-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q4DbL6zZcPOJDs7KAhdg6mWqV+jHmib9ZWTYiUu4xQHlwYZK47twLGEH2PHwuUJ8 4wNx3H+6HlXgkGi5L01Q/A== 0000899243-99-000660.txt : 19990403 0000899243-99-000660.hdr.sgml : 19990403 ACCESSION NUMBER: 0000899243-99-000660 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMEDISYS INC CENTRAL INDEX KEY: 0000896262 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 113131700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24260 FILM NUMBER: 99583736 BUSINESS ADDRESS: STREET 1: 3029 S SHERWOOD FOREST BLVD STE 300 CITY: BATON ROUGE STATE: LA ZIP: 70816 BUSINESS PHONE: 2252922031 MAIL ADDRESS: STREET 1: 3029 SOUTH SHERWOOD FOREST BLVD STREET 2: SUITE 300 CITY: BATON ROUGE STATE: LA ZIP: 70816 FORMER COMPANY: FORMER CONFORMED NAME: ANALYTICAL NURSING MANAGEMENT CORP DATE OF NAME CHANGE: 19940819 FORMER COMPANY: FORMER CONFORMED NAME: M&N CAPITAL CORP DATE OF NAME CHANGE: 19930125 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-K ---------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Fiscal Year Ended: December 31, 1998 Commission File Number: 0-24260 AMEDISYS, INC. (Exact name of registrant as specified in its charter) Delaware 11-3131700 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 3029 S. Sherwood Forest Boulevard, Suite 300 Baton Rouge, Louisiana 70816 (Address of principal executive offices, including zip code) (225) 292-2031 or (800) 467-2662 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulations S-K in this form, and if no disclosure will 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] Issuer's revenues for the year ended December 31, 1998 were $ 38,086,337. The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price as quoted by the OTC Bulletin Board on March 26, 1999 was $5,790,730. As of March 29, 1999 registrant has 3,071,797 shares of Common Stock outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- PART I................................................................... 3 ITEM 1. BUSINESS.................................................... 3 ITEM 2. PROPERTIES.................................................. 12 ITEM 3. LEGAL PROCEEDINGS........................................... 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13 PART II.................................................................. 13 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS..................................................... 13 ITEM 6. SELECTED FINANCIAL DATA..................................... 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................. 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 19 PART III................................................................. 19 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 19 ITEM 11. EXECUTIVE COMPENSATION...................................... 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 20 PART IV.................................................................. 20 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................................... 20 SIGNATURES............................................................... 22 FINANCIAL STATEMENTS..................................................... F-1
2 PART I ITEM 1. BUSINESS General Amedisys, Inc., a Delaware corporation ("the Company"), is a leading multi- regional provider of alternate-site health care services including home health care nursing, home infusion therapy and ambulatory surgery centers. The Company operates 71 offices within a network of subsidiaries in the southern and southeastern United States. Amedisys was incorporated in Louisiana in 1982. The Company consolidated the holdings of its subsidiaries through stock transfers pursuant to Section 351 of the Internal Revenue Code causing these subsidiaries to be 100% owned by Amedisys, Inc. in 1992. In 1993 the Company became public through a merger with M & N Capital, a New York corporation. In 1994, it moved its state of incorporation from New York to Delaware. Amedisys currently trades on the OTC Bulletin Board under the symbol "AMED." The Company seeks to differentiate itself from its competitors by providing a high level of quality medical care to its patients and a work environment that respects and values its employees. Its growth objective is to enhance its position in each of its markets and to provide its menu of services to patients, physicians and payors in a cost effective manner while maintaining a high level of quality. Amedisys will continue to penetrate its markets and increase patient admissions to its programs through its strong reputation for quality care and focused marketing and sales efforts. Recent Developments Recent Acquisitions On November 2, 1998, Amedisys, Inc. signed a definitive agreement to purchase certain assets, subject to the assumption of certain liabilities, of 83 home care offices including 35 provider numbers in Alabama, Georgia, Louisiana, North Carolina, Oklahoma and Tennessee from Columbia/HCA Healthcare Corporation. The Company had no material relationship with Columbia/HCA Healthcare Corporation prior to this transaction. The purchase price of $24,000,000 was calculated using various factors consistent with industry practice, including but not limited to: (i) a dollar figure per home care visit, (ii) number of patients, and (iii) state certificate of need requirements. A portion of the consideration, $9,994,000, less certain liabilities, was paid November 3, 1998 with the balance of $14,006,000 payable pursuant to a one-year promissory note at the prime rate of Union Planter's Bank of Louisiana plus 0.75%. The source for the cash portion of the consideration was from the sale of certain assets. The assets purchased consisted primarily of furniture, fixtures, and equipment; prepaid expenses; advances and deposits; inventory; office supplies; records and files; transferable governmental licenses and permits authorizations; and rights in, to and under specified licenses, contracts, leases, and agreements. The liabilities assumed were the paid-time-off balances of the Columbia/HCA employees and obligations arising on or subsequent to the closing dates under the assumed contracts. The closing of the transaction occurred in two stages. Assets located in Louisiana and Oklahoma were acquired November 16, 1998, and the remaining assets were acquired November 30, 1998. Columbia/HCA has agreed that for a period of two years from the date of closing it will not compete with the Company in the business of providing skilled intermittent home care services in the counties/parishes currently served by the acquired offices. Such covenant does not apply to a home health agency that is acquired as part of an acquisition of a general acute care hospital, skilled nursing facility, ambulatory surgical facility, physician practice management company or assisted living facility. On November 1, 1998, the Company acquired certain assets of Tanglewood Surgery Center in Odessa, Texas in exchange for $50,000 cash, a $50,000 note at 8.5% payable monthly over a one year period, and a $450,000 note at 10% payable monthly over a five year period. The assets acquired consisted of accounts receivable, inventory, and medical equipment. The liabilities assumed included a capital lease 3 collateralized by the acquired medical equipment. The Company contributed this facility to West Texas Ambulatory Surgery Center, LLC in exchange for a 67% ownership interest. The remaining ownership interest is held by local physicians. Recent Dispositions On September 21, 1998, the Company sold certain assets, subject to the assumption of certain liabilities, of its wholly-owned subsidiaries of Amedisys Staffing Services, Inc., Amedisys Nursing Services, Inc., and Amedisys Home Health, Inc. to Nursefinders, Inc. The Company had no material relationship with Nursefinders, Inc. prior to this transaction. The purchase price of $7,200,000 was calculated using a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). At closing, $6,480,000 was payable immediately with the balance of $720,000 placed in an escrow account. The escrow funds were to be held for an initial ninety (90) day period. The assets sold consisted primarily of all accounts and notes receivable; prepaid expenses; advances and deposits; on-site hardware and software; furniture, fixtures, and leasehold improvements; office supplies; records and files; transferable governmental licenses, permits, and authorizations; and rights in, to and under specified licenses, contracts, leases, and agreements. The liabilities assumed were the trade accounts payable, accrued expenses, and other liabilities as of the closing date. The Company has agreed to a five-year non-competition covenant. On November 3, 1998, Amedisys, Inc. (the "Company") and CPII Acquisition Corp. ("CPII") entered into an Asset Purchase Agreement whereby the Company sold certain of the assets, subject to the assumption of certain liabilities, of its proprietary software system (Analytical Medical Systems) and home health care management division (Amedisys Resource Management) to CPII in exchange for $11,000,000 cash. The assets sold consisted primarily of proprietary rights with respect to the home health information system developed and used by the Company and its subsidiaries; deposits, prepayments or prepaid expenses relating to the business; contracts; fixtures and equipment; books and records; rights under warranties; and claims, causes of action, chooses in action, rights of recovery and rights to set-off. The liabilities assumed were those associated with the assumed contracts. The Company has also agreed to provide limited support services to CPII for the period of one year from the date of the agreement. The Company has retained a licensing agreement with CPII for the software for a period of five years. On January 1, 1999, the Company sold all of the issued and outstanding stock of Amedisys Durable Medical Equipment, Inc. d/b/a Care Medical and Mobility (ADME) to Ace Drug Medical Equipment, Inc. (ACE), a Texas Corporation. The sales price was $672,385 of which $100,000 was paid at closing; $418,318 was a payable pursuant to a two year note, payable in eight equal quarterly payments of principal and interest at prime plus 2%, adjusted annually; and $154,067 was payable pursuant to a one year note, payable in four quarterly payments of principal plus accrued interest at prime plus 2%. Each note is solitarily guaranteed by Terry Huckabee, a principal of ACE. ACE acquired substantially all of the assets and liabilities of ADME. This transaction was accounted for as a sale by the Company. Recent Financing In December 1998, the Company secured a $25 million asset-based line of credit with National Century Financial Enterprises, Inc. (NCFE) of Dublin, Ohio. The line of credit is collateralized by eligible accounts receivable. Eligible receivables are defined as receivables, exclusive of workers' compensation and self-pay, that are aged less than 181 days. The ongoing fees associated with this line of credit equate to 1% of eligible billed receivables generated during each billing period. The Company also obtained from NCFE a $3,000,000 loan at 20% interest, payable in equal monthly installments of principal and interest for a period of three years. Industry Overview The health care industry continues to undergo changes. Today's focus is on managing cost and utilization, as opposed to the hospital/physician centered focus that has dominated healthcare since the early 1950's. Beginning in the mid-1980's, health care shifted from providing care at any cost to learning to manage costs. The industry is now experiencing another shift, which requires health care providers to work with payors to balance the management of care with cost. 4 In an effort to manage health care expenditures, a strong focus has been placed on moving the primary source of health care from the traditional institutional settings (hospitals), causing home health care to play a more dynamic role. As a result, the number of services that can be provided safely and effective in sites alternate to the hospital have dramatically increased. Managed care, Medicare, Medicaid and other payor reimbursement pressures continue to drive patients through the continuum of care until they reach a setting where the appropriate level of care can be provided most cost effectively. Over the past several years, home care has evolved as an acceptable (and often preferred) alternative in this continuum. In addition to patient comfort and convenience, substantial cost savings can be realized through treatment at home as an alternative to institutional settings. To compete in this evolving environment, it is critical that providers not only provide high quality, cost effective care, but implement clinically-based management information systems to reduce costs, improve productivity, produce and analyze clinical outcomes data, and position themselves as partners in the health care continuum. Strategy The Company's business objective is to enhance its position in its market areas as a primary provider of high quality, low cost alternate site health care services. To accomplish this, it will do the following: Focus on its employees. Because the Company is engaged in a service business, the essence of the Company is its people. The Company's emphasis on communication, education, empowerment, and competitive benefits allow it to attract some of the most highly skilled and experienced people in its markets. Focus on Selective Geographic Markets. The Company is targeting selected markets in the southern and southeastern United States. Through expansion of existing services, it plans to dominate these markets, to increase utilization of its services by payors and referral sources and to enhance its overall market position. Since many of the areas in which the Company operates are rural, home health care is an ideal delivery system. Manage Costs Through Disease State Management. Payors are focusing on the management of patients who suffer from chronic disease states which represent substantial costs. Some of the major disease states include: diabetes, congestive heart failure, HIV, cancer, and asthma. The Company's disease state management programs include patient and family education, frequent monitoring and coordinated care with other medical professionals involved in the care of the patient. Manage Costs Through Technology. The Company licenses a software system that had been developed internally by the Company which reduces its cost to operate its business, as well as integrates a number of financial and operating functions into a single entry system. By enhancing its operations through the use of information technology, the Company is positioned to not only operate more efficiently, but to compete in an environment increasingly influenced by cost containment. Business Development The Company is committed to growth in each of its divisions, however, its current and future primary focus is in its home health care nursing services division. The Company has an active team of professionals who support business development of new and ongoing service areas. The team provides support services including market analysis; planning; research; and community, public and media relations which impact Company wide and region specific growth and budget goals. The professionals on this team also provide advertising, public relations and educational campaigns. The local office level of the Company, community relations and sales professionals work with administrators and branch managers to capture additional market share and enhance growth in each local market. 5 Service Divisions Home Health Care Nursing Services provided in home health care include four broad categories: (1) nursing and allied health services, (2) infusion therapy, (3) respiratory therapy and, (4) home medical equipment. Accounting for $28 billion in expenditures in 1997, nursing and allied services represent the largest sector or 70% of all home health care services. Medicare reimbursements account for approximately 65.2% of home care nursing. The Balanced Budget Act of 1997 established a new reimbursement system for Medicare home care nursing services for cost reporting periods beginning on or after October 1, 1997 known as the Interim Payment System ("IPS"). This change has had a significant effect on the home care industry since Medicare is its largest payor source. On March 31, 1998, the Federal Government released its final determination and definitions of IPS, which was retroactive to October of 1997. In addition to changes in the home care nursing per visit rate, it imposed a per beneficiary limit. Industry experts predicted that 40%-50% of existing home care companies would no longer be in business by the end of 1998. At the end of 1998, it was estimated that over 1,000 companies had ceased operations. In June, 1998, the Budget Committee of the U.S. House of Representatives unanimously adopted a resolution that required revision of the Medicare IPS. The amendment called for recognition that IPS is inherently unfair to many home care providers and caused cuts in needed services, and directed the House Ways and Means Commerce Committee to revise IPS during the legislative session. Additionally, the Executive branch joined the House and Senate in supporting IPS reform. This amendment instructed the authorizing committees to ensure that the Prospective Payment System ("PPS") go into effect no later than October 1, 1999, however the Health Care Financing Administrations ("HCFA") recommended that this be postponed to July of 2000 due to their Y2K issues. These changes have had and will continue to have a significant effect on the home care nursing industry since Medicare is its largest payor source (see Billing and Reimbursement). The Company operates 57 home care nursing offices consisting of 28 parent offices with Medicare provider numbers, and 29 branch offices. Serving this market for the past 7 years, the Company has built an excellent reputation based on quality care and specialty nursing services. Because its services are comprehensive, cost-effective and can be accessed 24 hours a day, seven days a week, the Company's home care nursing services are attractive to payors and physicians. All of its offices are either accredited or in the process of accreditation by the Joint Commission on Accreditation of Health Care Organizations ("JCAHO"). The Company provides a wide variety of home health care services including: Registered nurses who provide specialty services such as infusion therapy, skilled monitoring, assessments, and patient education. Many of the Company's nurses have advanced certifications. Licensed practical (vocational) nurses who perform technical procedures, administer medications and change surgical and medical dressings. Physical and occupational therapists who work to strengthen muscles and restore range of motion and help patients to perform the activities of daily living. Speech pathologists/therapists who work to restore communication and oral skills. Social workers who help families address the problems associated with acute and chronic illnesses. Home health aides who perform personal care such as bathing or assistance in walking. Ambulatory Surgery Centers Ambulatory Surgery Centers ("Centers") offer an alternative to hospital surgical suites or operating rooms. The number of procedures offered in these Centers has increased due to advances in technology, including the use of endoscopic procedures and laser equipment. These techniques are less invasive and require shorter recovery periods than traditional hospital services. The Centers offer a high quality, cost effective benefit for insurers, as well as patients who are responsible for co-payments for their procedures. Facility fees are lower 6 than similar hospital procedures and the atmosphere is less institutional. Physicians who operate at the Centers can participate in ownership, and enjoy block scheduling and faster turnaround times, allowing them more time with their patients. According to a recent report by SMG Marketing Group, in 1997 the market share for freestanding surgery centers has increased in comparison to the outpatient surgical hospital market. Of the 32.1 million total surgical procedures performed in the nation last year, hospitals performed an estimated 24.1 million, of which 14.1 million or 58% occurred on an outpatient basis. It is projected that hospitals will perform 64% of all outpatient surgical procedures for the nation this year, a significant decrease from the 76% performed in 1990. Meanwhile, the shift in total outpatient surgical volume continues to increase. This shift is due, in large part, to technological advances which allow more procedures to be done in outpatient settings and payors seeking cost effective services for their health plans. The Company operates and has ownership interests in six ambulatory surgery centers. Each of its Centers are at the forefront of technology for a variety of out-patient surgical procedures. The Centers provide patients, physicians, and payors with an efficient and flexible alternative source for quality multi-specialty medical care. Each Center is either accredited or in the process of accreditation by the Accreditation Association of Ambulatory Health Care and staffed with highly talented and experienced multi-disciplinary teams, allowing them to enjoy an excellent reputation for delivering outstanding patient care. Infusion Therapy Services Infusion therapy is the intravenous, intramuscular, or subcutaneous administration of medications and nutrition. These procedures were once confined to hospital environments, however, with the portability of technology and the expanded training and certification standards for registered nurses, infusion procedures can be safely and effectively performed in the home setting, physician office and ambulatory infusion suites. According to Alex Brown in their Home Care Industry Perspective report, the total home infusion therapy market is approximately $5 billion or 13% of the total home health care expenditure, representing the second largest and fastest growing segment of the home care industry. Beginning as a cottage industry in the 1970's, the home infusion business experienced explosive growth in the mid-1980's. The industry became saturated in the 1990's. At that time, managed care, which now represents approximately 2/3 of revenues in this segment, began to negotiate lower pricing. This caused many companies to be driven out of business or acquired by the large national providers. As a result of questionable success in the integration of these combined companies, it appears that regional and local providers have benefitted as the larger, most visible companies continue to lose revenues and market share. The Company opened its first infusion therapy office in December, 1997. It currently operates five offices and offers a large menu of services including: Antibiotic therapy which is the infusion of antibiotic medications to treat various infections and diseases. Total parenteral nutrition which involves the provision of nutrients through catheters to patients who cannot absorb nutrients through the digestive tract due to chronic gastrointestinal conditions. This is typically a long term therapy. Enteral nutrition which is the infusion of nutrients through a feeding tube directly into the digestive tract. This can be a long term therapy for patients who cannot eat or drink normally. Pain management which is the infusion of drugs used to relieve chronic pain. Chemotherapy to treat various forms of cancer. Hydration therapy which is the infusion of fluids to patients who have disease states which deplete their normal balance of fluids. 