<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1996
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 0-19240
U.S. HOMECARE CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-2853680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO HARTFORD SQUARE WEST, SUITE 300, HARTFORD, CT 06106
(Address of principal executive offices) (Zip Code)
(860) 278-7242
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Name of each
exchange on which
Title of Each Class registered
COMMON STOCK, $.01 PAR VALUE OTC BULLETIN BOARD
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 [ ]
<PAGE> 2
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 [ ].
While it is difficult to determine the number of shares owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding Common Stock on March 27, 1997, (based upon the average bid and
asked prices of such Common Stock on the "Pink Sheets" on March 27, 1997) held
by non-affiliates was approximately $10,735,000 million and the aggregate market
value of outstanding Preferred Stock on March 27, 1997 (based upon the price at
which such Preferred Stock was sold) held by non-affiliates was approximately
$10,765,000 million. For this computation, the registrant has excluded the
market value of all shares of its Common Stock and Preferred Stock reported as
beneficially owned by officers and directors and their affiliates and certain
significant shareholders of the registrant. Such exclusion shall not be deemed
to constitute an admission that any such shareholder is an affiliate of the
registrant.
Documents Incorporated by Reference
NONE.
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report for the Year Ended
December 31, 1996 on Form 10-K as set forth in the pages attached hereto:
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Exhibit 1. Financial Statements and Schedules
<PAGE> 3
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
U.S. HomeCare Corporation
By: /s/ Clifford G. Johnson
---------------------------------
Name: Clifford G. Johnson
Title: Chief Financial Officer
<PAGE> 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and under "Risk Factors."
GENERAL
The Company was formed in April 1986 to acquire a home health care
company operating primarily through five nursing service offices in New York
City and Westchester County with net revenues of approximately $8.8 million for
the year ended May 31, 1986. Following its formation in 1986, the Company
expanded through a strategy of internal growth, the opening of new branch
offices, selected acquisitions within its region and the introduction of new
services and programs, including infusion therapy which was added in 1989.
In 1992, the Company adopted an accelerated expansion strategy, opened
offices in a number of new geographic markets, developed a new and sizable base
of Medicare business in South Florida, and, in late 1992, consummated a
significant infusion therapy acquisition in the greater New York metropolitan
area. Management underestimated the financial, managerial and system resources
necessary to execute its expansion strategy. As a result, the Company failed to
successfully implement its expansion strategy and began to incur operating
losses in the second quarter of 1993.
In August 1994, the Company announced an extensive restructuring plan,
which included the closing of its development-stage offices outside of its core
markets, the consolidation of its infusion therapy pharmacy facilities from five
to two, and the sale of its South Florida operations which was completed in
December 1995. Despite these actions, the Company continued to incur operating
losses in 1994, 1995 and the first three quarters of 1996.
At the end of September 1996, the Company undertook a series of steps
to improve operating results, restore financial health and focus on building its
core home nursing services business. First, the Company engaged a team of
experienced turnaround specialists to improve the operating and financial
performance of the Company. During the fourth quarter of 1996, corporate
overhead was reduced by more than $4 million per annum and branch level overhead
and direct costs were reduced by more than $2.5 million per annum. Second, the
Company sold the business and operating assets of its troubled home infusion
therapy operations as of October 1, 1996. Finally, the Company settled all of
its material litigation and reduced the borrowings under the Company's revolving
credit facility from $8.9 million on September 30, 1996 to $5.0 million on
December 31, 1996.
13
<PAGE> 5
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues from continuing (nursing) operations were $56.5 million in
both 1996 and 1995.
Cost of revenues as a percentage of net revenues increased to 69.4% in
1996 as compared to 66.6% in 1995. The increase in cost of revenues reflected
increased workers compensation insurance expense, additional employee benefit
expense, and changes in the mix of direct labor.
Operating expense increased by $3.8 million or 18.3% to $24.6 million
in 1996 compared to $20.8 million for 1995. This increase primarily reflecting a
restructuring charge in the third and fourth quarters of 1996 of $3.6 million, a
decline in depreciation and amortization expense of $.3 million and an increase
in selling, general and administrative expenses of $.4 million. The increase in
SG&A costs reflected increased workers compensation insurance expense, increased
employee benefits expense, information systems expense and an increase in
personnel and related costs during the first nine months of 1996, offset by the
expense reductions achieved by the restructuring program initiated in late
September 1996.
The restructuring steps that the Company undertook at the end of
September 1996 resulted in the following. On October 31, 1996, the Company
completed the sale of certain assets (not including accounts receivable) of its
IV therapy business for approximately $2.0 million in cash. The sale had an
effective date of October 1, 1996. As a result of the sale the operations of the
IV therapy business has been treated as a discontinued operation. The Company
recorded a loss on disposal of the IV therapy business of $13.8 million. Such
loss on sale, which was net of the cash proceeds of the sale of approximately
$2,000,000, included (1) a write-off of $11.6 million of goodwill and other
intangible assets, (2) additional provisions for losses on accounts receivable
of $2.6 million, and (3) $1.6 million related to a charge for severance and
other anticipated costs during the phase out period. The loss from IV operations
in the 1996 period was $1.5 million including a provision of $1.1 million for
legal settlements. The Company also recorded a provision for restructuring and
other nonrecurring charges of $3.6 million which was comprised of: severance of
$.6 million, turnaround consultants' compensation of $1.9 million, an increase
in 1994 restructuring reserve of $.5 million and other restructuring costs of
$.6 million (including assets write-offs and lease costs). The reserve
established for compensation for the turnaround consultants includes cash
payments totaling $.4 million and significant performance based equity
incentives valued at approximately $1.5 million. The balance of the 1996 reserve
for restructuring and other nonrecurring charges was approximately $2.7 million
at December 31, 1996.
Interest expense was $1.1 million in 1996 or 25.5% higher than in 1995.
The increase reflects the result of the increased average borrowings under the
Company's bank facilities in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net revenues from continuing operations for 1995 were $56.5 million
compared to $56.4 million for 1994.
Cost of revenues as a percentage of net revenues declined to 66.6% in
1995 as compared to 68.0% in 1994 reflecting the impact of payor mix changes.
