cash Flow for the year
ended December 31, 1996 and
Unaudited Combined Statement of Cash Flow for the three
months ended as of March 31, 1996 and 1997.
Notes to Combined Financial Statements.
Unaudited Pro Forma Financial information
Unaudited Pro Forma Condense Balance Sheet, as of March 31, 1997
Unaudited Pro forma Statement of Operations For the
Year Ended June 30, 1996
Unaudited Pro forma Statement of Operations For the
Nine Months ended March 31, 1997
Pro Forma Balance Sheet Adjustments
11
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Housecall Medical Resources, Inc.
(Registrant)
Date: November 13, 1996 by: /s/ Fred C. Follmer
---------------------------------
Fred C. Follmer
Chief Financial Officer
<PAGE>
HOUSECALL MEDICAL RESOURCES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Daniel J. Kohl and Fred C.
Follmer as Proxies, each with the power to appoint his substitute,
nd hereby authorizes either one or both of them to represent and
to vote, as designated below, all the shares of Common Stock of
Housecall Medical Resources, Inc. (the "Company") held of record
by the undersigned on June 30, 1998, at the Special Meeting of
Stockholders to be held on July 31, 1998.
1. To consider and vote upon a proposal to approve and adopt
the Amended and Restated Agreement and Plan of Merger, dated
June 17, 1998 by and among Adventist Health System Sunbelt
Healthcare Corporation ("Adventist"), Homecare Acquisition
Corp. ("Merger Sub"), the Company, Welsh, Carson, Anderson &
Stowe VI, L.P., WCAS Healthcare Partners, L.P. and WCAS
Capital Partners II, L.P., and to approve the consummation of
the transactions contemplated therein, including the merger
of Merger Sub with and into the Company such that the Company
will become a wholly owned subsidiary of Adventist (the
"Merger").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the meeting.
(Continued and to be dated and signed on reverse side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED FOR THE MERGER.
Please sign exactly as name appears below. When shares are
held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title
as such.
If a corporation, please sign in
full corporate name by President or
other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
DATED:____________________, 1998
___________________________________________
Signature
___________________________________________
Signature if held jointly