7 Referrals for these and other therapies are received primarily from managed care organizations and specialty physicians. Billing and Reimbursement Revenues generated from the Company's home health care services are paid by Medicare, Medicaid, private insurance carriers, managed care organizations, individuals, and other local health insurance programs. Medicare is a federally funded program available to persons with certain disabilities and persons aged 65 or older. Medicaid, a program jointly funded by federal, state, and local governmental health care programs, is designed to pay for certain health care and medical services provided to low income individuals without regard to age. The Company has several statewide contracts for negotiated fees with insurers and managed care organizations. The Company submits all Medicare claims to a single insurance company acting as a fiscal intermediary for the federal government. Outpatient surgery and infusion therapy fees are collected from commercial insurance systems, managed care organizations, Medicare, Medicaid, and individuals. Medicare Reimbursement Reductions and Related Restructuring The Company derives 73% of its revenues from the Medicare system. In 1997, Congress approved the Balanced Budget Act of 1997 (the "Budget Act"). The Budget Act established an interim payment system (the "IPS") that provided for the lowering of reimbursement limits for home health visits. For cost reporting periods beginning on or after October 1, 1997, Medicare-reimbursed home health agencies' cost limits were determined as the lesser of (i) their actual costs, (ii) per visit cost limits based on 105% of median costs of freestanding home health agencies, or (iii) a per beneficiary limited determined for each specific agency based on whether the agency was an "old" or "new" provider. An old provider was defined as an agency which filed a twelve month cost report in Federal FY 1994 and a new agency as one that did not. An old provider per beneficiary limit was based on 75% of 98% of the 1994 agency cost adjusted for inflation, plus 25% of a regional average as determined by Health Care Financing Administration ("HCFA"). A new provider per beneficiary limits was based on a national average, as determined by HCFA, adjusted for regional labor costs. The schedule of per visit limits for cost reporting periods ending on or after October 1, 1997 was published by HCFA on January 2, 1998 and the schedule of per-beneficiary limits for cost reporting periods beginning on or after October 1, 1997 was not published until March 31, 1998, by HCFA. The new IPS cost limits apply to the Company for the cost reporting period beginning January 1, 1998. The release of the final cost limit information well into the current fiscal year's operations created difficulty in projecting or restructuring home care operations to adjust to the lower IPS cost limits. After consolidation of offices and cost reductions, it is estimated the aggregate reduction in reimbursement for 1998, due to the effect of the per beneficiary limit, was in excess of $5.0 million for the Company's Medicare certified nursing agencies. Current operations are constantly monitored to ensure quality care is provided at the most efficient cost. In addition to reimbursement changes, HCFA has also established guidelines for the frequency and duration of reimbursable Medicare home health visits. These guidelines are intended to establish a clinical path for chronically ill patients to better measure their progress and/or stability. The clinical paths include a median frequency and duration of care in order to provide the most cost-effective treatment possible. These clinical paths will be a critical component in determining reimbursement under the Prospective Payment System (PPS). The Company is monitoring these guidelines and making adjustments as appropriate in order to ensure the smoothest possible transition to PPS for both the patients and the Company. Data Processing In connection with the acquisition of the home healthcare agencies from Columbia/HCA in November, 1998, the Company decided to out-source its home health care billing and payroll processing functions to create greater operating and financial efficiencies. On November 2, 1998, the Company and CareSouth Home Health Services, Inc. ("CareSouth"), an affiliate of CPII Acquisition Corp., entered into a Master Corporate Guaranty 8 of Service Agreement whereby the Company agreed to act as guarantor for each Agency Service Agreement between CareSouth and home health agencies which are owned or managed by the Company. Under the Agency Service Agreements, CareSouth has agreed to provide payroll processing, billing services, collection services, cost reporting services and software maintenance and support for the home health agencies. The Company continues to use the internally-developed home health care software program which was sold in November, 1998 (See Recent Dispositions) in accordance with a license agreement. This software system features a single entry system that allows data to flow through accounting, general ledger, payroll and billing and meet the extensive cost reporting requirements for Medicare reimbursement of home health care services. It also provides clinical documentation for tracking clinical outcome results. Each regional office can link via modem to the corporate accounting and information systems, as well as the to the company to whom its billing and payroll services have been out-sourced. This feature allows management to routinely monitor business activities and produce management reports. Quality Control and Improvement As a medical service business, the quality and reputation of the Company's personnel and operations are critical to its success. The Company has implemented quality management programs as well as policies and procedures in each of its divisions at both the corporate and field levels. The Company strives to meet guidelines set forth by the Joint Commission on Accreditation of Health Care Organizations (JCAHO), as well as state and federal guidelines for Medicare and Medicaid licensure. The Company maintains an active quality management team who makes periodic on-site inspections of field offices to review systems, operations, and clinical procedures. An educational division is also part of quality management operations and conducts educational and training sessions at field offices, as well as disseminating continuing education materials to employees in its field offices. Year 2000 Compliance Issues The Company is continuing to evaluate its entire operation as a result of potential problems associated with Year 2000 (Y2K). A task force was established within the Company to evaluate all areas for compliance issues and develop correction plans if necessary. Some internal areas and processes being evaluated include initial charge entry through billing and collections; accounts payable invoice receipt through processing and payment; bank processing of receipts and disbursements; computer hardware and software functionality; and time and/or date-sensitive office and medical equipment functionality. In preparation for Y2K, the Company has replaced, or is in the process of replacing, all of its mission critical computer systems that are not Y2K compliant. The general accounting system was replaced and has been in use since October, 1998. The Company's home health care nursing, outpatient surgery center, and infusion division software systems are Y2K compliant. At present, the Company does not anticipate any material disruption in its operations or significant costs to be incurred to attain compliance. There can be no assurance, however, that the Company will identify or adequately assess all aspects of the business that may be affected. Due to this uncertainly, a contingency plan is being developed as each area is evaluated to minimize any negative impact to the Company. In the event that any of the Company's significant payors, suppliers, or customers does not successfully and timely achieve Year 2000 compliance, the Company's business and/or operations could be adversely affected. Recruiting and Training The Company's Human Resources Department coordinates recruiting efforts for corporate and field personnel. Employees are recruited through newspaper advertising, professional recruiters, the Company's web page, networking, and word-of-mouth referrals. The Company believes it is competitive in the industry and offers its employees upward mobility, health insurance, an Employee Stock Option program, an Employee Stock Purchase Plan, a 401K plan, and a cafeteria plan. Uniform procedures for screening, testing, and verifying references, including criminal checks where appropriate, have been established. All employees receive a formalized orientation program, including familiarization with the Company's policies and procedures. 9 The Company believes it is in compliance with all Department of Labor, Wage and Hour regulations. Government Regulation The Company's home health care business is highly regulated by federal, state and local authorities. Regulations and policies frequently change and the Company monitors changes through trade and governmental publications and associations. Managers participate on various licensing and association boards. The Company's home health care subsidiaries are certified by the Health Care Financing Administration (HCFA) and are therefore eligible to receive reimbursement for services through the Medicare system. As a provider under the Medicare system, the Company is subject to the various "anti-fraud and abuse" laws, including the federal health care programs anti-kickback statute. This law prohibits any offer, payment, solicitation or receipt of any form of remuneration to induce the referral of business reimbursable under a federal health care program or in return for the purchase, lease, order, arranging for, or recommendation of items or services covered by any federal health care programs or any health care plans or programs that are funded by the United States (other than certain federal employee health insurance benefits) and certain state health care programs that receive federal funds under various programs, such as Medicaid. A related law forbids the offer or transfer of any item or service for less than fair market value, or certain waivers of copayment obligations, to a beneficiary of Medicare or a state health care program that is likely to influence the beneficiary's selection of health care providers. Violations of the anti-fraud and abuse laws can result in the imposition of substantial civil and criminal penalties and, potentially, exclusion from furnishing services under any federal health care programs. In addition, the states in which the Company operates generally have laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers where they are designated to obtain the referral of patients to a particular provider. Congress adopted legislation in 1989, know as the "Stark" Law, that generally prohibits a physician ordering clinical laboratory services for a Medicare beneficiary where the entity providing that service has a financial relationship (including direct or indirect ownership or compensation relationships) with the physician (or a member of his immediate family), and prohibits such entity from billing for or receiving reimbursement for such services, unless a specified exemption is available. Additional legislation became effective as of January 1, 1993 know as "Stark II," that extends the Stark law prohibitions to services under state Medicaid programs, and beyond clinical laboratory services to all "designated health services," including home health services, durable medical equipment and supplies, and parenteral and enteral nutrients, equipment, and supplies. Violations of the Stark Law may also trigger civil monetary penalties and program exclusion. Pursuant to Stark II, physicians who are compensated by the Company will be prohibited from seeking reimbursement for services rendered to such patients unless an exception applies. Several of the states in which the Company conducts business have also enacted statutes similar in scope and purpose to the federal fraud and abuse laws and the Stark laws. Various federal and state laws impose criminal and civil penalties for making false claims for Medicare, Medicaid or other health care reimbursements. The Company believes that it bills for its services under such programs accurately. However, the rules governing coverage of, and reimbursements for, the Company's services are complex. There can be no assurance that these rules will be interpreted in a manner consistent with the Company's billing practices. Home health care offices have licenses granted by the health authorities of their respective states. Additionally, some state health authorities require a Certificate of Need (CON). Tennessee, Georgia, Alabama and North Carolina do require a CON to establish and operate a home health care agency, while Texas, Louisiana and Oklahoma currently do not. In every state, each location license and/or CON, issued by the health authority, determines the service areas for the home health care agency. Currently JCAHO accreditation of home health care agencies is voluntary. However, Managed Care Organizations (MCO's), use JCAHO accreditation as a minimum standard for regional and state contracts. Ambulatory surgery centers require a Certificate of Need in some states and are regulated by state and federal guidelines, as well as Medicare standards. While accreditation is not mandatory, the majority of managed 10 care companies will only contract with accredited centers. All of the Company's ambulatory surgery centers have been or are in the process of being accredited by the Accreditation Association for Ambulatory Health Care. The Company strives to comply with all federal, state and local regulations and has satisfactorily passed all federal and state inspections and surveys. The ability of the Company to operate properly will depend on the Company's ability to comply with all applicable healthcare regulations. Competition The services provided by the Company are also provided by competitors at the local, regional, and national level. Home health care providers compete for referrals based primarily on scope and quality of services, geographic coverage, pricing, and outcomes data. The Company believes its favorable competitive position is attributable to its reputation for over a decade of consistent, high quality care; its comprehensive menu of services; its state-of-the-art information management systems; and its widespread service network. Seasonality The demand for the Company's home health care nursing, infusion therapy, and outpatient surgery are not typically influenced by seasonal factors. Employees As of December 31, 1998, the Company had 1,554 full-time employees, excluding part time field nurses and other professionals in the field. The Company currently employs the following classifications of personnel: Administrative level employees which consist of a senior management team (CEO, COO, CIO, product line and department presidents and vice presidents); office administrators; nursing directors; controllers; accountants; sales executives; licensed and certified professional staff (RN'S, LPN's, therapy assistants); and non-licensed care givers (aides). The Company complies with the Fair Labor Standards Act in establishing compensation methods for its employees. Select positions within the Company are deemed to be bonus eligible based on the achievement of pre-determined budget criteria. The Company sponsors and contributes toward the cost of a group health insurance program for its eligible employees and their dependents. The group health insurance program is self-funded by the Company; however, there is an aggregate stop loss policy in place to limit the liability for the Company. In addition the Company provides a group term life insurance policy and a long term disability policy for eligible employees. The Company also offers a 401K retirement plan as well as Cafeteria 125 plan, and an Employee Stock Purchase plan. The Company believes its employee relations are good. It successfully recruits employees and many of its employees are shareholders. Insurance The Company maintains casualty coverages for all of its operations, including professional and general liability, workers' compensation, automobile, property, and fiduciary liability. The insurance program is reviewed periodically throughout the year and thoroughly on an annual basis to insure adequate coverage is in place. The Company is approved through the State of Louisiana to self-insure its workers' compensation program. All other states are covered on a fully insured basis through "A+" rated insurers. In January 1999, the Company changed from the self-insured workers' compensation plan to a fully-insured, guaranteed cost plan. All of the Company's employees are bonded. The Company is self-insured for its employee health benefits. 11 ITEM 2. PROPERTIES The Company presently leases approximately 15,724 square feet for its corporate office located at 3029 South Sherwood Forest Boulevard, Baton Rouge, Louisiana. The lease provides for a basic annual rental rate of approximately $11 per square foot through the expiration date on September 30, 2002. The Company has an aggregate of 463,153 feet of leased space for regional offices pursuant to leases which expire between April, 1999 and August, 2005. Rental rates for these regional offices range from $2 per square foot to $22 per square foot with an average of $10 per square foot. Following the recent acquisition of 83 physical offices from Columbia/HCA, the Company has consolidated or is in the process of consolidating offices that cover the same patient service area in an overall effort to decrease costs and gain operating efficiencies, while still providing quality and accessible home health services. The Company has retained the services of a national real estate advisory firm to facilitate sub-leasing the unoccupied office space for the remaining lease terms. The following is a list of the Company's offices. Unless otherwise indicated, the Company has one office in each city. Texas (6) Virginia (1) Louisiana (11) Dallas Gate City Baton Rouge (4) Houston (2) Hammond (2) Pasadena Lafayette (2) San Antonio Metairie Odessa North Carolina (3) Monroe Chapel Hill Bossier City Tennessee (18) Raleigh Hendersonville Morrisville Georgia (18) Carthage Macon Portland Covington Johnson City Oklahoma (9) Douglasville Bristol Stilwell Fayetteville Kingsport Tahlequah Atlanta Athens Gore Forest Park Ducktown Tulsa Decatur McMinnville Hominy Lawrenceville Dayton Claremore Lavonia Pikeville Vinita Clayton Jasper Oklahoma City Toccoa Winchester Lawton Gainesville Dickson Ft. Oglethorpe Ashland Alabama (4) Summerville Livingston Selma Dalton Nashville Demopolis Rome Chattanooga Huntsville Cedartown Montgomery Cartersville Florida (1) St. Petersburgh
ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and its subsidiaries are defendants to lawsuits arising in the ordinary course of the Company's business. While the outcome of these lawsuits cannot be predicted with certainty, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 1998. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS From August 1997, through September 1998, the Company's common stock traded on the Nasdaq National Market. Since September 1998, the Company has been trading on the OTC Bulletin Board. As of March 29, 1999, there were approximately 151 holders of record of the Company's Common Stock and the Company believes there are approximately 977 beneficial holders. The Company has not paid any dividends on its Common Stock and expects to retain any future earnings for use in its business development. The following table provides the high and low prices of the Company's Common Stock during 1997 and 1998 as quoted by Nasdaq and the OTC Bulletin Board. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
High Low ---- --- 1st Quarter 1997......................................... $7 7/8 $4 3/8 2nd Quarter 1997......................................... 7 1/4 4 5/8 3rd Quarter 1997......................................... 7 1/4 4 5/16 4th Quarter 1997......................................... 7 4 5/16 1st Quarter 1998......................................... $5 1/4 $3 13/16 2nd Quarter 1998......................................... 4 9/16 3 5/8 3rd Quarter 1998......................................... 4 1/4 1 13/16 4th Quarter 1998......................................... 4 1 1/2
13 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain historical data relating to the Company. For all years presented, the data was derived from audited consolidated financial statements. Data for the years of 1994, 1995, 1996, and 1997 have been restated as a result of a discontinued operation in 1998, but in the opinion of management, presents fairly the financial condition and results of operation for these periods.