14
<PAGE> 6
Operating expense decreased by $21.1 million, or 50.3%, to $20.8
million in 1995. This decrease reflected cost cutting actions in 1995 as well as
bad debt, litigation and restructuring reserves taken in 1994 which did not
substantially reoccur in 1995.
Net interest expense was $0.9 million in 1995 or 38.9% lower than in
1994. The decrease was the result of decreased average borrowing under the
Company's bank facilities in 1995, as well as decreased interest charges in
connection with equipment leases.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
approximately $.6 million. Working capital (deficit) decreased by $11.7 million,
from $8.2 million at December 31, 1995 to a working capital (deficit) of ($3.5)
million at December 31, 1996. The decrease in net working capital was primarily
a result of a reduction in accounts receivable and an increase in accrued
expenses and restructuring reserves.
The reduction in net accounts receivable resulted primarily from the
reduction of receivables from the Company's discontinued infusion therapy
operations. The Company sold its infusion therapy operations on October 31,
1996. The Company retained its infusion therapy accounts receivable in
connection with the sale. Infusion therapy receivables (including off balance
sheet receivables which were sold under the securitization program) were $11.0
million on December 31, 1995 and $2.0 million on December 31, 1996.
Trade accounts payable declined from $4.2 million at December 31, 1995
to $3.2 million at December 31, 1996 reflecting the discontinuance of the
Company's infusion therapy business and the settlement and extension of certain
accounts payable.
Accrued expenses increased from $2.2 million at December 31, 1995 to
$4.5 million at December 31, 1996, resulting primarily from an increase in
accruals relating to workers compensation insurance and Medicare cost report
liabilities.
Cash flow from operating activities for the year ended December 31,
1996 improved $11.2 million to $6.0 million from ($5.2) million for the year
ended December 31, 1995. This improvement was principally due to the proceeds of
the IV therapy sale, the subsequent collection of the IV related accounts
receivable retained by the Company, improvement in collection of nursing
receivables and a reduction in cash payments on the 1994 restructuring charges.
Cash flow from financing activities was ($5.2) million for the year ended
December 31, 1996, compared to $4.9 million for the year ended December 31,
1995. Financing activities in 1995 reflect the issuance of $8.7 million of
preferred stock.
The Company has a revolving line of credit ("RLOC"), with availability
based upon a stated formula applied to "eligible" accounts receivable balances.
Borrowings bear interest at the higher of the bank's prime rate plus 2.0% or the
federal funds rate plus 1.0%. Remaining availability under the RLOC at December
31, 1996 was $1.6 million. Borrowings under the RLOC are collateralized by
substantially all of the Company's assets. The terms of the RLOC provide, among
other things, for prepayments in the event that the Company's formula based
borrowing capacity is reduced, for maintenance of certain financial ratios and
limitations on capital expenditures, acquisitions, and cash dividends. On March
25, 1997 the RLOC agreement was amended and restated to include a revised
maturity date of January 2, 1998, and an increase in the interest rate of 1% on
July 1, 1997 and an additional increase of 1% on October 1, 1997. In connection
with the revised agreement the banks were issued warrants to purchase 178,000
shares of the Company's Common Stock at $1.5969 per share.
15
<PAGE> 7
The Company has a $3.0 million subordinated credit facility the
("Subordinated Credit Facility") with a commercial bank. The Subordinated Credit
Facility is 100% guaranteed by the Connecticut Development Authority ("CDA"). On
March 25, 1997 the maturity of the Subordinated Credit Facility was extended to
January 15, 1998 and the CDA guarantee was extended to January 30, 1998. In
connection with the October 1995 issuance of the CDA guarantee, the Company
agreed to issue additional warrants (the "Additional Warrants") to the CDA to
purchase 735,000 shares of the Company's common stock for $1.5969 per share if
the guarantee was not released by April 30, 1997. As a result of the extension
of the CDA guarantee to January 30, 1998 the Company issued the Additional
Warrants to the CDA on March 25, 1997.
The Company has a Receivables Purchase and Servicing Agreement (the
"Securitization Program"), which allows the Company to sell for cash an
undivided percentage ownership interest in a designated pool of eligible
receivables, as defined. The Company relies on this accounts receivable
financing to fund working capital for current operations. The maximum amount of
cash advances (based on eligible accounts receivable) allowed under the program
is $10.0 million. The net proceeds from the sale of accounts receivable through
the Securitization Program at December 31, 1996 were $7.5 million. On March 27,
1997 the maturity date of the Securitization Program was extended to January 2,
1998. The Company will be required to adopt SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
in 1997. The adoption will not change the accounting for the accounts receivable
securitization.
Sales of substantial amounts of Common Stock in the public market in
the future could adversely affect the prevailing market price of the Company's
Common Stock. As outlined above, on March 25 and March 27, 1997, the Company
issued Warrants exercisable for an aggregate of 913,000 shares of Common Stock
exercisable at $1.5969 per share to its RLOC banks and the CDA. In addition,
during 1996 the Company issued or committed to issue an aggregate of 644,000
shares in exchange for the cancellation of certain of the Company's obligations
(the "Common Shares"). The foregoing securities are all restricted securities
within the definition of Rule 144 and are subject to certain resale provisions
relating to the manner and notice of sale, availability of current public
information about the Company and volume limitations. The holders of the
foregoing securities are entitled to have such shares registered by the Company
under the Securities Act of 1933, as amended. The Company intends to file a
registration statement registering approximately 11,900,000 shares of Common
Stock for resale in the second quarter of 1997 and plans to keep such
registration statement effective for a minimum of three years.
In order to fund operations during 1995 and 1996, the Company issued
securities and borrowed funds. The Company during the first three quarters of
1996 operated under severe cash flow pressure primarily because collections of
accounts receivable did not meet expectations. The Company believes that its
cash position and liquidity will continue to require careful management for the
foreseeable future. Cash availability improved during the last quarter of 1996
and the Company expects this improvement to continue during 1997.
The Company believes that its existing credit facilities, together with
cash generated from operations, will be sufficient to fund the Company's
operations and debt obligations through 1997. Beyond 1997, the Company believes
that it will need to extend or replace its existing credit facilities to ensure
sufficient funding of the Company's operations.