Selected Historical 1997 1996 1995(1) 1994(1) Statement of Income Data 1998 Restated Restated Restated Restated - ------------------------ --------- --------- --------- --------- --------- (In thousands, except per share amounts) Net Service Revenue..... $ 38,086 $ 37,204 $ 33,522 $ 23,815 $ 17,326 Cost of Service Revenue. 22,923 19,074 17,931 12,766 8,826 --------- --------- --------- --------- --------- Gross Margin.......... 15,163 18,130 15,591 11,049 8,500 General/Administrative Expenses............... 44,441 22,361 16,232 11,746 8,097 --------- --------- --------- --------- --------- Operating Income (Loss)............... (29,278) (4,231) (641) (697) 403 Other Income and Expense................ (1,281) (753) (1,104) (330) (270) Income Tax Expense (Benefit).............. (1,374) (1,293) (121) (183) 1 --------- --------- --------- --------- --------- Income (Loss) before Cumulative Effect of Change in Account Principle and Discontinued Operations............. (29,185) (3,691) (1,624) (844) 132 Cumulative Effect of Change in Accounting Principle.............. -- (235) -- -- -- Discontinued Operations Income from discontinued operations, net of income tax............. 1,137 2,732 1,642 1,786 1,773 Gain on Disposition, net of income taxes........ 3,177 -- -- -- -- --------- --------- --------- --------- --------- Net Income (Loss)....... $ (24,871) $ (1,194) $ 18 $ 942 $ 1,905 ========= ========= ========= ========= ========= Basic Earnings (Loss) Per Common Share....... $ (8.12) $ (0.43) $ 0.01 $ 0.37 $ 0.75 ========= ========= ========= ========= ========= Weighted Avg. Common Shares Outstanding..... 3,061,184 2,735,000 2,575,000 2,570,000 2,525,000 ========= ========= ========= ========= ========= Proforma Information (Unaudited)(1) Net Income (Loss) (Historical)........... $ (24,871) $ (1,194) $ 18 $ 942 $ 1,905 Proforma adjustments: Income Taxes on SCC Results................ -- -- -- 191 646 --------- --------- --------- --------- --------- Proforma Net Income (Loss)................. $ (24,871) $ (1,194) $ 18 $ 751 $ 1,259 ========= ========= ========= ========= ========= Proforma Earnings (Losses)/Common Share.. $ (8.12) $ (0.43) $ 0.01 $ 0.29 $ 0.50 ========= ========= ========= ========= ========= Balance Sheet Data Total Assets............ $ 44,428 $ 22,870 $ 16,858 $ 11,537 $ 9,160 Total Long-Term Obligations............ $ 14,394 $3,129 $ 3,223 $ 1,490 $ 1,537 Total Convertible Preferred Stock........ $ 1 $ 1 $ -- $ -- $ --
- -------- (1) Surgical Care Centers of Texas, LC ("SCC"), acquired on June 30, 1995, was a limited liability company. Prior to the transaction with Amedisys, the individual owners were responsible for all income taxes and no income tax expense was recorded on SCC through June, 30, 1995. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein. General The Company is a fully integrated provider of outpatient health services that operated in two basic industry segments: alternate-site provider services and management services operations. The Company's alternate-site provider segment includes the following services: home health care nursing, alternate- site infusion therapy, and ambulatory surgery centers. Its management services operations encompass: home health care management, software systems, staffing services, and physician support services. During 1998, the Company divested of its management services operations of home health care management, software systems, and staffing services and discontinued its physician support services. The Company's focus going forward will be on its home health care nursing division which as of December 1998, constituted 80% of net revenues. In an effort to operate most cost-efficiently in this business line following the recent acquisition of 83 physical offices from Columbia/HCA in November and December, 1998, the Company began consolidating or closing offices that cover the same patient service area in an overall attempt to decrease costs and gain operating efficiencies, while continuing to provide quality and accessible home health services. Based on office consolidations and adjustments to meet its staffing model, the Company expects to reduce salary and benefit expenses by approximately $5.5 million annually, or $458,000 per month. In addition, the Company expects to eliminate an additional $888,000 annually, or $74,000 per month in non-salary items such as car and computer leases and will continue to focus on areas of operations in which it can make additional adjustments. Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to the Company's established rates or estimated cost reimbursement rates, as applicable. Allowances and contractual adjustments representing the difference between the established rates and the amounts estimated to be payable by third parties are also recorded on an accrual basis and deducted from gross revenue to determine net service revenues. Reimbursement for home health care nursing services to patients covered by the Medicare program, is based on reimbursement of costs, subject to the lower of costs, per visit limits, or per beneficiary limits. Final reimbursement is determined after the submission of annual cost reports, 150 days after cost report year end, and final audits of the cost reports by the fiscal intermediary. Final closure of a cost report may not occur for as much as 24 to 30 months subsequent to fiscal year end. Effective October 1, 1997, home health cost limits were reduced and per beneficiary limits were established which have reduced payments to home health care providers. Additional proposed regulations are expected to change the payment methodology for home health care nursing providers for Medicare patients from a cost based reimbursement system to a prospective payment system in Federal FY 2000. 15 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items included in the Company's consolidated statements of operations as a percentage of net revenues:
Years Ended December 31, ------------------------ 1998 1997 1996 ------ ------ ------ Net services revenues............................... 100.00 % 100.00 % 100.00 % Cost of service revenues............................ 60.19 51.27 53.49 Gross margin........................................ 39.81 48.73 46.51 General and administrative expenses: Salaries and benefits............................. 48.63 30.30 27.22 Other............................................. 68.05 29.81 21.20 ------ ------ ------ Total general and administrative expenses......... 116.68 60.11 48.42 Operating (loss).................................... (76.87) (11.38) (1.91) Other income and expense............................ (3.36) (2.02) (3.30) ------ ------ ------ Net (loss) before taxes and cumulative effect of change in accounting principle and discontinued operations......................................... (80.23) (13.40) (5.21) ------ ------ ------ Income tax (benefit)................................ (3.61) (3.48) (0.36) ------ ------ ------ Net (loss) before cumulative effect of change in accounting principle and discontinued operations... (76.62) (9.92) (4.85) Cumulative effect of change in accounting principle. -- (0.63) -- Discontinued operations Income from discontinued operations, net of income tax.............................................. 2.99 7.34 4.90 ------ ------ ------ Discontinued operations Gain on disposition, net of income tax............ 8.33 -- -- ------ ------ ------ Net Income(loss).................................... (65.30)% (3.21)% 0.05 % ====== ====== ======
Years Ended December 31, 1998 and 1997 Net Service Revenues For the year ended December 31, 1998 as compared to the year ended December 31, 1997, the Company=s revenues increased to $38,086,000 from $37,204,000, a 2% increase. This change is primarily attributable to increased revenues in the provider services line. Provider services net revenues increased to $36,712,000 in 1998 from $32,104,000 in 1997, an increase of 14%. This increase is primarily attributed to growth in infusion therapy services which began operations in December 1997. Infusion therapy services increased from $7,000 in net revenues in 1997 to $5,021,000 in 1998 due to the acquisition of three infusion companies and the start-up of four additional infusion offices. Revenues for home medical equipment, which was purchased in August 1997, increased from $465,000 for the four months ended December, 1997 to $2,566,000 for the twelve months ended December, 1998. Home health care nursing, representing 60% of consolidated net revenue, decreased from $25,345,000 in 1997 to $22,901,000 in 1998, or 9.64%. This decrease was a result of changes in Medicare reimbursement coupled with a reduction in patient utilization, both of which where due to the implementation of IPS (See Billing and Reimbursement). Visits for our home health agencies in 1997 totaled 338,540. For the comparable agencies in 1998, visits decreased to 232,849, a decrease of 31.22%. Offsetting this dramatic reduction in visits were acquisitions completed in 1998 which added 184,416 visits, of which 104,398 visits, or 57%, were attributed to the month of December, 1998. Management services net revenues decreased to $1,374,000 in 1998 from $5,100,000 in 1997. This decrease is directly attributable to a decrease in home health care management and physician support service revenues. Home health care management recorded revenues declined as a result of the Medicare reimbursement changes, 16 causing many home health care agencies to either go out of business or to cut costs not associated with direct patient care. In November, 1998, the Company sold its home health care management division. Physician support service revenues decreased from 1997 due to the loss of several management contracts. The Company has concluded that the resources used in this line of business would add greater value in other lines of business within the Company, so the physician support services were discontinued in 1998. Cost of Service Revenues Cost of Service Revenues increased $3,849,000, or 20%, to $22,923,000 in 1998 from $19,074,000 in 1997. This increase is attributed to additional expenses resulting from the acquisitions and growth of the infusion therapy division of $2,692,000 and a full year of operation for the home medical equipment division. Home medical equipment expenses increased from $209,000 for the four months ended December, 1997 to $1,454,000 for the twelve months ended December, 1998. General and Administrative Expenses General and administrative expenses increased to $44,441,000 in 1998 compared to $22,361,000 in 1997. This increase is attributed to several factors: a write-down of goodwill for acquisitions completed in 1998 of $9,522,000, additional expenses in the home health care nursing division incurred as a result of acquisitions completed during the year of $5,710,637, and additional administrative expenses incurred with the continued development of the infusion therapy division of $4,955,000. Other Income/Expense Other income (expense) increased to ($1,290,000) in 1998 from ($962,000) in 1997, a 34% increase. The increase is mainly attributed to additional interest expense incurred during 1998 in connection with debt agreements. Discontinued Operations In September, 1998, the Company sold its staffing division and has reflected this sale as a discontinued operation in the accompanying consolidated statements of operations. Net revenues for the staffing division were $12,607,000 for the nine months ended September, 1998 as compared to $17,292,000 for the twelve months ended December 31, 1997. Net Income from discontinued operations, net of income tax, was $1,137,000 for the nine months ended September 30, 1998 as compared to $2,732,000 for the twelve months ended December 31, 1997. Upon disposition, a gain, net of income tax, was recorded in the amount of $3,177,000. Net (Loss) Net (loss) increased to ($24,871,000) or ($8.12) per share for 1998 from ($1,194,000) or ($.43) per share in 1997. Years Ended December 31, 1997 and 1996 Net Service Revenues For the year ended December 31, 1997 and the year ended December 31, 1996, the Company's revenues, restated for the discontinued operations, increased to $37,204,000 from $33,522,000, an 11% increase. This change is primarily attributable to increased revenues in the management services line. Provider services net revenues increased to $32,104,000 in 1997 from $30,126,000 in 1996, an increase of 7%. The increase is primarily attributed to continued growth in home health care nursing as well as a full year of operations for St. Luke's SurgiCenter. Home medical equipment was added as a product line in August 1997 with revenues of $465,000. 17 Management services net revenues increased to $5,100,000 in 1997 from $3,396,000 in 1996, an increase of 50%. This increase in primarily attributed to growth in home health care management. Home health care management revenues increased due to agencies seeking solutions to the expected changes in Medicare reimbursement. Cost of Service Revenues Cost of service revenues include all costs directly associated with the generation of net revenues, including salaries and employee benefits and medical supply costs. In 1997, cost of service revenues increased 6% to $19,074,000 from $17,931,000 in 1996. As a percentage of net service revenues, cost of service revenues decreased from 53% in 1996 to 51% in 1997. This decrease is primarily a result of increased revenues in the home care management and outpatient surgery divisions, which have lower direct costs. General and Administrative Expenses General and administrative expenses increased to $22,361,000 or 60% of revenue in 1997 compared to $16,232,000 or 48% of revenue in 1996. This increase is attributed to the write-off of previously recorded goodwill, increased expenses resulting from the growth in the Outpatient Surgery Division, as well as increased overhead expenses resulting from the development of the infusion therapy division. Start-up costs related to the development of this new division of $299,000 were expensed as incurred. The Company also developed an Employee Stock Ownership Plan (ESOP) for the home health care division with accrued contributions of $721,000 for 1997. Other Income/Expense Other income (expense) decreased from ($1,159,000) in 1996 to ($962,000) in 1997. This decrease is primarily attributed to a one-time charge to earnings in 1996 of $623,000 related to merger discussions with Complete Management, Inc. (CMI), offset by additional interest expense incurred in 1997. Cumulative Effect of Change in Accounting Principle During the fourth quarter of 1997, the Company changed its accounting policy to expense start-up costs which were previously capitalized as Other Assets. The Company has reflected this adjustment as a change in accounting principle from one acceptable method to another acceptable method. The cumulative effect of this change in accounting principle, as if the change were made effective January 1, 1997, is $235,000, net of an income tax benefit. Discontinued Operations In September, 1998, the Company sold its staffing division and has reflected this sale as a discontinued operation in the accompanying consolidated statements of operations. Net revenues for the staffing division were $17,292,000 for 1997 as compared to $12,538,000 for 1996. Net Income from discontinued operations, net of income tax, was $2,732,000 for 1997 as compared to $1,642,000 for 1996. Net Income (Loss) Net (loss) for 1997 was ($1,194,000) or ($0.43) per share as compared to net income of $18,000 or $.01 per share for 1996. Liquidity and Capital Resources At December 31, 1998, the Company had notes payable consisting primarily of a one-year $14,006,000 note payable to Columbia/HCA as a result of an acquisition consummated in November 1998 and borrowings under bank lines of credit of $3,450,000 and $750,000 bearing interest at bank prime plus 1.5% and bank prime plus 1%, respectively. Subsequent to year end, the $3,450,000 line of credit was decreased to $2,500,000 for 120 days. At December 31, 1998, approximately $223,000 was unused under these lines of credit. These lines of 18 credit are collateralized by 80% of eligible receivables in the staffing and outpatient surgery divisions and 75% in the home health care nursing division. Eligible receivables are defined principally as trade accounts that are aged less than 90 days for the staffing and outpatient surgery divisions and 120 days for the home health care nursing division. The bank lines of credit are subject to certain covenants, including a monthly borrowing base calculation, a debt service coverage ratio, and a leverage ratio. The Company was not in compliance with the debt service ratio requirement at December 31, 1998 and 1997, which defaults were waived by the bank through March 31, 1999. In December 1998, the Company secured a $25 million asset-based line of credit with National Century Financial Enterprises, Inc. of Dublin, Ohio. The line of credit is collateralized by eligible accounts receivable. Eligible receivables are defined as receivables, exclusive of workers' compensation and self-pay, that are aged less than 181 days. The ongoing fees associated with this line of credit equate to 1% of eligible billed receivables generated during each billing period. Net cash used by operating activities was ($141,000) in the year ended December 31,1997 as compared to net cash provided by operating activities of $7,626,000 in the year ended December 31,1998. The change was due to a non- cash write-off of goodwill of $9,522,000, an increase in deferred revenue of $10,240,000 and increases in accounts payable and accrued expenses, offset by the loss incurred during the year and the gain on disposition of the staffing division. Net cash used in investing activities increased from ($1,241,000) in the year ended December 31, 199 to ($3,072,000) in the year ended December 31, 1998. This decrease is attributed to an increase in the fixed asset acquisitions made during 1998. Net cash provided by financing activities was $5,349,000 in the year ended December 31, 1997 as compared to net cash used by financing activities of $8,052,000 in the year ended December 31, 1998. This increase is primarily attributed to cash used in purchase acquisitions of $11,647,000. At December 31, 1998, the Company had a working capital deficit of ($31,280,000) and a stockholders equity deficit of ($11,684,000). The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced significant losses from operations in 1998 and 1997 and has a deficit in stockholders' equity of $11,684,000 at December 31, 1998. In addition, at December 31, 1998, the Company has $22,120,000 in debt repayment obligations coming due within one year and Management's current projections indicate that operations will not produce sufficient cash flow to fund those obligations. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company has undertaken a significant restructuring effort to reduce operating costs by closing unprofitable locations and reducing components of overhead expenses to minimize this deficit. The Company is negotiating the restructuring of certain of its debt obligations and is considering the possible sale of certain operating assets to generate cash to fund its obligations. Management believes that the strategies it has undertaken will enable the Company to satisfy its obligations as they become due; however, there can be no assurance that these strategies will succeed. The financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The loan agreement with Columbia/HCA restricts the Company's ability to, among other things, incur additional indebtedness or sell or transfer any of its property unless the cash proceeds from such sale are applied to reduce the balance due on the note payable. Inflation The Company does not believe that inflation has had a material effect on its results of operations for the twelve months ended December 31, 1998. ITEM 8. FINANCIAL STATEMENTS See Index to Financial Statements on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 19 PART III Certain information required by Part III is omitted from this Report in that the Registrant will file its definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 25, 1999 pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement") no later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT (a) Executive Officers--The information required by this Item is incorporated by reference to the section entitled "Executive Officers" in the Proxy Statement. (b) Directors--The information required by this Item is incorporated by reference to the section entitled "Election of Directors" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the section "Compensation of Executive Officers" and "Compensation of Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the sections entitled "Record Date and Principle Ownership" and "Security Ownership of Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the section entitled "Certain Transactions" in the Proxy Statement. 20 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Identification of Exhibit ------- ------------------------- 2.1(1) --Acquisition Agreement dated December 20, 1993 between the Company and M & N Capital Corp. 2.2(3) --Plan of Merger dated August 3, 1994 between M & N Capital Corp. and the Company 2.3(4) --Certificate of Merger dated August 3, 1994 between M & N Capital Corp. and the Company 2.4(7) --Acquisition Agreement dated August 1,1997 between the Company and Allgood Medical Services, Inc. 2.5(7) --Exchange Agreement dated January 1, 1998 between the Company and Alliance Home Health, Inc. and University Capital Corp. dated December 10, 1997. 2.6(7) --Stock Purchase Agreement by and among Amedisys, Alternate-Site Infusion Therapy Services, Inc., PRN, Inc. d/b/a Home IV Therapy, Joseph W. Stephens, and Terry I. Stevens dated February 23, 1998. 2.7(7) --Agreement to Purchase by and between Amedisys, Alternate-Site Infusion Therapy Services, Inc. and Precision Health Systems, L.L.C. dated February 27, 1998. 2.8(7) --Promissory note in the amount of $250,000 to Precision Health Solutions, L.L.C. in connection with the purchase of the company. 2.9(7) --Stock Purchase Agreement by and among Amedisys Alternate-Site Infusion Therapy Services, Inc., Infusion Care Solutions, Inc. and Daniel D. Brown dated February 27,1998. 2.10(7) --Promissory note in the amount of $125,000 to Daniel D. Brown in connection with the purchase of the company. 2.11(8) --Stock Purchase Agreement by and among Amedisys Specialized Medical Services, Inc., Quality Home Health Care, Inc., Frances Unger, and James Unger dated May 1, 1998. 2.12(8) --Asset Purchase Agreement by and among Amedisys Specialized Medical Services, Inc., and Precision Home Health Care, Inc. dated May 1, 1998. 2.13(8) --Promissory note in the amount of $800,000 to Precision Home Health Care, Inc. in connection with the purchase of the company. 2.14(8) --Promissory note in the amount of $400,000 to Precision Home Health Care, Inc. in connection with the purchase of the company. 2.15(9) --Asset Purchase agreement among Nursefinders, Inc., Amedisys Staffing Services, Inc., Amedisys Nursing Services, Inc., and Amedisys Home Health, Inc. and Amedisys, Inc. 2.16(10) --Asset Purchase Agreement by and between CPII Acquisition Corp. and Amedisys, Inc. 2.17(10) --Asset Purchase Agreement by and between Columbia/HCA Healthcare Corporation and Amedisys, Inc. 2.18(13) --Asset Purchase Agreement among Amedisys Surgery Centers, LC and Permian Surgical Care Center, Inc. d/b/a Tanglewood Surgery Center 3.1(4) --Certificate of Incorporation 3.2(4) --Bylaws 4.1(4) --Common Stock Specimen 4.2(7) --Certificate of Designation for the Series A Preferred Stock 4.3(7) --Preferred Stock Specimen 4.4(7) --Form of Placement Agent's Warrant Agreement 5.1(7) --Opinion regarding Legality 10.1(4) --Master Note with Union Planter's Bank of Louisiana 10.2(4) --Merrill Lynch Term Working Capital Management Account 10.3(5) --Promissory Note with Deposit Guaranty National Bank
21
Exhibit No. Identification of Exhibit ------- ------------------------- 10.4(7) --Amended and Restated Stock Option Plan 10.5(7) --Registration Rights Agreement 10.6(11) --Master Corporate Guaranty of Service Agreements between CareSouth Home Health Services, Inc. and Amedisys, Inc. dated November 2, 1998. 18.1(8) --Letter regarding Change in Accounting Principles 21.1(7) --List of Subsidiaries 23.1(7) --Consent of Counsel (contained in Exhibit 5.1) 23.2(7) --Consents of Arthur Andersen, LLP and Hannis T. Bourgeois & Co., L.L.P., independent public accountants 27.1(13) --Financial Data Schedule