16
<PAGE> 8
QUARTERLY INFORMATION
The following table presents unaudited financial data for the eight
quarters beginning January 1, 1995. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary have been
made to present fairly the following selected quarterly information when read in
conjunction with the consolidated financial statements included elsewhere
herein.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Net revenues ........................... $ 14,262 $ 14,481 $ 13,557 $ 14,183
Income/(loss) from continuing operations
before interest and income taxes .. (423) (242) (8,300) 1,657
Income/(loss) from discontinued
operations ........................ 171 (62) (14,452) (900)
Net income (loss) ...................... (567) (608) (23,073) 455
Income (loss) per share(2) ............. $ (.07) $ (.07) $ (2.54) $ .05
1995
Net revenues ........................... 13,581 14,296 13,937 14,636
(Loss) from continuing operations
before interest and income taxes .. (887) (342) (301) (440)
Income from discontinued operations .... 135 206 336 519
Net loss ............................... (974) (337) (190) (297)
Loss per share(2) ...................... $ (.12) $ (.04) $ (.02) $ (.04)
</TABLE>
- ------------------
(2) The sum of the quarterly amounts does not equal the annual total due to
rounding.
During the fourth quarter of 1996, the company recorded an adjustment
to reduce its provision for restructuring and other non-recurring charges by $.9
million based upon a reevaluation of the cost of such reorganization. Also, in
the fourth quarter of 1996 the Company increased its loss on discontinued
operations by $.9 million to adjust its estimate for uncollectable IV therapy
receivables.
17
<PAGE> 9
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995................F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1995 and 1994........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................................F-6
Notes to Consolidated Financial Statements..................................F-7
Schedule II - Valuation and Qualifying Accounts.............................S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
U.S. HomeCare Corporation
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of U.S. HomeCare
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index on
page F-1. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement 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, such consolidated financial statements present fairly, in all
material respects, the financial position of U.S. HomeCare Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Hartford, Connecticut
March 27, 1997
F-2
<PAGE> 11
U.S. HOMECARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 647 $ 225
Accounts receivable, net of allowance
for doubtful accounts of $3,843 and $2,960 - Note 2 7,925 15,480
Other current assets 1,225 2,329
-------- --------
TOTAL CURRENT ASSETS 9,797 18,034
-------- --------
PROPERTY AND EQUIPMENT, net 2,578 3,875
-------- --------
OTHER ASSETS
Excess cost over net assets acquired, net
of accumulated amortization of $653 and $2,496 1,581 11,669
Intangible assets, net of accumulated
amortization of $5,165 and $6,573 822 3,735
Other 767 1,128
-------- --------
TOTAL OTHER ASSETS 3,170 16,532
-------- --------
TOTAL ASSETS $ 15,545 $ 38,441
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt $ 346 $ 1,119
Accounts payable 3,175 4,205
Accrued Expenses - Note 6 4,509 2,229
Reserve for restructuring and other non-recurring charges 3,670 1,172
Accrued payroll and related costs 1,608 1,123
-------- --------
TOTAL CURRENT LIABILITIES 13,308 9,848
-------- --------
OTHER LIABILITIES
Bank revolving lines of credit 7,980 11,766
Capital lease obligations and other long-term debt 3 758
Other 1,309 154
-------- --------
TOTAL OTHER LIABILITIES 9,292 12,678
-------- --------
TOTAL LIABILITIES 22,600 22,526
COMMITMENT AND CONTINGENCIES - Note 8
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 20,000,000 shares
authorized, 9,130,303 and 8,782,963 shares outstanding 94 88
Preferred stock, $1 par value, 484,000 authorized, 328,569
shares outstanding 328 328
Additional paid-in capital 44,923 45,688
Accumulated deficit (52,400) (28,607)
Treasury stock at cost, 0 and 277,936 shares 0 (1,582)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (7,055) 15,915
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY (DEFICIT) $ 15,545 $ 38,441
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 12
U.S. HOMECARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 56,483 $ 56,450 $ 56,351
Cost of revenues, primarily payroll and related costs 39,213 37,605 38,295
Gross profit 17,270 18,845 18,056
Operating expenses:
Selling, general & administrative expenses 19,016 18,607 27,382
Provision for litigation settlement 2,000
Amortization and depreciation 1,943 2,208 4,875
Restructuring and other non-recurring
charges - Note 5 3,619 7,650
-------- -------- --------
Total operating expenses 24,578 20,815 41,907
-------- -------- --------
Loss from continuing operations before interest
expense and income taxes (7,308) (1,970) (23,851)
Interest expense 1,092 870 1,423
-------- -------- --------
Loss from continuing operations
before income taxes (8,400) (2,840) (25,274)
Income taxes (benefit) 150 154 (219)
-------- -------- --------
Loss from continuing operations (8,550) (2,994) (25,055)
Discontinued Operations: (Note 1)
Income (loss) from discontinued operations (1,464) 1,196 (1,710)
Loss on sale of IV therapy business (13,779)
-------- -------- --------
Net loss $(23,793) $ (1,798) $(26,765)
Loss per share:
Loss from continuing operations $ (0.96) $ (0.37) $ (3.04)
Discontinued Operations:
Income (loss) from discontinued operation (0.17) 0.15 (0.21)
Loss on sale of IV therapy business (1.55)
-------- -------- --------
Net loss per share $ (2.68) $ (0.22) $ (3.25)
======== ======== ========
Weighted average common shares outstanding 8,868 8,180 8,247
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 13
<TABLE>
<CAPTION>
U.S. HOMECARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Series B
Common Stock Preferred Stock Treasury Stock
------------ --------------- Additional --------------
Paid-In Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit
------ ------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 8,547 $85 -- -- $ 35,924 (303) ($2,557) ($44)
Private placement -- -- 57 $ 57 1,910 -- -- --
Exercise of options 5 -- -- -- 23 -- -- --
Preferred dividends -- -- -- -- (40) -- -- --
Net loss -- -- -- -- -- -- -- (26,765)
---------------------------------------------------------------------------------------