- -------- (1) Previously filed as an exhibit to the Current Report on Form 8-K dated December 20, 1993. (2) Previously filed as an exhibit to the Current Report on Form 8-K dated February 14, 1994. (3) Previously filed as an exhibit to the Current Report on Form 8-K dated August 11, 1994. (4) Previously filed as an exhibit to the Annual Report on Form 10-KSB for the year ended December 31, 1994. (5) Previously filed as an exhibit to the Current Report on Form 8-K dated June 30, 1995. (6) Previously filed as an exhibit to the Registration Statement on Form S-1 (333-8329) dated July 18, 1996. (7) Previously filed as an exhibit to the Registration Statement on Form S-3 dated March 11, 1998. (8) Previously filed as an exhibit to the Quarterly Report on Form 10-Q dated August 14, 1998. (9) Previously filed as an exhibit to the Current Report on Form 8-K dated October 5, 1998. (10) Previously filed as an exhibit to the Current Report on Form 8-K dated November 10, 1998. (11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q dated December 30, 1998. (12) Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997. (13) Filed herewith. (b) Report on Form 8-K The Company filed a Current Report on Form 8-K with the SEC on October 5, 1998 in connection with the disposition of its Staffing Division to Nursefinders, Inc. on September 21, 1998. Pro forma financial information, required pursuant to Article 11 of Regulation S-X, was included in the filing. The pro forma financial information was comprised of a pro forma consolidated balance sheet as of June 30, 1998, a pro forma consolidated statement of operations for the six months ended June 30, 1998 and the year ended December 31, 1997, and explanatory notes. The Company filed a Current Report on Form 8-K with the SEC on November 10, 1998 in connection with the sale of its proprietary software system and home health care management division to CPII Acquisition Corp. on November 3, 1998, the acquisition of 83 home care offices of Columbia/HCA Healthcare Corporation on November 2, 1998, and the Master Corporate Guaranty of Service Agreement entered into with CareSouth Home Health Services, Inc. on November 2, 1998 . Pro forma financial information for the sale of the proprietary software system and health care management division, required pursuant to Article 11 of Regulation S-X, was included in the filing. This pro forma financial information was comprised of a pro forma consolidated balance sheet as of June 30, 1998, a pro forma consolidated statement of operations for the six months ended June 30, 1998 and the year ended December 31, 1997, and explanatory notes. The audited financial statements and pro forma financial information for the acquisition of the home care offices of Columbia/HCA Healthcare Corporation were not available to be included in the Current Report on Form 8- K filed on November 10, 1998, but were subsequently filed as of part of the Current Report on Form 8-K/A filed on January 19, 1999. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized, on the 31st day of March, 1999. AMEDISYS, INC. By: /s/ William F. Borne ---------------------------------- William F. Borne, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ William F. Borne Chief Financial March 31, 1999 - ----------------------------------- Officer and Chairman William F. Borne of the Board /s/ Larry R. Graham Chief Operating March 31, 1999 - ----------------------------------- Officer (Principal Larry R. Graham Financial and Accounting Officer) /s/ Jake L. Netterville Director March 31, 1999 - ----------------------------------- Jake L. Netterville Director March 31, 1999 - ----------------------------------- David R. Pitts Director March 31, 1999 - ----------------------------------- Peter F. Ricchiuti /s/ Ronald A. LaBorde Director March 31, 1999 - ----------------------------------- Ronald A. LaBorde 23 AMEDISYS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS [To Come] F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Amedisys, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Amedisys, Inc. (a Delaware Corporation) and Subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amedisys, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company experienced significant losses from operations in 1998 and 1997 and has a deficit in stockholders' equity of $11,684,000 at December 31, 1998. In addition, at December 31, 1998, the Company has $22,120,000 in debt repayment obligations coming due within one year and Management's current projections indicate that operations will not provide sufficient cash flow to fund those obligations. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. As explained in Note 5 to the financial statements, effective January 1, 1997, the Company changed its method of accounting for start-up costs. ARTHUR ANDERSEN LLP HANNIS T. BOURGEOIS & CO., LLP New Orleans, Louisiana Baton Rouge, Louisiana March 29, 1999 F-2 AMEDISYS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (in 000's except share data)
1998 1997 -------- ------- CURRENT ASSETS: Cash and cash equivalents................................. $ 572 $ 4,070 Accounts receivable, net of allowance for doubtful accounts of $3,095 in 1998 and $1,617 in 1997............ 7,456 9,630 Prepaid expenses.......................................... 604 247 Income tax receivable (Note 9)............................ -- 118 Inventory and other current assets........................ 1,703 536 -------- ------- Total current assets.................................... 10,335 14,601 NOTES RECEIVABLE FROM RELATED PARTIES (Note 10)............. 89 252 OTHER INVESTMENTS (Note 4).................................. 689 399 PROPERTY, PLANT AND EQUIPMENT, NET (Notes 3 and 8).......... 8,574 4,785 DEFERRED TAX ASSET (Note 9)................................. -- 926 OTHER ASSETS, NET (Note 5).................................. 24,741 1,907 -------- ------- Total assets............................................ $ 44,428 $22,870 ======== ======= CURRENT LIABILITIES: Accounts payable.......................................... $ 7,295 $ 1,338 Accrued expenses-- Payroll and payroll taxes................................ 5,257 2,025 Insurance (Note 12)...................................... 368 521 Other.................................................... 4,456 847 Notes payable (Note 6).................................... 18,979 5,806 Deferred revenue, current portion (Note 2)................ 2,119 -- Current portion of notes payable to related parties (Note 10)...................................................... 45 45 Current portion of long-term debt (Note 7)................ 2,633 690 Current portion of obligations under capital leases (Note 8)....................................................... 463 192 -------- ------- Total current liabilities............................... 41,615 11,464 LONG-TERM DEBT (Note 7)..................................... 4,759 2,995 DEFERRED REVENUE (Note 2)................................... 8,121 -- OBLIGATIONS UNDER CAPITAL LEASES (Note 8)................... 688 134 OTHER LONG-TERM LIABILITIES................................. 826 -- -------- ------- Total liabilities....................................... 56,009 14,593 -------- ------- COMMITMENTS AND CONTINGENCIES (Notes 8 and 12).............. -- -- -------- ------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.............. 103 3 -------- ------- STOCKHOLDERS' EQUITY (Note 11): Common stock--$.001 par value; 30,000,000 shares authorized; 3,064,918 and 2,850,067 shares outstanding in 1998 and 1997, respectively.............................. 3 3 Preferred stock--$.001 par value; 5,000,000 shares authorized; 750,000 and 400,000 shares outstanding in 1998 and 1997, respectively.............................. 1 1 Additional paid-in capital................................ 12,005 7,092 Treasury stock--4,167 shares at $6.00 per share........... (25) (25) Retained earnings (deficit)............................... (23,668) 1,203 -------- ------- Total stockholders' equity.............................. (11,684) 8,274 -------- ------- Total liabilities and stockholders' equity.............. $ 44,428 $22,870 ======== =======
The accompanying notes are an integral part of these statements. F-3 AMEDISYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in 000's except share data)
1998 1997 1996 --------- --------- --------- INCOME: Net service revenues....................... $ 38,086 $ 37,204 $ 33,522 Cost of service revenues................... 22,923 19,074 17,931 --------- --------- --------- Operating revenues........................ 15,163 18,130 15,591 --------- --------- --------- GENERAL AND ADMINISTRATIVE EXPENSES: Salaries and benefits...................... 18,522 11,271 9,124 Other (Notes 2 and 5)...................... 25,919 11,090 7,108 --------- --------- --------- Total general and administrative expenses. 44,441 22,361 16,232 --------- --------- --------- Operating income (loss)................... (29,278) (4,231) (641) --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense........................... (1,155) (863) (574) Interest income............................ 46 31 24 Write-off of investments (Note 4).......... -- -- (566) Miscellaneous.............................. (181) (130) (43) --------- --------- --------- Total other expense....................... (1,290) (962) (1,159) --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, AND DISCONTINUED OPERATIONS.................................. (30,568) (5,193) (1,800) INCOME TAX EXPENSE (BENEFIT) (Note 9)........ (1,374) (1,293) (121) --------- --------- --------- Income (loss) before minority interest in net income of consolidated subsidiaries, cumulative effect of a change in accounting principle, and discontinued operations................................ (29,194) (3,900) (1,679) MINORITY INTEREST IN (INCOME) LOSS OF CONSOLIDATED SUBSIDIARIES................... 9 209 55 --------- --------- --------- Net income (loss) before cumulative effect of change in accounting principle and discontinued operations................... (29,185) (3,691) (1,624) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 1)............................ -- (235) -- DISCONTINUED OPERATIONS Income from discontinued operations, net of income tax................................ 1,137 2,732 1,642 Gain on disposition, net of income tax..... 3,177 -- -- --------- --------- --------- Net income (loss)......................... $ (24,871) $ (1,194) $ 18 ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................. 3,061,184 2,735,000 2,575,000 --------- --------- --------- BASIC EARNINGS (LOSS) PER COMMON SHARE (Notes 1 and 2): Income (loss) before cumulative effect of change in accounting principle and discontinued operations................... $ (9.53) $ (1.35) $ (0.63) Cumulative effect of change in accounting principle................................. -- (0.08) -- Income from discontinued operations, net of income tax................................ 0.37 1.00 .64 Gain on disposition, net of income tax..... 1.04 -- -- --------- --------- --------- Net income (loss)......................... $ (8.12) $ (0.43) $ 0.01 ========= ========= =========
The accompanying notes are an integral part of these statements. F-4 AMEDISYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in 000's, except share data)
Preferred Common Stock Stock Additional Stock Total ----------------- -------------- Paid-In Retained Subscriptions Treasury Stockholders' Shares Amount Shares Amount Capital Earnings Receivable Stock Equity --------- ------ ------- ------ ---------- -------- ------------- -------- ------------- BALANCE, December 31, 1995................... 2,583,864 $ 3 -- $-- $ 1,977 $ 2,379 $(84) $ -- $ 4,275 Issuance of stock in connection with warrants (Note 11)... 1,190 -- -- -- 9 -- -- -- 9 Payments received on and write-off of stock subscriptions.. (8,863) (1) -- -- (70) -- 83 -- 12 Net income............ -- -- -- -- -- 18 -- -- 18 --------- --- ------- --- ------- -------- ---- ---- -------- BALANCE, December 31, 1996................... 2,576,191 2 -- -- 1,916 2,397 (1) -- 4,314 Payments received on stock subscriptions.. -- -- -- -- -- -- 1 -- 1 Issuance of stock in connection with private placement stock offering, acquisition, and 401(k) plan (Notes 2, 11, and 13).......... 273,876 1 -- -- 1,596 -- -- -- 1,597 Cost of private placement............ -- -- -- -- (110) -- -- -- (110) Purchase of treasury stock................ -- -- -- -- -- -- -- (25) (25) Issuance of preferred stock (Note 11)...... -- -- 400,000 1 3,999 -- -- -- 4,000 Costs of preferred stock issuance (Note 11).................. -- -- -- -- (309) -- -- -- (309) Net loss.............. -- -- -- -- -- (1,194) -- -- (1,194) --------- --- ------- --- ------- -------- ---- ---- -------- BALANCE, December 31, 1997................... 2,850,067 $ 3 400,000 $ 1 $ 7,092 $ 1,203 $ -- $(25) $ 8,274 Issuance of stock in connection with acquisitions and 401(k) plan.......... 214,851 -- -- -- 964 -- -- -- 964 Issuance of preferred stock................ -- -- 350,000 -- 3,500 -- -- -- 3,500 Costs of preferred stock issuance....... -- -- -- -- (256) -- -- -- (256) Issuance of stock for ESOP................. -- -- -- -- 705 -- -- -- 705 Net loss.............. -- -- -- -- -- (24,871) -- -- (24,871) --------- --- ------- --- ------- -------- ---- ---- -------- BALANCE, December 31, 1998................... 3,064,918 $ 3 750,000 $ 1 $12,005 $(23,668) $ -- $(25) $(11,684) ========= === ======= === ======= ======== ==== ==== ========
The accompanying notes are an integral part of these statements. F-5 AMEDISYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in 000's)
1998 1997 1996 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $(24,871) $(1,194) $ 18 Adjustments to reconcile net income to net cash (used) provided by operating activities-- Depreciation and amortization.................... 1,707 1,240 945 Provision for bad debts.......................... 1,642 1,427 878 Write-off of goodwill (Note 2)................... 9,522 1,028 -- (Gain) loss on disposal of property and equipment....................................... 208 (12) 8 Gain on disposition of staffing division......... (3,177) -- -- Other, net....................................... 13 37 -- Deferred income tax (benefit) expense............ 926 (566) (240) Minority interest................................ (9) (209) (55) Cumulative effect of change in accounting principle....................................... -- 326 -- Changes in assets and liabilities-- (Increase) decrease in accounts receivable....... 1,684 (2,549) (3,025) (Increase) decrease in inventory and other current assets.................................. (1,043) 46 (54) (Increase) decrease in other assets.............. 891 (406) (1,734) Increase (decrease) in accounts payable.......... 5,003 (143) 1,014 Increase in accrued expenses..................... 4,890 834 308 Increase in deferred revenue..................... 10,240 -- -- -------- ------- ------- Net cash (used) provided by operating activities..................................... 7,626 (141) (1,937) -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable...................... (290) -- -- Proceeds from sale of property, plant and equipment........................................ 430 191 12 Purchase of property, plant and equipment......... (3,321) (1,456) (2,965) Minority interest investment in subsidiary........ 109 24 240 -------- ------- ------- Net cash used by investing activities........... (3,072) (1,241) (2,713) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash received in purchase acquisitions............ 125 -- -- Cash used in purchase acquisitions................ (11,647) (465) -- Net borrowings on line of credit agreements....... (92) 1,428 1,922 Proceeds from issuance of notes payable and capital leases................................... 4,000 992 2,596 Payments on notes payable and capital leases...... (3,845) (1,037) (699) Decrease in notes payable--related parties........ -- (1) (44) (Increase) decrease in notes receivable--related parties.......................................... 163 (62) 85 Proceeds from issuance of stock................... 3,244 4,518 9 Payments received on stock subscriptions receivable....................................... -- 1 14 Purchase of treasury stock........................ -- (25) -- -------- ------- ------- Net cash provided (used) by financing activities..................................... (8,052) 5,349 3,883 -------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (3,498) 3,967 (767) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 4,070 103 870 ======== ======= ======= CASH AND CASH EQUIVALENTS AT END OF YEAR........... 572 $ 4,070 $ 103 ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (See also Note 2): Cash payments for-- Interest......................................... $ 914 $ 846 $ 495 ======== ======= ======= Income taxes..................................... $ -- $ -- $ 586 ======== ======= =======
The accompanying notes are an integral part of these statements. F-6 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Organization and Operations Amedisys, Inc. (the Company) is incorporated in the state of Delaware and operates in nine states including Louisiana, Texas, Tennessee, North Carolina, Georgia, Oklahoma, Alabama, Florida and Virginia. The Company provides a variety of home health care, infusion therapy, and outpatient surgery services. During 1998, the Company disposed of its supplemental staffing, home care management, and primary care services operations (see Note 2). The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced significant losses from operations in 1998 and 1997 and has a deficit in stockholders' equity of $11,684,000 at December 31, 1998. In addition, at December 31, 1998, the Company has $22,120,000 in debt repayment obligations coming due within one year and Management's current projections indicate that operations will not produce sufficient cash flow to fund those obligations. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company has undertaken a significant restructuring effort to reduce operating costs by closing unprofitable locations and reducing components of overhead expenses to minimize this deficit. The Company is negotiating the restructuring of certain of its debt obligations and is considering the possible sale of certain operating assets to generate cash to fund its obligations. Management believes that the strategies it has undertaken will enable the Company to satisfy its obligations as they become due; however, there can be no assurance that these strategies will succeed. The financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Use of Estimates The accounting and reporting policies of the Company and its subsidiaries conform with generally accepted accounting principles. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in these financial statements. Business combinations accounted for as purchases are included in the consolidated financial statements from the respective dates of acquisition. Revenue Recognition Policy Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to the Company's established rates or estimated cost reimbursement rates, as applicable. Allowances and contractual adjustments are recorded for the difference between the established rates and the amounts estimated to be payable by third parties and are deducted from gross revenue to determine net service revenues. Reimbursement for home health care services to patients covered by the Medicare program is based on reimbursement of allowable costs subject to certain limits. Final reimbursement is determined after submission of annual cost reports and audits thereof by the fiscal intermediaries. Effective January 1, 1998, home health cost F-7 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 limits were reduced and per beneficiary limits were established which have reduced payments to home health service providers. Additional proposed regulations are expected to change the payment methodology for home health care services to Medicare patients as the Medicare system prepares to transition from a cost-based reimbursement system to a prospective payment system in the future. Cash and Cash Equivalents For purposes of reporting cash flows, cash includes certificates of deposit and all highly liquid debt instruments with maturities of three months or less when purchased. Inventory Inventories consist of medical supplies that are utilized in the treatment and care of home health and outpatient surgery patients. Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment is generally carried at cost. Additions and improvements are capitalized, but ordinary maintenance and repair expenses are charged to income as incurred. The cost of property sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the property and related accumulated depreciation accounts, and any gain or loss is credited or charged to income. Capitalized leases, primarily consisting of medical equipment, computer equipment, phone systems, and vans are included in property and equipment. Capital leases are recorded at the present value of the future rentals at lease inception and are amortized over the lesser of the applicable lease term or the useful life of the equipment. For financial reporting purposes, depreciation and amortization of property including those subject to capital leases ($1,376,000 in 1998, $1,101,000 in 1997 and $788,000 in 1996) is included in other general and administrative expenses and is provided utilizing the straight-line method based upon the following estimated useful service lives: Buildings....................................................... 40 years Leasehold Improvements.......................................... 5 years Equipment and furniture......................................... 5-7 years Vehicles........................................................ 5 years Computer software............................................... 5 years
Accounting for the Impairment of Long-Lived Assets And Long-Lived Assets to be Disposed of: Whenever recognized events or changes in circumstances indicate the carrying amount of an asset, including intangible assets, may not be recoverable, management reviews the asset for possible impairment. In accordance with SFAS No. 121, management uses undiscounted estimated expected future cash flows to assess the recoverability of the asset. If the expected future net cash flows are less than the carrying amount of the asset, an impairment loss, measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, would be recognized. F-8 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 Accounting for Start-Up Costs In April 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5 ("SOP"), "Reporting on the Costs of Start-Up Activities" which requires costs of start-up activities and organization costs to be expensed as incurred. The Company elected to write off previously capitalized start-up costs in the fourth quarter of 1997 in anticipation of the issuance of the SOP. The cumulative effect of this change in accounting principle, as if the change were made effective January 1, 1997, of $235,000 (net of a $91,000 tax benefit), is shown in the 1997 statement of operations. Start-up costs of $299,000 incurred during 1997 were expensed as incurred in general and administrative expense. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company does not expect the adoption of this accounting pronouncement will have a material effect on its financial position or results of operations. Earnings Per Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which simplifies the computation of earnings per share (EPS). The Company adopted SFAS No. 128 in the fourth quarter of 1997. SFAS No. 128 requires the restatement of prior years' EPS data; however, application of the statement has no impact on the Company's prior years' EPS data. Basic net income per share of common stock is calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year. Diluted net income per share is not presented as all stock options and convertible securities outstanding during the periods presented (see Note 11) were not dilutive. Reclassifications Certain amounts previously reported in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. 2. ACQUISITIONS AND DISPOSITIONS: On January 1, 1998, the Company acquired all of the issued and outstanding stock of Alliance Home Health, Inc. (Alliance), a home health business with locations throughout Oklahoma, in exchange for $300,000 and 194,286 shares of common stock. Of the 194,286 shares of Company common stock issued to the former owners of Alliance, 122,857 shares were placed in escrow as consideration for certain contingent liabilities which may be asserted against the former stockholder of Alliance to the extent such claims exceed $500,000 (singularly and/or in aggregate). The escrow period expires December 31, 2003. The Company performed management services for Alliance during 1997 and received revenues totaling approximately $1.3 million of which $695,000 is included in accounts receivable at December 31, 1997. In addition, the Company had advanced $1,465,000 to Alliance for cash flow purposes which was included in other assets at December 31, 1997. F-9 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 The following unaudited pro forma information has been prepared as if the acquisition of Alliance had occurred on January 1, 1997, in thousands of dollars, except per share data. This pro forma information has been prepared for comparative purposes only and is not necessarily indicative of what would have occurred had the acquisition of Alliance taken place on the date indicated, nor does it purport to be indicative of the future operating results of the Company.
Caption 1997 ------- ------- Operating Revenues.................................................... $21,528 Net loss before cumulative effect of change in accounting principle... (3,443) Basic earnings (loss) per common share before cumulative effect of change in accounting principle....................................... (1.18)
During 1998, management decided to close substantially all of the home health agencies acquired from Alliance based on estimates of certain reimbursement reductions (see below), and, accordingly, goodwill totaling $7,228,000 recorded in connection with this acquisition was written-off as other general and administrative expense. On February 23, 1998, the Company acquired all of the issued and outstanding capital stock of PRN, Inc. (PRN), a home infusion pharmacy business, in exchange for $430,000 and assumption of $71,000 debt. The Company has agreed to pay additional consideration of up to $150,000 upon PRN reaching certain revenue goals ("Additional Consideration"). The Company has retained the right to offset certain indemnifiable liabilities against the Additional Consideration. On February 27, 1998, the Company acquired all of the issued and outstanding capital stock of Infusioncare Solutions, Inc. ("ICS") a home health care and infusion business, based in Baton Rouge, Louisiana, in exchange for aggregate consideration of $500,000, of which $375,000 was payable in cash at closing and $125,000 was payable pursuant to a two year promissory note. The Company has retained the right to offset certain indemnifiable liabilities against the sums payable pursuant to the promissory note. On February 27, 1998, the Company acquired substantially all of the assets of Precision Health Solutions, L.L.C. ("PHS") a home health care and infusion business, based in Baton Rouge, Louisiana, in exchange for aggregate consideration of $1,000,000, of which $750,000 was payable in cash at closing and $250,000 was payable pursuant to a two year promissory note. The Company has retained the right to offset certain indemnifiable liabilities against the sums payable pursuant to the promissory note. On April 1, 1998, the Company acquired certain assets of Precision Home Health Care, Inc., (Precision), a home health care business based in Baton Rouge, Louisiana in exchange for $1,250,000. The purchase price consisted of an $800,000 note payable at 9.5% paid on July 1, 1998, a $400,000 note payable at 9.5% payable monthly for a period of two years, and $50,000 in liabilities for capital improvements. On November 1, 1998, the Company acquired certain assets of Tanglewood Surgery Center in Odessa, Texas in exchange for $50,000, a $50,000 note payable at 8.5% payable monthly over a one-year period, and a $450,000 note payable at 10% payable monthly over a five-year period. The Company contributed this facility to West Texas Ambulatory Surgery Center, LLC in exchange for a 67% interest in the Venture. On November 2, 1998, the Company signed a definitive agreement to purchase certain assets, subject to the assumption of certain liabilities, of 83 home care offices including 35 provider numbers of Columbia/HCA Healthcare Corporation ("Columbia/HCA") located in Alabama, Georgia, Louisiana, North Carolina, Oklahoma and Tennessee. The Company had no material relationship with Columbia/HCA Healthcare Corporation prior to F-10 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 this transaction. A portion of the $24,000,000 purchase price, $9,994,000 less certain liabilities, was paid November 3, 1998 with the balance of $14,006,000 payable pursuant to a one-year promissory note with interest calculated at the prime rate of Union Planter's Bank of Louisiana plus 0.75%. The loan agreement with Columbia/HCA restricts the Company's ability to, among other things, incur additional indebtedness or sell or transfer any of its property unless the cash proceeds from such sale are applied to reduce the balance due on the note payable. The cash portion of the consideration was provided by the Company's sale of certain assets (see below) in 1998. The assets purchased consist primarily of furniture, fixtures, and equipment; prepaid expenses; advances and deposits; inventory; office supplies; records and files; transferable governmental licenses and permits authorizations; and rights in, to and under specified licenses, contracts, leases, and agreements. The liabilities being assumed are the paid-time-off balances of the Columbia/HCA employees and obligations arising on or subsequent to the closing dates under the assumed contracts. Assets located in Louisiana and Oklahoma were acquired November 16, 1998, and the remaining assets were acquired November 30, 1998. Columbia/HCA has agreed that for a period of two years from the date of closing, it will not compete with the Company in the business of providing skilled intermittent home care services in the counties/parishes currently served by the acquired by Columbia/HCA offices. This covenant does not apply to a home health agency that is acquired by Columbia/HCA as part of an acquisition of a general acute care hospital, skilled nursing facility, ambulatory surgical facility, physician practice management company or assisted living facility. Subsequent to the acquisition, several of the home health agencies acquired were closed, and accordingly, goodwill totaling approximately $2.3 million which had been recorded for these locations, was written off as other general and administrative expense in 1998. In addition, lease abandonment costs of $307,000 were recorded as other general and administrative expense, representing the Company's estimated cost of remaining lease obligations at these locations. On August 1, 1997, the Company acquired substantially all of the assets of Allgood Medical Services, Inc. d/b/a Care Medical and Mobility Equipment Company for $1,165,000. The purchase price consisted of $465,000 in cash, $100,000 note payable, and $600,000 in common stock which represented 115,518 common shares. This transaction has been accounted for as a purchase and the excess of the total acquisition cost over the fair value of net assets acquired (goodwill) of $852,000 was being amortized over twenty years using the straight-line method. Subsequent to this purchase, certain reimbursement reductions were announced to implement the Balanced Budget Act of 1997. Based on management's estimate of the expected impact of these changes in reimbursement on future cash flows, this goodwill was fully written off as Other General and Administrative Expense at December 31, 1997 as required under Statement of Financial Accounting Standard No. 121. Each of the above transactions was accounted for as a purchase. Effective September 21, 1998, the Company sold certain assets, subject to the assumption of certain liabilities, of its staffing division to Nursefinders, Inc. The sale price of $7,200,000 consisted of $6,480,000 payable immediately upon closing with the balance of $720,000 placed in an escrow account. The assets sold consist primarily of all accounts and notes receivable; prepaid expenses; advances and deposits; on-site hardware and software; furniture, fixtures, and leasehold improvements; office supplies; records and files; transferable governmental licenses, permits, and authorizations; and rights in, to and under specified licenses, contracts, leases, and agreements. The liabilities being assumed are the trade accounts payable, accrued expenses, and other liabilities as of the closing date. Amedisys has agreed to a five-year non-competition covenant. The sale of the staffing division resulted in a pre-tax gain of $5,041,000. The Company has reflected the results of operations for the staffing division as a discontinued operation for all periods presented in the accompanying statements of operations. On November 3, 1998, the Company and CPII Acquisition Corp. ("CPII") entered into an Asset Purchase Agreement whereby the Company sold certain of the assets, subject to the assumption of certain liabilities, of its F-11 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 proprietary software system (Analytical Medical Systems) and home health care management division (Amedisys Resource Management) to CPII in exchange for $11,000,000 cash. The assets sold consist primarily of proprietary rights with respect to the home health information system developed and used by the Company and its subsidiaries; deposits, prepayments or prepaid expenses relating to the business; contracts; fixtures and equipment; books and records; rights under warranties; and claims, causes of action, rights of recovery and rights to set-off. The liabilities assumed are associated with the assumed contracts. The Company has also agreed to provide limited support services to CPII for the period of one year from the date of the agreement. An affiliate of CPII will utilize the assets to provide certain management services to the Company's home health agencies (see Note 12). Due to the Company's continuing involvement with the assets sold, the gain on the sale of the software system totaling $10,593,000 was deferred and is being amortized over the term of the management services agreement referred to above. The $10,240,000 unamortized gain at December 31, 1998 is reflected as deferred revenue on the accompanying balance sheet. 3. PROPERTY AND EQUIPMENT: Property and equipment consists of (000's):
1998 1997 ------ ------ Land...................................................... $ 220 $ 220 Buildings and leasehold improvements...................... 1,285 717 Equipment, furniture and vehicles......................... 10,172 6,721 Computer software......................................... 230 114 ------ ------ Total................................................... 11,907 7,772 Accumulated depreciation.................................. (3,333) (2,987) ------ ------ Net..................................................... $8,574 $4,785 ====== ======
4. OTHER INVESTMENTS: The Company has a 42% interest in a surgery center in Houston, Texas which, as of December 31, 1998, has a carrying value of $500,000. As of December 31, 1997, the Company had made advances totaling $366,000 in connection with this facility. The surgery center opened in May, 1998 and is managed by the Company under a long-term management contract. The Company accounts for this investment using the equity method. The Company has developed a $3.6 million surgery center in Lafayette, Louisiana with a group of physician investors. As of December 31, 1998, the Company's investment in the surgery center totaled $189,000, representing a 21% interest in this development. The Company manages the development under a management contract for a fee based on 4% of revenue. This facility began operations in March 1999. Management concluded in December, 1996, that the realization of certain previously recorded assets might not be assured and, accordingly, wrote off the portion of these investments (approximately $623,000 believed to be unrealizable through future operations.) These investments were primarily comprised of advances made to develop FutureCare, Inc., a proposed managed care organization, of $391,000, certain non-operating equipment of $132,000 believed to be unrealizable through future operations, and $100,000 in notes receivable due from a related party. The $391,000 advance to FutureCare, Inc. was to be reimbursed upon completion of a securities offering of its stock. Due to the uncertainty of a successful offering, the Company chose to expense these amounts. The $132,000 was comprised of opthamology and processing kitchen equipment that the Company was attempting to sell. None of these assets were producing, or expected to produce, a benefit in current or future years. The $100,000 was written off because of a dispute between the Company and Internal Medicine Clinic of Tangipahoa, Inc. ("IMC"). Subsequent to December 31, 1998, this dispute was resolved and amounts due were recovered by the Company. F-12 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 5. OTHER ASSETS: Other assets include the following for the years ended December 31, 1998 and 1997 (000's):
1998 1997 ------- ------ NOTES RECEIVABLE.......................................... $ 699 $1,530 GOODWILL, net of accumulated amortization of $406 and $70. 23,712 71 OTHER..................................................... 330 306 ------- ------ $24,741 $1,907 ======= ======
Notes receivable at December 31, 1997, consist primarily of advances of $1,465,000 due from Alliance Home Health, Inc. which was acquired on January 1, 1998 (see Note 2). "Other" consists primarily of deposits on leased properties and advances made in connection with various other business development projects. 6. NOTES PAYABLE: Notes payable consist primarily of a one-year $14,006,000 note payable to Columbia/HCA as a result of the acquisition consummated in November 1998 (see Note 2) and borrowings under $3,450,000 and $750,000 lines of credit that bear interest at bank prime plus 1.5% (10.0% at December 31, 1998) and bank prime plus 1% (9.5% at December 31, 1998), respectively. Both lines are secured by accounts receivable, life insurance on the major stockholder and personal guarantees of several stockholders. Subsequent to year-end, the $3,450,000 line of credit was decreased to $2,500,000 for 120 days bearing interest at bank prime plus 1.5%. As of December 31, 1998, approximately $223,000 was unused under these lines of credit. The weighted average monthly interest on short-term borrowings was 9.94%, 9.79% and 9.78% in 1998, 1997 and 1996, respectively. The revolving lines of credit are subject to certain covenants, including a monthly borrowing base or margin requirement calculation, a debt service coverage ratio and a leverage ratio. The Company was not in compliance with the debt service ratio requirement at December 31, 1998 and 1997, which defaults were waived by the bank through March 31, 1999. In December 1998, the Company secured a $25 million asset-based line of credit with National Century Financial Enterprises, Inc. of Dublin, Ohio. The line of credit is collateralized by eligible accounts receivable. Eligible receivables are defined as receivables, exclusive of workers' compensation and self-pay, that are aged less than 181 days. The ongoing fees associated with this line of credit equate to 1% of eligible billed receivables generated during each billing period. F-13 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 7. LONG-TERM DEBT: Long-term debt consists of notes payable to banks and other financial institutions that are due in monthly installments through 2003 (000's):
Payee 1998 1997 ----- ------ ------ Notes payable to finance and equipment companies that accrue interest at 8.00-11.25%............................ $7,301 $3,154 Notes payable to banks that accrue interest at 8.00-14.39%. 91 531 ------ ------ Total.................................................... 7,392 3,685 Current portion............................................ 2,633 690 ------ ------ Long-Term.................................................. $4,759 $2,995 ====== ======
These borrowings are secured by equipment, vehicles and the personal guarantee of a stockholder. Maturities of debt as of December 31, 1998, are as follows (000's):
Year Ended ---------- December 31, 1999.................................................. $2,633 December 31, 2000.................................................. 1,731 December 31, 2001.................................................. 1,804 December 31, 2002.................................................. 331 December 31, 2003.................................................. 344 Thereafter......................................................... 549 ------ $7,392 ======
The fair value of long-term debt as of December 31, 1998 and 1997, estimated based on the Company's current borrowing rate of 10%, was approximately $7,982,000 and $3,582,000, respectively. 8. CAPITAL LEASES: The Company acquired certain equipment under capital leases for which related liabilities have been recorded at the present value of future minimum lease payments due under the leases. The present minimum lease payments under the capital leases and the net present value of future minimum lease payments are as follows (000's):
Year Ended ---------- December 31, 1999................................................. $ 556 December 31, 2000................................................. 335 December 31, 2001................................................. 153 December 31, 2002................................................. 102 December 31, 2003................................................. 102 Thereafter........................................................ 130 ------ Total future minimum payments..................................... 1,378 Amount representing interest...................................... 227 ------ Present value of future minimum lease payments.................. 1,151 Current portion................................................... 463 ------ Long-term portion................................................. $ 688 ======
F-14 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 9. INCOME TAXES: The Company files a consolidated federal income tax return, including all subsidiaries that are owned more than 80%. State income tax returns are filed individually by the subsidiaries in accordance with state statutes. The Company utilizes the liability approach to measuring deferred tax assets and liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates in accordance with SFAS No. 109. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The total provision (benefit) for income taxes consists of the following (000's):
1998 1997 1996 ---- ----- ----- Current portion........................................ $ -- $ 93 $ 242 Deferred portion....................................... 926 (566) (239) ---- ----- ----- $926 $(473) $ 3 ==== ===== =====
Total income tax expense (benefit) is included in the following financial statement captions for the years ended December 31, (000's):
1998 1997 1996 ------- ------- ----- Continuing operations........................... $(1,374) $(1,293) $(121) Discontinued operations: Income from discontinued operations........... 436 911 124 Gain on disposition of discontinued operations................................... 1,864 -- -- Cumulative effect of change in accounting principle...................................... -- (91) -- ------- ------- ----- $ 926 $ (473) $ 3 ======= ======= =====
Net deferred tax assets consist of the following components (000's):
1998 1997 ------- ----- Deferred tax assets: Receivable allowance................................... $ 462 $ 523 Self-insurance reserves................................ 139 161 Deferred revenue....................................... 3,584 -- Losses of consolidated subsidiaries not consolidated for tax purposes, expiring beginning in 2010.......... 195 57 Amortization of intangible assets...................... 1,164 453 Expenses not currently deductible for tax purposes..... 177 -- Other.................................................. 43 -- Deferred tax liabilities: Property and equipment................................. (161) (268) Less: valuation allowance................................ (5,603) -- ------- ----- $ -- $ 926 ======= =====
The valuation allowance was recorded against net deferred tax assets due to the significant operating losses incurred by the Company for the last two years. F-15 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 Total tax expense (benefit) on income before taxes resulted in effective tax rates that differed from the federal statutory income tax rate. A reconciliation of these rates is as follows for 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Income taxes computed on federal statutory rate........ 34% 34% 34% State income taxes..................................... -- (5) (1) Nondeductible goodwill................................. (10) -- -- Valuation allowance.................................... (28) -- -- Nondeductible expenses and other....................... -- (4) (40) --- --- --- Total................................................ (4)% 25% (7)% === === ===