Balance, December 31, 1994
8,552 85 57 57 37,817 (303) (2,557) (26,809)
Private placement -- -- 271 271 8,391 -- -- --
Purchase of treasury stock
from a related party -- -- -- -- -- (200) (329) --
Preferred dividends -- -- -- -- (1,263) 225 1,304
Stock issued in lieu of
cash for accounts payable
settlement 231 3 -- -- 545 -- -- --
Stock issued under
Employee Stock Savings
Plan -- -- -- -- 198 -- -- --
Net loss -- -- -- -- -- -- -- (1,798)
---------------------------------------------------------------------------------------
Balance, December 31, 1995
8,783 88 328 328 45,688 (278) (1,582) (28,607)
Preferred dividends 95 1 (1,583) 278 1,582
Stock issued in lieu of
cash for accounts payable
settlement 534 5 807
Stock issued under
Employee Stock Savings
Plan 8 11
Net loss (23,793)
---------------------------------------------------------------------------------------
Balance, December 31, 1996
9,420 $94 328 $328 $ 44,923 -- $ -- ($52,400)
---------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-5
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
U.S. HOMECARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($23,793) ($ 1,798) ($26,765)
Adjustments to reconcile net loss to net
cash provided by/(used in) operating activities:
Write-off of goodwill and intangible assets 11,577
Depreciation and amortization 2,510 3,456 6,612
Provision for bad debts 3,759 1,757 8,046
Non-cash charges 1,470 59 581
Deferred income taxes (280) 202
Gain on return of leased assets (24)
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable 3,796 (3,855) 2,596
Decrease in other current assets 1,104 2,301 3,458
Decrease/(increase) in other assets 361 (425) (425)
Increase/(decrease) in accounts payable
and accrued expenses 2,062 (3,389) 2,290
Increase/(decrease) in restructuring reserve 1,494 (3,047) 5,703
Increase/(decrease) in accrued payroll
and related costs 485 38 (21)
Increase in other liabilities 1,155
-------- -------- --------
Net cash provided by/(used in) operating activities 5,980 (5,207) 2,277
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases)/disposition of property and equipment, net (255) (114) 16
-------- -------- --------
Net cash (used in)/provided by investing activities (255) (114) 16
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments on)/proceeds from promissory note (2,000) 2,000
Proceeds from borrowing long-term debt 3,000 378
Payments on capital leases and long-term debt (5,314) (3,201) (6,452)
Purchase of treasury stock (329)
Decrease in cash overdraft (1,247) (43)
Issuance of common stock 11
Issuance of preferred stock 8,664 1,950
-------- -------- --------
Net cash (used in)/provided by financing activities (5,303) 4,887 (2,167)
-------- -------- --------
Net increase/(decrease) in cash 422 (434) 126
Cash and cash equivalents, beginning of year 225 659 533
-------- -------- --------
Cash and cash equivalents, end of year $ 647 $ 225 $ 659
======== ======== ========
Cash paid during the year for:
State income taxes $ 169 $ 25 $ --
Interest $ 1,043 $ 870 $ 1,380
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE> 15
U.S. HOMECARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation and Nature of Business - The consolidated financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly owned. All material intercompany accounts and transactions have
been eliminated. The Company is a provider of home health care services,
including nursing care and personal care, in Connecticut, New York, and
Pennsylvania. The infusion therapy business was discontinued September 30, 1996.
b. Management Actions and Operating Results - The accompanying financial
statements reflect operating and net losses for 1994, 1995 and 1996 and a
stockholder deficit and working capital deficit at December 31, 1996. As
discussed in c. below, the Company sold its IV therapy business effective
October 1, 1996. As discussed in Note 5, the Company has restructured its
operations to reduce both corporate overhead and branch operating costs. As
discussed in Note 7, the Company's long-term debt maturities were extended to
January 1998. As a result of the above actions, the Company believes that its
existing credit facilities, together with cash generated from operations, will
be sufficient to fund the Company's operations through 1997. Beyond 1997, the
Company believes that it will need to extend or replace its existing credit
facilities.
c. Discontinued Operations - On October 31, 1996, the Company completed the sale
of certain assets (not including accounts receivable) of its IV therapy business
for approximately $2,000,000 in cash. The sale had an effective date of October
1, 1996. The accompanying consolidated financial statements of operations for
the years ended December 31, 1996, 1995 and 1994 present the results of
operations of the IV therapy business as a discontinued operation. As a result
of the sale, the Company recorded a loss on disposal of the IV therapy business
of $13,779,000. Such loss on sale included (1) a write-off of $11,577,000 of
goodwill and other intangible assets, (2) additional provisions for losses on
accounts receivable of $2,578,000, and (3) $1,624,000 related to a charge for
severance and other anticipated costs during the phase out period net of the net
cash proceeds of the sale of approximately $2,000,000.
Net revenues from the discontinued IV therapy operations were
approximately $6,541,000, $14,733,000 and $22,715,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The income (loss) from
operations of the IV therapy business was ($1,464,000), $1,196,000 and
($1,710,000) for the years ended December 31, 1996, 1995 and 1994, respectively.
As a result of net operating loss tax credit Carry forwards, no income tax
benefits have been recognized for the discontinued operations. The December 31,
1996 balance sheet includes approximately $2,000,000 of accounts receivable (net
of a $2.9 million allowance for doubtful accounts) related to the assets of the
IV therapy business which was sold. The accounts receivable have been retained
by the Company.
d. Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates in the Company's financial
statements include: accounts receivable contractual allowances and bad debt
reserves, medicare reserves, reserves for self insured risks and restructuring
reserves. Actual results could differ from those estimates.
F-7
<PAGE> 16
e. Property and Equipment - Property and equipment are recorded at cost, less
accumulated depreciation computed on a straight-line basis over the useful lives
of the related assets. The useful lives vary from three to seven years.
Leasehold improvements and leased equipment are amortized over the lives of the
respective leases or the service lives of the asset, whichever is shorter.
f. Intangible Assets - Excess cost over net assets acquired is being amortized
over a period of 25 years. The Company reviews the recoverability of the excess
cost of net assets acquired based upon anticipated future cash flows of the
acquired company. Other intangible assets consist principally of patient and
referral lists, training programs, and aides and nurses lists and are being
amortized over a period of five to ten years. The net carrying value of aides
and nurses lists was approximately $822,000 and $1,359,000 as of December 31,
1996 and 1995 respectively. The net carrying value of patient and referral lists
was approximately $0 and $2,376,000 as of December 31, 1996 and 1995,
respectively.
g. Revenue Recognition - The Company recognizes revenues as the services are
performed. The Company receives retroactive increases to certain rates, certain
of which are intended to be passed through as additional salary and benefits to
Company personnel. The Company records such additional amounts as revenues and
expenses when they are notified by the payor or the amount is estimable. Certain
of the Company's revenues and related disbursements are subject to audit by
third party payors; these revenues are accrued on an estimated basis in the
period the related services are rendered. Net revenues is adjusted, as required
in subsequent periods, based on final settlement.
h. Per Share Information - Primary earnings per share do not include Common
Stock equivalents outstanding since they are anti-dilutive.
I. Reclassification - The presentation of certain prior year information has
been reclassified to conform with the current year presentation.
j. Cash and Cash Equivalents - The Company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
k. Income Taxes - The Company provides for income taxes based upon the asset and
liability method. Deferred income taxes have been provided for temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements.
l. Non-cash transactions - Schedule of non-cash transactions for the years
ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Stock issued in lieu of cash
for accounts payable settlement $ 812,000
Preferred Stock dividends paid with common stock $1,709,000
DECEMBER 31, 1995
-----------------
Write-off of assets against restructuring
reserve $1,484,000
Disposal of assets under capital leases $ 687,000
Stock issued in lieu of cash
for accounts payable settlement $ 548,000
Preferred Stock dividends paid with common stock $1,304,000
Disposal of assets under capital leases $ 167,000
</TABLE>
F-8
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
<S> <C>
Additional property and equipment
acquired through capital lease $102,000
Disposal of assets under capital leases $325,000
</TABLE>
. Stock Based Compensation - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which was effective for the Company
beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and non-employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded to employees. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock based
compensation awards to employees.
n. Fair Value of Financial Instruments - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
for certain assets and liabilities, whether or not recognized in the balance
sheets, for which it is practicable to estimate that value. The Company's
balance sheets include the following financial instruments: cash and cash
equivalents; accounts receivable; accounts payable and accrued expenses; bank
revolving line of credit; and capital lease obligations and other long-term
debt. The Company considers the carrying amount in the financial statements to
approximate fair value of these financial instruments because of the relatively
short period of time between the origination of such instruments and their
expected realization and/or the fact that the instruments reprice frequently at
market rates.
2. ACCOUNTS RECEIVABLE
In November 1993, the Company entered into a financing agreement with a bank
whereby it can sell an undivided percentage ownership interest in a designated
pool of accounts receivable. This agreement was amended and extended on March
27, 1997. The bank has committed up to $10.0 million based upon securitizing the
Company's eligible accounts receivable. The agreement now expires on January 2,
1998. Accounts receivable in the consolidated balance sheet do not include the
receivables sold to the bank in the amount of approximately $7.5 and $8.9
million at December 31, 1996 and 1995, respectively. The Company remains liable
for all sold receivables until collected.
The Company will be required to adopt SFAS, No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" in 1997.
The adoption will not change the accounting for the accounts receivable
securitization.
The Company maintains a reserve for accounts receivable including receivables
sold, based upon the expected collectibility of all accounts receivable.
F-9
<PAGE> 18
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS)
1996 1995
---- ----
<S> <C> <C>
Leasehold improvements and buildings $ 2,743 $ 2,663
Furniture and fixtures 1,970 2,088
Computer and other equipment 6,889 6,986
------- --------
11,602 11,737
Less accumulated depreciation
and amortization 9,024 7,862
------- --------
$ 2,578 $ 3,875
======= ========
</TABLE>
At December 31, 1996 and 1995 amounts relating to assets under capital
leases (included above) had a net carrying value of approximately $116,000 and
$838,000 respectively. Depreciation expense was $1,086,000, $1,235,000, and
$2,206,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
4. INCOME TAXES
The tax benefit recognized in 1994 was limited to the amount previously
paid for federal income tax purposes, partially offset by state tax expense.
There was no federal benefit recorded in 1996 or 1995 due to the incurred net
operating losses. The 1996 and 1995 provision consisted entirely of state taxes.
The tax effect of temporary differences giving rise to the Company's
deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 12,920 $ 7,140
Bad debt reserves 1,537 1,184
Restructuring reserves 1,468 469
Legal settlements 584 532
Accrued expenses 64 --
Other 200 208
-------- --------
Total deferred tax assets 17,673 9,533
Deferred Tax Liabilities:
Depreciation and amortization (127) (154)
-------- --------
Net Deferred Tax Asset 17,546 9,379
Valuation Allowance (17,546) (9,533)
-------- --------
Net Deferred Tax Liability $ -- $ (154)
======== ========
</TABLE>
F-10
<PAGE> 19
For financial reporting purposes, deferred tax assets are reduced by a
valuation allowance to an amount that is "more likely than not" to be realized.
Due to the Company's cumulative losses, management does not consider that enough
support to overcome the "more likely than not" criteria existed at December 31,
1996 and 1995.
The Company's income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
State and Local $ 150 $ 154 $ 231
Federal -- -- (329)
----- ----- -----
Total Current 150 154 (98)
Deferred (121)
----- ----- -----
Total provision/(benefit) for $ 150 $ 154 $(219)
income taxes ===== ===== =====
</TABLE>
At December 31, 1996 the Company has a tax net operating loss ("NOL") of
approximately $38.0 million expiring from 2009 to 2011 to offset against future
taxable income, if any. The Internal Revenue Code limits the amount of a
company's NOL carryforward that may be used in any one year to offset future
income after an "ownership change" (as defined). The Company does not believe
any such "ownership change" has occurred which would limit the available annual
amount.