10. RELATED PARTY TRANSACTIONS: Notes Receivable Notes receivable from related parties consist primarily of unsecured and non-interest bearing notes from certain stockholders of the Company totaling approximately $102,000 at December 31, 1997, and receivables from an internal medicine clinic totaling approximately $89,000 and $150,000 at December 31, 1998 and 1997, respectively. Subsequent to December 31, 1998, the amounts due from the internal medicine clinic were collected. Notes Payable Notes payable to related parties at December 31, 1998 and 1997 ($45,000) consists of unsecured notes to certain stockholders of the Company that are due on demand and bear interest at rates from 0%-12%. The fair value of these notes approximates the recorded balance due to the short-term nature of the notes. Other The Company paid consulting fees to stockholders of $32,000 in 1998 and medical directors fees to stockholders of $115,000 and $156,000 in 1998 and 1997, respectively. Amedisys Surgery Centers, LC (ASC) paid fees associated with a medical foundation to a stockholder of $12,000 and $12,000 in 1998 and 1997, respectively. In 1998 and 1997, ASC paid $10,800 for equipment rental to a stockholder of the Company. 11. CAPITAL STOCK: Common Stock On April 17, 1997, the Company completed, in two phases, a placement of common stock with Plymouth Partners, LP under which the Company issued 37,500 shares of Common Stock to Plymouth Partners, LP, pursuant to a shelf registration statement for gross proceeds of $262,500 and also issued 112,500 shares of Common Stock to Plymouth Partners, LP, pursuant to a shelf registration statement for gross proceeds of $675,000. The net proceeds from both of these offerings was $831,000. F-16 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 Preferred Stock In December, 1997, the Company completed a private placement of 400,000 shares of $.001 par value convertible preferred stock pursuant to Regulation D of the Securities Act of 1933 at $10 per share for gross proceeds of $4 million. The Company used the proceeds of this placement to fund acquisitions and accelerate the growth of its fully integrated network of outpatient health care services, including home health care offices, alternate site infusion therapy divisions and outpatient surgery centers. These shares are convertible into 864,865 shares of common stock which is equivalent to $4.625 per share. On March 3, 1998, the Company completed a secondary phase of its private placement of preferred stock and issued an additional 350,000 shares for gross proceeds of $3.5 million. These shares are convertible into 756,757 shares of common stock which is equivalent to $4.625 per share. Warrants to purchase 52,500 shares of preferred stock at $10 per share, convertible into 113,514 shares of common stock, were issued to the placement agent, Hudson Capital Partners, L.P. in connection with the offering. In February 1999, the Company offered preferred shareholders an option to reduce the conversion price from $4.625 to $3.00 in exchange for an agreement by these shareholders not to sell, transfer or otherwise dispose of any Company securities until December 31, 1999. Stock Options The Company's Statutory Stock Option Plan provides incentive stock options to key employees. The Plan is administered by a Compensation Committee (appointed by the Board) which is to determine, within the provisions of the Plan, those eligible employees to whom, and the times at which, options shall be granted. Each option granted under the Plan is to be convertible into one (1) share of common stock, unless adjusted in accordance with the provisions of the Plan. Options may be granted for a number of shares not to exceed, in the aggregate 1,000,000 shares of common stock at an option price per share of no less than 85% of the fair market value of a share of common stock on the date the option is granted. If the option is granted to any owner of 10% or more of the total combined voting power of the Company and its subsidiaries, the option price is to be at least 110% of the fair market value of a share of common stock on the date the option is granted. Each option vests ratably over a two-to-three year period and may be exercised during a period as determined by the Compensation Committee, not to exceed 10 years from the date such option is granted. The aggregate fair market value of common stock subject to an option granted to a participant by the Committee in any calendar year shall not exceed $100,000. A summary of the Company's stock options as of December 31, 1998, 1997 and 1996, and changes during the year ended on those dates follows:
1998 1997 1996 ------------------------ ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price -------- -------------- -------- -------------- ------- --------------- Outstanding at beginning of year....................... 957,065 $6.14 288,723 $6.66 27,650 $7.00 Granted..................... 105,000 5.63 794,422 6.01 261,073 6.62 Exercised................... -- -- -- -- -- -- Cancelled/forfeited/expired. (600,014) 6.08 (126,080) (6.48) -- -- -------- ----- -------- ----- ------- ----- Outstanding at end of year.. 462,051 6.11 957,065 $6.14 288,723 $6.66 ======== ===== ======== ===== ======= ===== Exercisable at end of year.. 273,421 $6.34 205,446 $6.49 88,741 $6.65 ======== ===== ======== ===== ======= ===== Weighted average fair value of options granted during the year................... $ 1.85 $ 1.99 $ 3.11 ======== ======== =======
F-17 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 Of the 462,051 options outstanding at December 31, 1998, 151,562 become exercisable in 1999 and 37,086 in 2000. The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------- -------------------- Weighted Weighted Number Weighted Average Average Number Average Outstanding Remaining Exercise Exercisable Exercise Range of Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price - ------------------------ ----------- ---------------- -------- ----------- -------- $5.63--$7.00............ 462,051 6 years $6.11 273,421 $6.34
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and changes the methods for recognition of cost on plans similar to those of the Company. Adoption of SFAS 123 is optional; however, pro forma disclosures, as if the Company had adopted the cost recognition requirements under SFAS 123 in 1997 and 1996, are presented below. The fair value of each option granted during the periods presented is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (i) dividend yield of 0%, (ii) expected volatility of 53.0% for options issued in 1998, a range of 51.23%-53.69% for the options issued in 1997, 40.02% and 45.44% for options issued in 1996, and 27.63% for options issued in 1995, (iii) risk-free interest rate of 5.7% in 1998, a range of 5.70%-6.22% in 1997, 6.22% in 1996 and 5.23% in 1995, respectively, and (iv) expected life of 3 to 5 years. Had compensation cost for the Company's 1998, 1997, 1996 and 1995 options been determined consistent with SFAS 123, the Company's net income (loss), net income (loss) applicable to common stockholders and net income (loss) per common share for 1998 and 1997 would approximate the pro forma amounts below (000's, except share amounts):
1998 1997 1996 ------------------ ----------------- --------------- As Pro As Pro As Pro Reported forma Reported forma Reported forma -------- -------- -------- ------- -------- ------ Net income (loss)....... $(24,871) $(25,565) $(1,194) $(1,813) $ 18 $ (59) ======== ======== ======= ======= ===== ====== Net income (loss) applicable to common stockholders........... $(24,871) $(25,565) $(1,194) $(1,813) $ 18 $ (59) ======== ======== ======= ======= ===== ====== Net income (loss) per common share........... $ (8.12) $ (8.35) $ (0.43) $ (0.66) $0.01 $(0.02) ======== ======== ======= ======= ===== ======
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. Amedisys Specialized Medical Services, Inc. (ASM) Employee Stock Ownership Plan ASM, a wholly-owned subsidiary, developed an Employee Stock Ownership Plan (ESOP) effective January 1, 1997 to enable participating employees of ASM to share in the ownership of ASM. Under the ESOP, the Company may make annual contributions to a trust for the benefit of eligible employees, in the form of either cash or common stock of ASM. The amount of the annual contribution is discretionary. The Company's contribution for the year ended December 31, 1997 was $721,000 which was funded in 1998. No contribution will be made for the year ended December 31, 1998. F-18 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 12. COMMITMENTS AND CONTINGENCIES: Leases The Company and its subsidiaries have leased office space at various locations under noncancelable agreements which expire between February 28, 1999 and August 31, 2005, and require various minimum annual rentals. Total minimum rental commitments at December 31, 1998, are due as follows (000's): 1999................................................................ 8,054 2000................................................................ 6,699 2001................................................................ 4,100 2002................................................................ 2,497 2003................................................................ 1,169 Due thereafter...................................................... 3,153
Rent expense for all non-cancelable operating leases was $3,255,000, $1,706,000 and $1,351,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Management Agreement On November 2, 1998, the Company and CareSouth Home Health Services, Inc. ("CareSouth"), an affiliate of CPII Acquisition Corp., entered into agreements under which CareSouth has agreed to provide payroll processing, billing services, collection services, cost reporting services and software maintenance and support for the Company's home health agencies with a consolidated fee structure. Under the consolidated fee structure, fees are collected for services provided on a per visit basis, which may be adjusted depending on the cumulative number of annual visits. Self-Funded Insurance Plans During 1995, the Company became self-insured for workers' compensation claims in the State of Louisiana up to certain policy limits. Claims in excess of $200,000 per incident and $1,300,000 in the aggregate over a two-year policy period are insured by third party reinsurers. The Company has accrued a liability for outstanding and incurred, but not reported claims based on historical experience. In connection with the self-insurance plan and as required by the State of Louisiana, the Company issued a $175,000 letter of credit in favor of the Louisiana Department of Labor, which expired February 17, 1998, and was renewed to February, 1999. In January, 1999, the Company changed from a self-insured workers' compensation plan to a fully insured, guaranteed cost plan. During 1997, the Company became self-insured for health claims up to certain policy limits. Claims in excess of $35,000 per incident and approximately $64,000 aggregate per month are insured by third party reinsurers. The Company has accrued a liability of approximately $589,000 and $78,000 at December 31, 1998 and 1997, respectively for outstanding and incurred, but not reported claims based on historical experience. Employment Contracts The Company has commitments related to employment contracts with a number of its top executives. Such contracts generally commit the Company to pay bonuses on the attainment of certain operating goals and severance benefits under certain circumstances. F-19 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 Other The Company is subject to various types of claims and disputes arising in the course of its businesses. While the resolution of such issues is not presently determinable with certainty, management believes that the ultimate resolution of such matters will not have a significant effect on the Company's financial position or results of operations. 13. BENEFIT PLAN: The Company adopted a plan qualified under Section 401(k) of the Internal Revenue Code for all employees who are 21 years of age and have at least 90 days of service. Under the plan, eligible employees may elect to defer a portion of their compensation, subject to internal revenue service limits. The Company may make matching contributions equal to a discretionary percentage of the employee's salary reductions. No matching contribution was made for the year ended December 31, 1995. A matching contribution of $59,000 for the year ended December 31, 1996 was made in 1997, a matching contribution of $71,000 was made for 1997 in 1998, and a matching contribution of $129,000 was made for 1998 in 1999. Such contributions were made in the form of common stock of the Company, valued based upon the fair market value of the stock at the end of the applicable year. 14. SEGMENT INFORMATION: The Company operates principally in two business segments: Provider Services (consisting of home health care and outpatient surgery) and Management Services (consisting of staffing/professional services and physician support and home health care management). The following shows industry segment information for the fiscal years ended December 31, 1998, 1997 and 1996 (1997 and 1996 amounts have been restated as a result of the reclassification of the staffing/professional services division as a discontinued operation as discussed in Note 2) (in 000's):
1998 1997 1996 -------- -------- -------- Restated Restated Net Service Revenues: Provider Services Home health care................................. $ 30,488 $25,817 $25,500 Outpatient surgery............................... 6,224 6,287 4,626 Physician support and home health care management services........................................ 1,374 5,100 3,396 Corporate support................................. -- -- -- -------- ------- ------- Total.......................................... $ 38,086 $37,204 $33,522 ======== ======= ======= 1998 1997 1996 -------- -------- -------- Operating Income (Loss): Provider Services Home health care................................. ($20,423) $ 831 $ 2,038 Outpatient surgery............................... 659 (960) 1,175 Physician support and home health care management services.......................................... (942) 1,494 347 Corporate support................................. (8,572) (5,596) (4,201) -------- ------- ------- Total.......................................... (29,278) (4,231) (641) Other expenses.................................... (1,290) (962) (1,159) -------- ------- ------- Income (loss) before income taxes, minority interest, cumulative effect of change in accounting principle and discontinued operations.. $(30,568) $(5,193) $(1,800) ======== ======= =======
F-20 AMEDISYS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996
Capital Expenditures ----------------------- 1998 1997 1996 ------- ------- ------- Provider services Home health care..................................... $ 1,767 $ 348 $ 135 Outpatient surgery................................... 696 631 2,233 Physician support and home health care management services.............................................. 122 18 89 Corporate support...................................... 993 459 508 ------- ------- ------- Total.............................................. $ 3,578 $ 1,456 $ 2,965 ======= ======= ======= Depreciation and Amortization ----------------------- 1998 1997 1996 ------- ------- ------- Provider services Home health care..................................... $ 761 $ 344 $ 319 Outpatient surgery................................... 659 609 271 Physician support and home health care management services.............................................. 44 129 201 Corporate support...................................... 243 158 154 ------- ------- ------- Total.............................................. $ 1,707 $ 1,240 $ 945 ======= ======= ======= Long-lived Assets ----------------------- 1998 1997 1996 ------- ------- ------- Provider services Home health care..................................... $10,636 $ 5,164 $ 4,489 Outpatient surgery................................... 6,840 6,135 6,296 Physician support and home health care management services.............................................. 476 2,290 1,200 Corporate support...................................... 2,209 9,157 4,211 ------- ------- ------- Total.............................................. $20,161 $22,746 $16,196 ======= ======= =======
15. SUBSEQUENT EVENT: On January 1, 1999, the Company sold all of the issued and outstanding stock of Amedisys Durable Medical Equipment, Inc. d/b/a Care Medical and Mobility (ADME) to Ace Drug Medical Equipment, Inc. (ACE), a Texas Corporation. The sales price was $672,385 of which $100,000 was paid at closing; $418,318 was payable pursuant to a two year note in eight equal quarterly payments of principal and interest at prime plus 2%, adjusted annually; and $154,067 was payable pursuant to a one year note in four quarterly payments of principal plus accrued interest at prime plus 2%. Each note is guaranteed by Terry Huckabee, a principal of ACE. ACE acquired substantially all of the assets and liabilities of ADME. This transaction was accounted for as a sale by the Company. F-21 EX-2.18 2 ASSET PURCHASE AGREEMENT EXHIBIT 2.18 ASSET PURCHASE AGREEMENT among AMEDISYS SURGERY CENTERS, LC a Texas Limited Liability Company and PERMIAN SURGICAL CENTER, INC. dba TANGLEWOOD SURGERY CENTER a Texas Corporation Dated as of October 23, 1998 1 TABLE OF CONTENTS Page No. ARTICLE I PURCHASE OF ASSETS................... 1 1.1 Assets To Be Acquired............................... 1 1.2 Employees........................................... 3 ARTICLE II PURCHASE PRICE.................... 3 2.1 Payment of Purchase Price........................... 3 ARTICLE III CLOSING........................ 3 3.1 Closing............................................. 3 ARTICLE IV 4.1 Representations of PURCHASER........................ 4 4.2 Representations of SELLER........................... 5 ARTICLE V COVENANTS....................... 10 5.1 Covenants of SELLER................................. 10 5.1.1 Existence and Rights................................ 10 5.1.2 Consents............................................ 10 5.1.3 Closing Documents................................... 11 5.2 Covenants and Agreements of PURCHASER............... 11 5.3 Mutual Covenants and Agreements..................... 11 5.4 Forwarding of SELLER's Collected Receivables........ 13 5.5 Forwarding of Telephone Calls....................... 13 5.6 Risk of Loss........................................ 13 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS.......... 14 6.1 Conditions to SELLER's Obligations.................. 14 6.2 Conditions to Obligations of PURCHASER.............. 15 ARTICLE VII BULK SALES COMPLIANCE................. 17 7.1 Bulk Sales Compliance............................... 17 2 ARTICLE VIII INDEMNIFICATION................... 17 8.1 Indemnification by SELLER........................... 17 8.3 Indemnification by PURCHASER........................ 17 8.5 Procedure for Indemnification....................... 18 ARTICLE IX MISCELLANEOUS..................... 19 9.1 Notices............................................. 19 9.2 Captions............................................ 19 9.3 Waivers............................................. 20 9.4 No Third-Party Beneficiaries........................ 20 9.5 Counterparts........................................ 20 9.6 Severability........................................ 20 9.7 Remedies of PURCHASER............................... 20 9.8 Governing Law....................................... 20 9.9 Attorneys' Fees..................................... 20 SCHEDULES - ------------------ Schedule 1.1(b) - September 30, 1998 Balance Sheet Schedule 1.1(c) - Machinery and Equipment Schedule 1.1(d) - Supplies and Inventory Schedule 1.1(e) - Licenses and Permits Schedule 1.1(f) - Contracts Schedule 1.1(g) - Personal Property Leases, Sub Leases and Assignments Schedule 1.1(h) - Real Property Leases Schedule 1.1(k) - Manuals and Marketing Materials Schedule 1.2 - Employee Benefits Schedule 2.1(c) - Term Note Schedule 2.1(d) - Guaranty Schedule 2.1(e) - Security Agreement Schedule 4.2(b) - Governmental Consents Schedule 4.2(i) - Hazardous Materials Schedule 4.2(l) - Physician Utilization Schedule 4.2(n) - Litigation Schedule 4.2(p) - Employees Schedule 5.5(a) - Bill of Sale Schedule 5.5(b) - Assignment of Contracts Schedule 5.5(c) - Assignment of Leases Exhibit A - Promissory Note 3 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made by and among [Permian Surgical Center, Inc. a Texas corporation] doing business as Tanglewood Surgery Center, ("SELLER"), and Amedisys Surgery Centers, LC., a Texas limited liability company ("PURCHASER"). RECITALS WHEREAS, SELLER owns and operates an outpatient ambulatory surgery center known as Tanglewood Surgery Center located at 4241 Tanglewood, Odessa, Texas 79762 (the "Surgery Center"). WHEREAS, PURCHASER is a Texas limited liability company formed for the purpose of acquiring and operating an ambulatory surgery center; WHEREAS, PURCHASER is willing to buy and SELLER is willing to sell upon the terms and conditions as hereinafter set forth certain assets of the Surgery Center; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I PURCHASE OF ASSETS 1.1 Assets To Be Acquired. Subject to the terms of this Agreement, SELLER shall transfer to PURCHASER on the Closing Date (as hereinafter defined) all right, title and interest of SELLER, in and to the following to the extent and only to the extent assignable: (a) All accounts receivable set forth on the October 31, 1998 balance sheet of the Surgery Center. (b) The prepaid items listed on the SELLER's Balance Sheet dated October 31, 1998, (the "Balance Sheet") attached hereto as Schedule 1.1(b) and made a part hereof. 