5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the third quarter of 1996, the Company's Board of Directors made
decisions to restructure the operations of the Company and restore its focus on
core home nursing operations. The "1996 restructuring plan" included the sale of
the Company's IV therapy business discussed in Note 1. Additional actions
included the retention of two individual turnaround consultants, implementation
of plans to reorganize its home nursing operations in a more cost effective
manner, a reduction in both corporate management and non-management expenses and
the consolidation of certain offices. It is expected that the reorganization
plan will be completed by the end of the second quarter of 1997. As a result of
these decisions, the Company recorded a provision for restructuring and other
non-recurring charges of $3,619,000 during 1996 which was comprised of:
severance of $640,000, turnaround consultants $1,898,000, an increase in 1994
restructuring reserve of $535,000 and other reorganization costs of $546,000
(including asset write-offs and lease costs). The reserve established for
compensation for the turnaround consultants includes cash payments totaling
$428,000 and significant performance based equity incentives valued at
approximately $1,470,000. The balance of the "1996 plan" reserve was
approximately $2,719,000 at December 31, 1996 and is related principally to
severance costs, turnaround consultant compensation, and obligations for closed
facilities.
The equity incentives granted to the turnaround consultants consist of
options to purchase 1,730,000 shares of the Company's common stock for $0.15 per
share of which 576,667 were vested immediately. The remaining 1,153,000 options
vested in January 1997 based on predefined operating results being achieved in
the fourth quarter of 1996. The option contains a put provision which would
require the Company to purchase the Options for $1,500,000 if a Realization
Event (i.e acquisition of the Company by a merger or by a stock or asset sale,
etc.) does not occur prior to December 31, 1997.
F-11
<PAGE> 20
The Company has recorded a liability at December 31, 1996 of $1,470,000
to account for the issuance of these options to non employees. Such amount
approximates the fair value of the services provided.
During 1996, the Company paid, on a net basis, approximately $406,000
in restructuring and other non-recurring costs related principally to severance,
compensation to turnaround consultants, legal costs, and leasing costs. In
addition, the Company charged approximately $715,000 of non-cash items against
the reserve for restructuring and other non-recurring charges. Such non-cash
items related principally to depreciation expense and obligations settled with
common stock.
In the third quarter of 1994, the Company announced a restructuring
plan and recorded a charge of approximately $7.65 million. The plan was designed
to improve profitability by exiting the Florida market, consolidating infusion
therapy operations and closing development offices opened during 1992 and 1993.
The charge relates to: severance; disposition of property and equipment and
intangible assets related to these operations; and the estimated costs to close
or sublease facilities. The balance of the reserve at December 31, 1996 was
approximately $951,000 and is related principally to remaining obligations for
abandoned locations.
6. ACCRUED EXPENSE
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Legal settlements $1,459 $ 828
Medicare 1,012 --
Workers compensation 1,398 39
Other 640 1,362
------ ------
$4,509 $2,229
====== ======
</TABLE>
7. LONG TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Capitalized lease obligations (a) $ 69 $ 838
Revolving credit facility (b) 4,980 8,766
Subordinated revolving credit facility (c) 3,000 3,000
Notes payable -- 743
Other 280 296
------- -------
8,329 13,643
Less current portion 346 1,119
------- -------
$ 7,983 $12,524
======= =======
</TABLE>
a. The Company leases certain equipment under non-cancelable leases expiring at
various times through 1997.
F-12
<PAGE> 21
b. The Company has a revolving line of credit ("RLOC"), with availability based
upon a stated formula applied to accounts receivable balances. Borrowings
bearing interest at the higher of the bank's prime rate plus 2.0% or the federal
funds rate plus 1.0%. The interest rate at December 31, 1996 was 10.25%.
Remaining availability under the RLOC at December 31, 1996 was $1,591,000.
Borrowings under the RLOC are collateralized by substantially all of the
Company's assets. The terms of the RLOC provide, among other things, for
prepayments in the event that the Company's formula based borrowing capacity is
reduced, for maintenance of certain financial ratios, limitations on capital
expenditures, acquisitions, and cash dividends.
On March 25, 1997 the RLOC agreement was amended and restated to include a
revised maturity date of January 2, 1998, and increase in the interest rate of
1% on July 1, 1997 and an additional increase of 1% on October 1, 1997. In
connection with the revised agreement the banks were issued warrants to purchase
178,000 shares of the Company's Common Stock at $1.5969 per share.
c. In October 1995, the Company entered into a $3.0 million subordinated credit
facility with a commercial bank. The subordinated credit facility is 100%
guaranteed by the Connecticut Development Authority ("CDA"). The credit facility
originally had an expiration date of April 15, 1997. On March 25, 1997 the
subordinated credit facility was extended to January 15, 1998 and the CDA
guarantee was extended to January 30, 1998. The interest rate at December 31,
1996 was 6.5%. In connection with the October 1995 issuance of the CDA
guarantee, the Company agreed to issue additional warrants (the "Additional
Warrants") to the CDA to purchase 735,000 shares of the Company's common stock
for $1.5969 per share if the guarantee was not released by April 30, 1997. As a
result of the extension of the CDA guarantee to January 30, 1998 the Company
issued the Additional Warrants to the CDA on March 25, 1997.
Aggregate maturities of long-term debt as of December 31, 1996 are as follows:
(In Thousands)
1996 $ 346
1997 7,983
------
$8,329
======
8. COMMITMENTS AND CONTINGENCIES
a.Operating Leases - The Company leases office space under various leases with
terms ranging from one to fifteen years. Rent expense was $1,284,000,
$1,330,000, and $2,203,000 for the years ended December 31, 1996, 1995, and 1994
respectively. Future minimum rental commitments under non-cancelable operating
leases as of December 31, 1996 are as follows:
(IN THOUSANDS)
1997 $ 993
1998 420
1999 317
2000 250
2001 117
Thereafter 1,348
-----
$ 3,445
=========
b. Medicare - Approximately 14% in 1996, 18% in 1995, and 15% in 1994 of net
revenues were derived under the Medicare program. These revenues are based, in
part, on cost reimbursement principles and are subject to audit and retroactive
adjustment by the respective third-party fiscal intermediaries. Included in
accrued expenses at
F-13
<PAGE> 22
December 31, 1996 was approximately $1.0 million which is an estimate of what is
to be paid upon finalization of certain cost reports. In the opinion of
management, additional other retroactive adjustments, if any, are not expected
to be material to the consolidated financial statements of the Company.
c. Litigation -
i) HIPS/Abel. The Company reached settlement in November 1996 in HIPS
v. USHC Infusion, et al (Supreme Court, State of New York, New York
County), a suit brought in July 1993 by Home Infusion Pharmaceutical
Services, Inc. ("HIPS") in connection with the acquisition (the
Acquisition") of assets from HIPS and its affiliate Abel Health
Management Services, Inc. and their principal, Edward J. Abel. The
settlement is comprised of both cash and Company Common Stock, and
is payable in installments through April, 2001.
ii) Kingsland Litigation. The Company reached settlement in November
1996 in Kingsland Associates v. Abel Health Management Services,
Inc. and U.S. HomeCare Infusion Therapy Products Corporation
(Supreme Court of the State of New York, Nassau County), a suit
which also arose from the Acquisition. This was settled principally
in cash payable through April, 1998.
iii) Debenture Litigation. The Company reached settlement in February
1997 in Smith, Katz and Cole v. U.S. HomeCare Corporation, et al.
(Supreme Court of the State of New York, Nassau County), a suit
which arose from the 1986 acquisition of Reliable Nurses Aides of
Westchester, Inc. This settlement was settled by cash payments
scheduled through August, 1998.
iv) Roberts v. U.S. HomeCare Corporation, et al., 93 Civ. 4060 (CLB)
(U.S. District Court for the Southern District of New York).
In October 1994, the Company reached settlement in the securities
class action suit, Roberts v. U.S. HomeCare Corporation, et al., and
the defendants (the Company and certain directors and officers of
the Company) reached a settlement agreement with the Court. On March
17, 1995, the Court approved the settlement, certified the class for
settlement purposes only, and approved procedures for administering
the settlement process. Under the agreement the Company paid $3.0
million dollars (included in accounts payable and accrued expenses
at December 31, 1994). This amount consists of $1.0 million to be
paid by the Company's directors' and officers' liability insurance
(included in other current assets at December 31, 1994) and $2.0
million in cash by the Company. As of March 1995 the $3.0 million
dollars had been paid into a settlement fund which was disbursed
throughout the year.
v) In addition to the matters discussed above, the Company is involved
in litigation in the ordinary course of business. The Company
carries general liability insurance in the amounts of $2.0 million
per occurrence and $6.0 million in the aggregate, such aggregate
coverage having been increased over time. The Company does not
believe, after giving consideration to the insurance in place and
the claims outstanding, that the resolution of these matters will
have a material adverse effect on the financial position, results of
operations, or cash flows of the Company.
9. STOCKHOLDERS' EQUITY
a.Common Stock - The Company's authorized Common Stock consists of 40,000,000
shares of Common Stock, par value $0.01 per share, of which 9,419,973 shares
were issued and outstanding as of December 31, 1996.
On June 1, 1988, the Company established an Employee Stock Ownership
Plan (ESOP). The cost of the ESOP is borne by the Company through annual
contributions in amounts determined by the Board of Directors. The annual ESOP
contribution expense was $0 for the years ended December 31, 1996, 1995 and
1994. The ESOP funds are invested either by contribution of Common Stock of the
Company or open market purchases of Common
F-14
<PAGE> 23
Stock. On February 19, 1997 the Board of Directors voted to terminate the plan
and have the assets of the plan distributed to the participants in accordance
with the plan documents.
b. Exchange Preferred Stock - Preferred Stock Placement - On February 1 and
February 8, 1995, the Company issued and sold in a private placement a total of
271,428 shares of $35.00 6% Convertible Preferred Stock, $1.00 par value (the
"$35.00 Preferred") for $35.00 per share (the "Private Placement"). The $35.00
Preferred is convertible into approximately 7,200,000 shares of Common Stock at
a current conversion price of $1.5969 per share (as adjusted from the original
conversions price of $1.75 per share), subject to certain adjustments, and will
be automatically converted into Common Stock if the 20 day moving average of the
closing prices of the Company's Common Stock is greater than $4.375 per share.
The $35.00 Preferred pays an annual dividend of $2.10, which is payable
quarterly in cash or, at the Company's option, Common Stock. Simultaneously,
with the initial closing of the Private Placement, all of the holders of
Preferred Stock issued in September and October 1994 (the "Exchange Preferred")
exchanged their 57,141 shares of Exchange Preferred for an equal number of
shares of the $35.00 Preferred and exchanged their Exchange Warrants for
Warrants to purchase an aggregate of 99,997 shares of Common Stock at $1.5969
per share. To date, the dividends have been paid in Common Stock, with a total
of approximately 598,000 shares issued. The total liquidation preference was
$11.5 million at December 31, 1996 and 1995.
c. In connection with the restructured financing in 1995, the Company issued
warrants, which are currently exercisable to purchase an aggregate of 821,904
shares of Common Stock at $1.5969 per share to its RLOC banks. In connection
with the CDA's guarantee, the Company issued to the CDA warrants to purchase
821,904 shares of Common Stock at $1.5969 per share and has issued, as a result
of the March 25, 1997 extension of the guarantee, to the CDA a warrant to
purchase an additional 735,000 shares of Common Stock at the same price. These
warrants are exercisable at any time through March 25, 2002.
d. Stock Options - At the Company's Annual Meeting held on May 18, 1995, the
Company obtained shareholder approval of its 1995 Stock Option/Stock Issuance
Plan (the "1995 Plan"), pursuant to which 2,550,000 shares of common Stock were
reserved for issuance. The 1995 Plan is the successor to the Company's 1990
Stock Option Plan (the "1990 Plan"). Options available for grant at December 31,
1996 were 1,359,000.