4 (c) The machinery and equipment listed on Schedule 1.1(c) attached hereto and made a part hereof (collectively the "Equipment"). (d) The supplies and inventory listed on Schedule 1.1(d) attached hereto and made a part hereof. (e) The regulatory licenses, approvals and registrations listed on Schedule 1.1(e) attached hereto and make a part hereof to the extent assignable by seller. (f) The contracts listed on Schedule 1.1(f) attached hereto and made a part hereof (collectively the "Contracts"). Copies of the written contracts listed on Schedule 1.1(f) are collectively attached hereto as Schedule 1.1(f)(A) and made a part hereof. (g) The leases listed on Schedule 1.1(g) attached hereto and made a part hereof (collectively the "Leases"). (h) The customer lists and vendor lists delivered on the Closing Date (as hereinafter defined) by SELLER to PURCHASER. (i) The marketing materials, training materials, office and reference manuals listed on Schedule 1.1(k) attached hereto and made a part hereof. (j) All goodwill associated with the Surgery Center. It is the intention of the parties that all of the assets, properties, and rights of SELLER used in and reasonably necessary to conduct the Surgery Center business, as of the Effective Date (as defined herein), be transferred and conveyed to PURCHASER pursuant to this Agreement. To the extent that any such asset, property and rights of SELLER are not specifically identified above, SELLER shall execute and deliver such other documents and instruments and take such other action as PURCHASER shall reasonably request to transfer and convey such assets, properties and rights to PURCHASER. All of the foregoing assets specified in sub-paragraphs 1.1(a) through 1.1(k) inclusive are sometimes collectively referred to as the "Assets". PURCHASER is not assuming any liability for any obligations of SELLER except as specifically provided herein. 1.2 Employees. It is understood and agreed that the employees of the Surgery Center Business will continue as employees of SELLER through the Effective Date at which time they will be 5 discharged by SELLER. PURCHASER may hire all or some of such employees following the Effective Date. ARTICLE II PURCHASE PRICE 2.1 Payment of Purchase Price. The total aggregate purchase price for the Assets to be transferred to PURCHASER shall be $500,000 (the "Purchase Price") payable as follows: a. The sum of $50,000 payable in cash in the form of a check at the Closing. b. The sum of $50,000 in the form of a promissory note payable to SELLER included herein as Exhibit A; c. The sum of $400,000 in the form of a purchase note Payable to SELLER included herein as Exhibit B; ARTICLE III CLOSING 3.1 Closing. The closing (the "Closing" or "Closing Date") of the purchase and sale of the assets and the transactions contemplated by this Agreement shall occur on October 23, 1998, at 5:00 p.m. at the Surgery Center or at such other time and/or place as may be mutually agreed by the parties to this Agreement. Regardless of when Closing occurs, it shall be effective as of 6:00 a.m. on November 1, 1998 (the "Effective Date") and SELLER and PURCHASER agree to acknowledge and use the Effective Date for all purposes, including accounting and federal and state tax reporting purposes. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations of PURCHASER In addition to any other representations and warranties of PURCHASER made in this Agreement, PURCHASER further represents and warrants to SELLER as follows: (a) Corporate Existence. PURCHASER is presently and will be on the Closing Date, a limited liability company duly organized, 6 validly existing and in good standing under the laws of the State of Texas with full power and authority to purchase the Assets. (b) Governmental Consents. No consent or approval by any governmental authority is or will be required in connection with the execution, delivery and performance of this Agreement by PURCHASER or the consummation by PURCHASER of the transactions contemplated in this Agreement. (c) Full Disclosure. No representation or warranty by PURCHASER in this Agreement or any statement or instrument furnished, or to be furnished, by any of them to SELLER pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to prevent any such statement from becoming inaccurate, misleading, erroneous or untrue. (d) Brokerage. PURCHASER has not entered into any agreement with any individual or entity for the payment of any commission, brokerage, finders or other fee in connection with the execution of this Agreement or the transactions contemplated hereunder. (e) No Disability. As of the date of this Agreement, PURCHASER is not and will not be under any legal disability to enter into and perform this Agreement and, at all times from the date of this Agreement until the Closing, PURCHASER shall have the full power and authority to perform all of its respective obligations under this Agreement. (f) Authority Relative to this Agreement. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and effectively authorized by PURCHASER and the members of PURCHASER and this Agreement, together with each schedule attached hereto, is valid, legally binding and enforceable against PURCHASER in accordance with its terms and their terms. (g) No Insolvency. The purchase of the Assets shall not render PURCHASER insolvent. All of the representations, warranties, agreements, and obligations of PURCHASER as set forth in this Agreement and the foregoing paragraphs are deemed to be continuing and shall survive the Closing of this transaction and shall be true as of the Closing Date. 4.2 Representations of SELLER. In addition to any other representations and warranties of SELLER made in this Agreement, as 7 set forth herein, SELLER further represents and warrants to PURCHASER as follows: (a) Assets. To the best of SELLER's knowledge and belief in good operating condition and in reasonable repair, free and clear from any known defects, except such minor defects as do not interfere with continued use thereof. (b) Ownership. Seller is the beneficial owner of the Assets and has good and marketable title to and the absolute right to sell, assign, and transfer the Assets to Purchaser, free and clear of any interests, security interest, claims, liens, pledges, penalties, charges, encumbrances, buy-sell agreements, or other rights of any party whatsoever of every kind and character by, through, or under seller. Upon delivery of and payment of the purchase price in accordance with this Agreement, good and marketable title thereto shall be delivered to Purchaser, free and clear of any interest, security interest, claims, liens, pledges, penalties, charges, encumbrances, buy-sell agreements, or other rights of any party whatsoever claiming by, through, or under seller. (c) Governmental Consents. No consent or approval by any governmental authority is or will be required in connection with the execution, delivery and performance of this Agreement by SELLER or the consummation by SELLER of the transactions contemplated herein except with respect to the transfer of the regulatory licenses, approvals and registrations listed on Schedule 4.2(b) attached hereto. (d) Full Disclosure. No representation or warranty by SELLER in this Agreement or any statement of instrument furnished, or to be furnished, by SELLER to PURCHASER pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact presently known to seller necessary to prevent any such statement from becoming inaccurate, misleading, erroneous or untrue. (e) Existence. SELLER is presently and will be on the Closing Date a corporation duly organized, validly existing and in good standing under the laws of the State of Texas with full power and authority to own, manage, operate, encumber, transfer, sell and lease its properties. (f) Insurance. SELLER shall maintain in full force and effect until the Closing, at its sole cost and expense, all insurance policies covering the Assets. SELLER shall also obtain at its expense, "tail" or "previous acts" malpractice insurance coverage for any potential claims for pre-Effective Date business conducted by SELLER. 8 (g) No Disability. As of the date of this Agreement and as of the Closing Date, SELLER is not and will not be under legal disability to enter into and perform this Agreement and, at all times from the date of this Agreement until the Closing, SELLER shall have the full power and authority to perform all of its respective obligations under this Agreement. (h) Brokerage. SELLER has not entered into any agreement with any individual or entity for the payment of any commission, brokerage, finders or other fee in connection with the execution of this Agreement or the transactions contemplated hereunder. (i) Authority Relative to this Agreement. The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and effectively authorized by the Board of Directors of SELLER and the shareholders of SELLER and this Agreement, together with each schedule attached hereto, is valid, legally binding and enforceable against SELLER in accordance with its terms and their terms. (j) Compliance With Law. SELLER believes that it has conducted the business of the Surgery Center in compliance in all material respects with all applicable federal, state and local laws, statutes, licensing requirements, rules and regulations, and judicial or administrative decisions applicable to the Surgery Center bus iness, including without limitation, all laws, statutes, licensing requirements, rules and regulations and decisions applicable to the Surgery Center business (i) regarding the disposal of its medical waste; (ii) regarding Medicare and Medicaid fraud and abuse. SELLER contracts with Biomedical Waste Systems for disposal of its medical waste. No enforcement action, litigation or other proceedings or claims has been brought or, to the best knowledge of SELLER, threatened against SELLER during the period that SELLER has owned the property at 4241 Tanglewood, Odessa, Texas (the "Property") alleging use of any Hazardous Materials on, from or under the Property. Schedule 4.2(i) sets forth a list of all environmental reports relating to the Surgery Center Business prepared by, for or on behalf of SELLER, and SELLER has delivered or made available true and complete copies of all such reports to PURCHASER. For purposes of this Agreement, the following terms shall have the following meanings: "Hazardous Materials" means any and all flammable, corrosive or ignitable materials, explosives, petroleum or petroleum by-products, asbestos, radioactive materials, hazardous waste, toxic substances or related materials, to the extent those materials and substances are defined as "hazardous substances," "hazardous materials," 9 "hazardous wastes" or "toxic substances" in, or are otherwise governed by, the Environmental Laws, but shall expressly include those materials excluded by 42 U.S.C. Section 9601(14). "Environmental Laws" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq.; the Toxic Substances Control Act, 15 U.S.C. 2601 et seq.; the Hazardous Materials Transpor tation Act, 49 U.S.C. Section 1801 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; the Federal Clean Water Act, 33 U.S.C. Section 1251 et seq.; the Porter- Cologne Water Quality Act; including all amendments thereto, replacements thereof, and regulations and publications promulgated pursuant thereto and any other federal, state or local law, rule or regulation relating to the environment (including the work place) or regulating the use of Hazardous Materials to the extent the same are applicable to SELLER or the Property. (k) Medicare and Medicaid. The SELLER is licensed by the Texas Department of Health to operate the Surgery Center as an ambulatory surgery center, and the Surgery Center is certified and qualifies for reimbursement under Medicare and Medicaid as an ambulatory surgery center. (l) Contracts and Commitments. There are no material contracts, commitments, leases, permits, and other instruments binding upon SELLER with respect to the Surgery Center business, including, without limitation, any agreements or arrangements (written or oral) granting any person the right to purchase, use or occupy the premises used in connection with the Surgery Center business, except as set forth in Schedules 1(f), and (g). To the best of SELLER's knowledge, (i) all of the contracts, and leases listed on Schedules 1.1(f) and 1.1(g) are in full force and effect and are valid, binding and enforceable in accordance with their respective provisions; (ii) SELLER is not in default of any contract or lease listed on Schedule 1.1(f) and Schedule 1.1(g), nor has there occurred an event or condition which, with the passage of time or giving of notice (or both), would constitute a default with respect to the payment or performance of any obligation thereunder; and no claim of such a default has been asserted and there is no basis upon which such a claim could validly be made. No notice has been received by SELLER claiming any such default or indicating the desire or intention of any other party thereto to amend, modify, rescind or terminate the same. (m) Financial and Operating Information (i) To the best of seller's knowledge, based on information and belief, Schedule 4.2(l) contains a complete 10 and accurate chart setting forth the physician utilization of the Surgery Center for 1997 and for the months of January through September of 1998. (ii) SELLER has heretofore delivered to PURCHASER the following financial statements: (i) a balance sheet as of September 30, 1998, (ii) an income statement as of September 30, 1998, and (iii) an income statement for each month in 1998, (collectively, the "Financial Statements"). The Financial Statements (i) are in accordance with the books and records of SELLER, (ii) have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and (iii) fairly and accurately present the assets, liabilities (including all reserves) and financial position of SELLER as of the date thereof and the results of operations for the periods then ended. As of the September 30, 1998 balance sheet, there were no liabilities of SELLER which, in accordance with generally accepted accounting principles, should have been shown on such balance sheet. (n) Absence of Certain Changes and Events. Since September 30, 1998, there has not been any material adverse change in the financial condition assets, liabilities, business or prospects of SELLER or any occurrence, circumstance, or combination thereof which reasonably could be expected to result in any such adverse change which would directly effect the transactions herein; (o) Litigation. Except as set forth on Schedule 4.2(n) there is no action, order, writ, injunction, judgment or decree outstanding or any claim, litigation, proceeding, labor dispute, arbitral action, governmental audit or investigation (collectively "Actions") pending or, to the best knowledge of SELLER, threatened or anticipated (i) against, related to or affecting the Assets (ii) seeking to delay, limit or enjoin the transactions contemplated by this Agreement; or (iii) in which SELLER is a plaintiff. SELLER is not subject to any judgment, order, writ, injunction or decree of any court or governmental agency, and there is no unsatisfied judgments against the SELLER. (p) Taxes. All taxes, including, without limitation, income, property, sales, use, franchise, value added, employees, income withholding, social security and other employee-related taxes, imposed by the United States, by any state, municipality, other local government or other subdivision or instrumentality of the United States, or by any foreign country or any state or other government thereof, or by any other taxing authority, that are due and payable by SELLER and all interest and penalties thereon, whether disputed or not (collectively, "Taxes"), and which would result in the imposition of a lien, claim, or encumbrance on the Assets, or other than Taxes which are not yet due and payable, have been paid in full or contested in appropriate proceedings, all tax returns required to be filed in connection therewith have been accurately prepared and duly and 11 timely filed and all deposits required by law to be made by SELLER with respect to employees' withholding or other Taxes have been duly made. SELLER is not delinquent in the payment of any Taxes, assessment or governmental charge or deposits which would result in the imposition of a lien, claim or encumbrance on the Assets and SELLER has no Taxes, deficiency or claim outstanding, proposed or assessed against it, and to the best of SELLER's knowledge and belief there is no basis for any such deficiency or claim, which would result in the imposition of any lien, claim or encumbrances on the Assets. (q) Labor Relations. As set Forth in Schedule 4.2(p), attached hereto, is a complete list of all employees of SELLER and with respect to each such employee, each employee's: (i) hire date; (ii) current wage or salary; (iii) age; and (iv) social security number. (r) Seller's Relationships. To the best of SELLER's knowledge and belief, neither SELLER nor any person having any direct or indirect equity interest in SELLER, has any material financial interest or other relationship, direct or indirect, in any supplier of SELLER, any party to any contract which is material to the Surgery Center business, or with any employee of the SELLER or any physician practicing or performing services at the Surgery Center other than Ralph Cepero, M.D. (s) No Other Agreements to Sell the Assets. Neither SELLER nor any of its officers, employers or affiliates have any commitment or obligation, absolute or contingent, to any other person or firm other than PURCHASER to, directly or indirectly, sell, assign, transfer, or effect a sale of the Assets, to effect any liquidation, dissolution or other reorganization of SELLER. (t) Books and Records. SELLER has made and kept and given PURCHASER, and PURCHASER's representatives, access to books and records which, in reasonable detail, accurately and fairly reflect the activities of the Surgery Center. ARTICLE V COVENANTS 5.1 COVENANTS OF SELLER. SELLER covenants and agrees that it will comply with each of the covenants and agreements set forth in paragraph 5.2, the fulfillment of each of which shall constitute a condition precedent to PURCHASER'S obligations to purchase the Assets at the Closing. 12 5.2. EXISTENCE AND RIGHTS. Between the date hereof and the Closing Date, SELLER will take all necessary actions to keep in full force and effect its existence. During the period from the date hereof to the Effective Date, SELLER shall not, without the written consent of the PURCHASER, which consent shall not be unreasonably withheld; (a) Enter into any material transaction not in the ordinary course of business except as contemplated by or provided for in this Agreement or which would prevent SELLER from fulfilling its obligations under this Agreement. (b) Mortgage, pledge or voluntarily subject to lien or other encumbrance any of the Assets; and SELLER shall promptly notify PURCHASER in writing of any lien or encumbrance created against any of the Assets of SELLER of which SELLER becomes aware. (c) Sell or transfer any of the Assets. 5.1.2 Consents. SELLER shall use its best efforts to procure all consents, approvals or waivers which must be obtained by SELLER and which are necessary for completion of the transactions described herein, including using all reasonable efforts to obtain all required consents of any governmental agency or body issuing any permits, licenses or other governmental authorizations affecting SELLER. 5.1.3 Closing Documents. SELLER shall cause the following documents to be delivered to PURCHASER at or before the Closing: (a) The Assignment and Bill of Sale, executed by SELLER in substantially the form of Schedule 5.5(a) attached hereto and made a part hereof. (b) The Assignments of Contracts, in substantially the form of Schedule 5.5(b) attached hereto and made a part hereof. (c) The Assignments of Leases, in substantially the form of Schedule 5.5(c) attached hereto and made a part hereof. 5.2 COVENANTS AND AGREEMENTS OF PURCHASER. PURCHASER covenants and agrees that it will comply with each of the covenants and agreements set forth in this paragraph 5.2, the fulfillment of each of which shall constitute a condition precedent to SELLER's obligations to sell the Assets at the Closing. (a) Consents. PURCHASER agrees to use its best efforts to procure all necessary consents, approvals, or waivers which must be 13 obtained by PURCHASER or are necessary for completion of the transactions described herein on or prior to the Closing. 