All outstanding stock options under the 1990 Plan were incorporated into the new
1995 Plan but continue to be governed by the terms and conditions of the
specific agreements evidencing those grants. As a result of shareholder approval
of the 1995 Plan, (i) the Company's 1993 Director Stock Option Plan (the "1993
Plan") was terminated and all options outstanding thereunder were cancelled on
December 21, 1994 and (ii) the Company's 1991 Premium Price Stock Option Plan
(the "1991 Plan") was terminated and all options outstanding thereunder were
canceled. No further option grants or stock issuances will be made under the
1990 Plan, the 1991 Plan or the 1993 Plan (collectively, the "Predecessor
Plans").
Prior to the inception of the Plans, options were granted to certain key
employees, officers and directors under substantially the same terms, except
that vested options automatically expired if not exercised upon the initial
public offering of the Company's stock.
The 1995 Plan contains three separate equity incentive programs; (i) a
Discretionary Option Grant Program, (ii) an Automatic Option Grant Program and
(iii) a Stock Issuance Program.
The 1995 Plan (other than the automatic Option Grant Program) is administered by
the Compensation Committee of the Board. However, all grants under the Automatic
Option Grant Program are made in strict compliance with the provisions of that
program, and no administrative discretion is exercised by the Compensation
Committee with respect to the grants made thereunder.
Employees of the Company, non-employee members of the Board (other than those
serving as members of the Compensation Committee) and consultants and
independent advisors of the Company are eligible to participate in the
Discretionary Option Grant and Stock Issuance Program. Non-employee members of
the Board (including
F-15
<PAGE> 24
members of the Compensation Committee) are also eligible to participate in the
Automatic Option Grant Program.
Options may be granted under the Discretionary Option Grant Program at an
exercise price per share not less than 85% of the fair market value per share of
Common Stock on the option grant date. No granted option will have a term in
excess of ten years. The fair market value per share of Common Stock on any
relevant date under the 1995 Plan will be the last reported sales price per
share on that date.
Under the Automatic Option Grant Program, each individual who was serving as a
non-employee Board member on December 21, 1994 was automatically granted at that
time an option grant for 25,000 shares of Common Stock. Each individual who
first becomes a non-employee Board member after such date will automatically be
granted at that time an option grant for 25,000 shares of Common Stock. Each
option will have an exercise price per share equal to 100% of the fair market
value per share of Common Stock on the option grant date and a maximum term of
ten years measured from the option grant date.
Shares may be sold under the Stock Issuance Program at a price per share not
less than 85% of fair market value per share of Common Stock, payable in cash or
through a promissory note payable to the Company. Shares may also be issued
solely as a bonus for past services.
F-16
<PAGE> 25
A summary of the status of employee and directors options under the Company's
Stock Option Plan at December 31, 1996, 1995 and 1994, and changes during the
years ending on those dates, is presented below.
<TABLE>
<CAPTION>
1996 1995 1994
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1996 EXERCISE 1995 EXERCISE 1994 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,966,500 $3.10 1,206,223 $4.25 817,325 $9.50
Granted 945,000 $1.26 1,097,232 $2.52 1,074,880 $3.32
Exercised -- -- (54,000) $3.93
Cancelled/expired (1,721,000) $2.86 (336,955) $5.97 (631,982) $9.75
---------- --------- ---------
Outstanding at end of year 1,190,500 $1.61 1,966,500 $3.10 1,206,223 $4.25
========== ========= =========
Option exercisable at year end 767,067 $1.95 1,151,450 $3.37 739,800 $3.69
========== ========= =========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------- ----------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$1.00-$2.00 835,000 8.8 years $ 1.12 411,667 $ 1.24
$2.25-$6.00 335,000 6.6 years $ 2.33 335,000 $ 2.33
$6.25-$10.25 20,500 8.0 years $10.04 20,400 $ 10.04
--------- -------
1,190,500 $ 1.61 767,067 $ 1.95
========= =======
</TABLE>
On December 12, 1996, the Company canceled and reissued options previously
granted to certain employees under the Discretionary Option Grant Program at a
significantly lower exercise prices but equal to or greater than the market
price on such date. A total of 409,500 shares with exercise prices ranging from
$1.22 to $25.87 were canceled and reissued with an exercise price of $1.00. The
quoted market price at the date of reissuance was $0.625
The weighted average fair values of options granted during 1996 and 1995 was
$1.19 and $1.29, respectively per share for those options granted with an
exercise price that equaled the market price of the stock on the grant date and
was $0.31 per share for options granted during 1996 whose exercise price was
greater than the market price of the stock on the grant date. The Company
applies Accounting Principles Board Opinion No. 25 and related Interpretations
in accounting for stock option plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement 123,
the Company's net loss and net loss per share for the years ended December 31,
1996 and 1995 would have been reduced to the pro forma amounts indicated below:
F-17
<PAGE> 26
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss
As reported $ 23,793,000 $ 1,798,000
Pro forma $ 24,118,000 $ 2,498,000
Net loss per common share
As reported $ 2.67 $ 0.22
Pro forma $ 2.71 $ 0.31
</TABLE>
The fair value of options granted under the Company's stock option plans during
1996 and 1995 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 56.3%, risk free interest rate of 6.0%,
and expected lives of 5 years. See Note 5 for discussion of non-employee
options.
10. MAJOR CUSTOMER
VNS HomeCare ("VNS"), a non-profit home health institution in New York City,
accounted for approximately $5.4 million (10%), $6.2 million (11%), and $8.8
million (16%) respectively,of net revenue for the years ended December 31, 1996,
1995, and 1994.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations are shown on page 17 of the 1996 Form
10-K.
F-18
<PAGE> 27
U.S. HOMECARE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE
BALANCE AT AT END
BEGINNING OF CHARGED TO COST CHARGED TO OF
DESCRIPTION PERIOD AND EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ --------------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1994:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS $4,699,577 $8,045,688 $ -- $4,728,524 $8,016,741
========== ====================== ========== ==========
YEAR ENDED
DECEMBER 31, 1995:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS $8,016,741 $1,757,469 $ -- $6,814,064 $2,960,146
========== ====================== ========== ==========
YEAR ENDED
DECEMBER 31, 1996:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS $2,960,146 $3,759,455 $ -- $2,876,141 $3,843,460
========== ====================== ========== ==========
</TABLE>
The notes to the financial statements are an integral part of this schedule.
S-1