5.3 MUTUAL COVENANTS AND AGREEMENTS. PURCHASER, and SELLER mutually agree as follows: (a) Allocation of the Total Aggregate Purchase Price. The parties shall on or before the Closing Date allocate the Total Aggregate Purchase Price to the Assets in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended, (the "Code") and the regulations thereunder and each shall timely file with the Secretary of the Treasury and information required to be furnished thereunder. (b) Accounting and Attorneys Fees. PURCHASER, and SELLER shall each pay their own respective expenses including, but not limited to, appraisal, legal and accounting fees attendant or incidental to the negotiation, preparation and Closing of the transactions contemplated by this Agreement. (c) Computation of Time. Any time period to be computed pursuant to this Agreement shall be computed by the number of days stipulated, excluding the first and including the last day of such period. (d) Retention of Liabilities. SELLER shall retain and be responsible for (i) any debts, obligations or liabilities whether actual or contingent, known or unknown arising out of medical malpractice or products liability, and related claims made by or on behalf of patients of the Surgery Center to the extent that such claims arise out of actions or omissions occurring prior on or prior to the Effective Date; (ii) any debts, obligations or liabilities of SELLER or any person or entity affiliated with SELLER arising as the result of the termination by SELLER prior to the Effective Date of any contract whether or not listed in Schedule 1.1(f), nor shall PURCHASER be required to defend any suit or claim arising out of any act, omission or transaction by SELLER or any person or entity affiliated with SELLER regardless of whether any such liability or obligation corresponds to any Assets purchased by PURCHASER under this Agreement; (iii) termination payments, severance benefits or other amounts payable (except for vacation and sick leave amounts for employees of SELLER as are scheduled on Schedule 1.2 hereto which will be borne by PURCHASER) to employees of SELLER under SELLER's employment contracts, compensation plans or severance policies or as required by applicable law or regulation; and (iv) obligations and liabilities relating to the Surgery Center business which were incurred during the period from the date of the last financial statements delivered to PURCHASER and the Closing Date outside the ordinary course of the Surgery Center business (collectively, 14 "Retained Liabilities"). PURCHASER shall not assume, or otherwise be responsible for, any Retained Liabilities. (e) Survival of Warranties and Representations. Unless otherwise specifically provided to the contrary or unless the text of this Agreement clearly dictates otherwise, each of the covenants and agreements of the parties hereto shall survive the Closing of this transaction and delivery of all Closing documents and shall be fully enforceable against the party or parties sought to be charged with any breach hereof for a period of forty-eight (48) months from the Closing. (f) Taxes. SELLER shall pay when due all ad-valorem property taxes for the Assets from January 1 to the Effective Date, and for the year 1997 and prior years. PURCHASER shall pay when due all ad-valorem property taxes from the Effective Date and all subsequent years. (g) Time of the Essence. The parties hereto declare that time shall be of the essence in the performance of this Agreement and the terms and conditions set forth herein. (h) Condition of Assets. PURCHASER and SELLER acknowledge the Assets to be transferred at the Closing are transferred "AS IS" and "WHERE IS", with no warranties of any kind except for the warranty of title by, through, or under seller and with a warranty of quantity with respect to and only with respect to the items set forth on Schedules 1.1(c) and 1.1(d) SELLER DOES HEREBY DISCLAIM ANY AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. PURCHASER acknowledges that on or prior to the Closing Date it has had an opportunity to inspect the Assets. (i) Entire Agreement. This Agreement sets forth the entire understanding and agreement between the parties pertaining to the sale of the Assets and shall be binding upon the parties, their subsidiaries, affiliates, successors and permitted assigns. All prior negotiations, agreements and understandings as to the transactions contemplated in this Agreement are superseded hereby. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. (j) Conflict of Interest. This Agreement has been prepared by counsel representing PURCHASER in the transactions contemplated by this Agreement. Seller was represented by independent counsel. 5.4 THIS SECTION INTENTIONALLY OMITTED 15 5.5 Forwarding of Telephone Calls. PURCHASER shall refer to SELLER all telephone calls pertinent to SELLER received by PURCHASER after the Closing Date. 5.6 Risk of Loss. The risk of loss of, or damage to, the Assets shall be upon SELLER until the date and time of the Closing. If any portion of the Assets with a value in the aggregate of $15,000.00 or less, based on the net book value of the Assets as reflected on the books of SELLER, are partially or totally damaged or destroyed prior to the date and time of the Closing, PURCHASER shall continue under this Agreement and receive the proceeds of any insurance payable in connection with said damage or destruction. In the event any of the Assets valued in excess of $15,000.00 shall be damaged or destroyed, SELLER shall immediately and with forty-eight (48) hours thereafter notify PURCHASER thereof in writing and PURCHASER shall have the option upon written notice to SELLER to (i) terminate this Agreement and thereafter the same shall be null and void and each party released and discharged from any liability hereunder, or (ii) PURCHASER may elect to continue under this Agreement and receive the proceeds of any insurance payable in connection with said damage or destruction. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS 6.1 Conditions to SELLER's Obligations. The obligations of SELLER to make the deliveries contemplated at the Closing shall, in addition to conditions set forth elsewhere herein, be subject to the satisfactory completion on or prior to the Closing Date of each of the following conditions, any of which may be waived by SELLER: (a) Corporate Existence. PURCHASER shall have furnished to SELLER, on the Closing Date, (i) a Certificate of Corporate Existence issued by the Office of the Secretary of State of Texas, dated not more than thirty (30) days prior thereto, setting forth that PURCHASER is duly organized under the laws of the State of Texas, and (ii) a Certificate of Good Standing issued by the Office of the Comptroller of the State of Texas, dated not more than sixty (60) days prior thereto, setting forth that PURCHASER is in good standing under the laws of the State of Texas. (b) PURCHASER's Corporate Authority. PURCHASER shall have furnished to SELLER on or before the Closing Date, a copy of a corporate resolution duly adopted by the members of PURCHASER, authorizing the purchase of the Assets from SELLER pursuant to the terms and conditions of this Agreement, including, without limitation, authorization for the execution and delivery by PURCHASER 16 to SELLER of this Agreement, which copy shall be duly certified by the Secretary of the PURCHASER and otherwise be in form and content satisfactory to counsel for SELLER. (c) Correctness of Representations and Warranties. All the representations and warranties of PURCHASER, in this Agreement shall be true and complete in all respects on the Closing Date as though such representations and warranties were made on said date. (f) Performance of Covenants and Agreements. All covenants and agreements of PURCHASER, contained in this Agreement and required to be performed by PURCHASER, on or before the Closing Date shall have been performed in all material respects. (g) Closing Documents. PURCHASER shall have furnished to SELLER, at the Closing, all documents required to be furnished to SELLER by PURCHASER, under the terms of this Agreement. (h) Additional Closing Documents. PURCHASER shall have delivered to SELLER at or prior to Closing such documents as SELLER may reasonably request to enable SELLER to determine whether the conditions to PURCHASER's obligations under this Agreement have been met and otherwise carry out the provisions of this Agreement. (i) No Legal Bar. (a) There shall not have been instituted or threatened any legal proceeding seeking to prohibit the consummation of the transactions contemplated by this Agreement, or to obtain substantial damages with respect thereto. (b) None of the parties hereto shall be prohibited by any order, writ, injunction or decree of any governmental body of competent jurisdiction from consummating the transactions contemplated by this Agreement, and no action or proceeding shall then be pending which questions the validity of this Agreement, any of the transactions contemplated hereby or any action which has been taken by any of the parties in connection herewith or in connection with any of the transactions contemplated hereby. (j) Purchase Price Documents. PURCHASER shall have furnished to SELLER all documents required by Section 2 of this Agreement. 6.2 Conditions to Obligations of PURCHASER The obligations of PURCHASER to make the deliveries contemplated at the Closing shall, in addition to conditions set forth elsewhere herein, be subject to the satisfactory completion on or prior to the Closing Date of each of the following conditions, any of which may be waived by PURCHASER: (a) Representations, Warranties and Covenants. All 17 the SELLER's representations and warranties set forth in Section 4.2 of this Agreement shall have been true and complete in all respects on the Closing Date as though such representations and warranties were made on said date. (b) Consents. All consents and waivers necessary to the consummation of the transactions contemplated hereby and for the operation of the Surgery Center business by PURCHASER shall have been obtained. (c) Government Licenses. Seller will assign any and all regulatory, administrative or other governmental approvals, licenses, clearances, provider numbers and certificates which seller has and may properly assign necessary for the operation of the Surgery Center business, including, without limitation, all applicable Medicare and Medicaid certifications and all approvals for participation in the Texas Medicare and Medicaid Program. In addition, SELLER shall have obtained reasonable assurances from the appropriate governmental authorities that no material structural alterations to the Surgery Center facility will be required by such governmental authorities. (d) No Legal Bar. (i) There shall not have been instituted or threatened any legal proceeding seeking to prohibit the consummation of the transactions contemplated by this Agreement, or to obtain substantial damages with respect thereto. (ii) None of the parties hereto shall be prohibited by any order, writ, injunction or decree of any governmental body of competent jurisdiction from consummating the transactions contemplated by this Agreement, and no action or proceeding shall then be pending which questions the validity of this Agreement, any of the transactions contemplated hereby or any action which has been taken by any of the parties in connection herewith or in connection with any of the transactions contemplated hereby. (e) Due Diligence(e) PURCHASER and its representatives shall have conducted a due diligence review of SELLER's books and records, financial statements, and other records and accounts, and in the sole discretion of PURCHASER, PURCHASER shall be satisfied on the basis of such review that there has been no breach of the representations and warranties or the pre-closing covenants of SELLER made pursuant to this Agreement. Such review shall have no effect whatsoever on the liability of SELLER to PURCHASER under this Agreement or otherwise for breach of any representations, warranties, or covenants of SELLER hereunder. (f) Evidence of Title PURCHASER shall have received evidence, at or prior to the Closing Date, satisfactory to it of 18 SELLER's title to all of the Assets and right to fully convey all the Surgery Center Assets and to assign the Facility Lease, in each case, free and clear of any lien, encumbrances, restrictions on transfer or the like. (g) Certificates. SELLER shall furnish PURCHASER with such certificates of its officers and others to evidence compliance with the conditions set forth in this Section 6.2 as may be reasonably requested by PURCHASER. (h) Other Documents. The Noncompetition and Confidentiality Agreement has been executed and delivered, in each case, by all of the parties thereto. 19 ARTICLE VII BULK SALES COMPLIANCE 7.1 Bulk Sales Compliance. PURCHASER hereby waives compliance by SELLER with the provisions of the Bulk Sales Law of any state. SELLER warrants and agrees to pay and discharge when due all claims of creditors are asserted against PURCHASER by reason of such noncompliance. SELLER shall indemnify and hold PURCHASER harmless from, against and in respect of (and shall on demand reimburse PURCHASER for) any damages suffered or incurred by PURCHASER by reason of the failure of SELLER to pay or discharge such claims. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification by SELLER SELLER hereby agrees to indemnify, defend and hold harmless PURCHASER and its successors and permitted assigns at any time after the Closing from and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, costs and expenses (including, without limitation, reasonable fees and expenses of counsel) (collectively, "Damages"), asserted against, resulting to, imposed upon or incurred by or PURCHASER, directly or indirectly, by reason of or resulting from (i) a breach of any agreement of SELLER contained in or made pursuant to this Agreement and (ii) a breach by SELLER of any repre sentation or warranty to PURCHASER contained in or made pursuant to this Agreement. 8.2 Indemnification by PURCHASER PURCHASER hereby agrees to indemnify, defend and hold harmless SELLER, its successors and permitted assigns at any time after the Closing, from and against all Damages asserted against, resulting to, imposed upon or incurred by SELLER, directly or indirectly, by reason of or resulting from (i) a breach of any agreement of PURCHASER contained in or made pursuant to this Agreement and (ii) a breach by PURCHASER of any representation or warranty to SELLER contained in or made pursuant to this Agreement. 8.3 Procedure for Indemnification. (a) In General. If PURCHASER or SELLER determines to seek indemnification for Damages under this Article VIII (the party seeking such indemnification hereinafter referred to as the "Indemnified Party," the party against whom such indemnification is sought is hereinafter referred to as the "Indemnifying Party" and the claim for which such party is seeking such indemnification is 20 hereinafter referred to as the "Indemnifiable Claim") the Indemnified Party shall give notice (a "Claim Notice") to the Indemnifying Party as promptly as practicable after becoming aware of any such Indemnifiable Claim or of facts upon which any such Indemnifiable Claim will be based. The Claim Notice shall set forth such material information with respect thereto as is then reasonably available to the Indemnified Party. (b) Third-Party Claims. If any lawsuit or enforcement action is filed against any Indemnified Party, a Claim Notice shall be given to the Indemnifying Party as promptly as practicable; provided, however, the failure of any Indemnified Party to give timely notice shall not affect rights to indemnification hereunder, except to the extent that the Indemnifying Party demonstrates actual damage caused by such failure. After such notice, if the Indemnifying Party shall acknowledge in writing to the Indemnified Party that the Indemnifying Party shall be obligated under the terms of its indemnify hereunder in connection with such lawsuit or action, then the Indemnifying Party shall be entitled, if it so elects, (i) to take control of the defense and investigation of such lawsuit or action; (ii) to employ and engage attorneys of its own choice to handle and defend the same, at the Indemnifying Party's cost, risk and expense unless the named parties to such action or proceeding includes both the Indemnifying Party and the Indemnified Party and the Indemnified Party has been advised in writing by counsel that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the Indemnifying Party, in which case the Indemnified Party shall also have the right to employ its own counsel in any such case with the reasonable fees and expenses of such counsel being borne by the Indemnifying Party; and (iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the Indemnified Party, such consent not to be unreasonably withheld. Notwithstanding anything in this Article VIII to the contrary, (i) if there is a reasonable probability than an Indemnifiable Claim may materially and adversely affect the Indemnified Party, other than as a result of money damages or other money payments, the Indemnified Party shall have the right to participate in such defense, compromise or settlement and the Indemnifying Party shall not, without the Indemnified Party's written consent (which consent shall not be unreasonably withheld), settle or compromise any Indemnifiable Claim or consent to entry of any judgment in respect thereof unless such settlement, compromise or consent includes as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such Indemnifiable Claim. If the Indemnifying Party fails to assume the defense of such claim within fifteen (15) calendar days after receipt of the Claim Notice, the Indemnified Party will (upon delivering such notice to such effect to the Indemnifying Party) have the right to undertake 21 the defense, compromise or settlement of such third party claim on behalf of and for the account and risk of the Indemnifying Party. ARTICLE IX MISCELLANEOUS 9.1 Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to: If to SELLER, addressed to: Dan Cepero 4241 Tanglewood Odessa, Texas 79762 Bryan Neil Linch Todd, Barron & Thomason, P.C. 3800 East 42/nd/ Street, Suite #409 Odessa, TX 79762-5982 If to PURCHASER, addressed to: Amedisys Surgery Centers, LC 3029 S. Sherwood Forest Boulevard, Suite 300 Baton Rouge, LA 70819 With a copies to: Ambulatory Systems Development of Texas, Inc. 7617 Arborgate Dallas, Texas 75231 Attn: Joseph S. Zasa, President or to such other place and with such other copies as either party may designate as to itself by written notice to the others. 9.2 Captions. The Article and Section headings of this Agreement are inserted for convenience only and shall not constitute a part of this Agreement in construing or interpreting any provision hereof. 22 9.3 Waivers. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 9.4 No Third-Party Beneficiaries. Except as otherwise expressly provided for in this Agreement, nothing herein, expressed or implied, is intended or shall be construed to confer upon or give to any person, firm, corporation or legal entity, other than the parties hereto, any rights, remedies or other benefits under or by reason of this Agreement. 9.5 Counterparts. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 9.6 Severability If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 9.7 Remedies of PURCHASER. SELLER agree that the Surgery Center Assets are unique and not otherwise readily available to PURCHASER. Accordingly, SELLER acknowledges that, in addition to all other remedies to which PURCHASER is entitled, PURCHASER shall have the right to enforce the terms of this Agreement by a decree of specific performance; provided, that PURCHASER is not in material default hereunder. 9.8 Governing Law. This Agreement shall be construed and enforced pursuant to the laws of the State of Texas, except to the extent preempted or governed by the laws of the United States of America. In the event of a legal dispute arising from or pertaining to this Agreement, it is agreed that the venue shall be Dallas County, Texas. 9.9 Attorneys' Fees If any party to this Agreement brings an action to enforce its rights under this Agreement, the prevailing party shall be entitled to recover its costs and expenses, including without limitation reasonable attorneys' fees, incurred in connection with such action, including any appeal of such action. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by and through their duly authorized representatives on the date first above written. 23 "PURCHASER" AMEDISYS SURGERY CENTERS, LC A TEXAS LIMITED LIABILITY COMPANY By: /s/ Melany Pierson --------------------------------------- Its: President _______________________________________ "SELLER" PERMIAN SURGICAL CENTER, INC. a Texas corporation /s/ Daniel Cepero, M.D., President ----------------------------------------------------- Daniel Cepero, M.D., President 24 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 572,000 0 10,551,000 3,095,000 1,440,000 10,335,000 11,907,000 3,333,000 44,428,000 41,615,000 14,394,000 0 1,000 3,000 (11,688,000) 44,428,000 38,086,000 38,086,000 22,923,000 22,923,000 42,799,000 1,642,000 1,155,000 (30,568,000) (1,374,000) (29,194,000) 4,314,000 0 0 (24,871,000) (8.12) (8.12)
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