<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 2 TO FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED: COMMISSION FILE NUMBER:
DECEMBER 31, 1994 0-17490
------------------------
IN HOME HEALTH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1458213
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CARLSON CENTER, SUITE 500
601 LAKESHORE PARKWAY
MINNETONKA, MINNESOTA 55305-5214
(Address of principal (Zip Code)
executive offices)
(Registrant's telephone number, including area code) 612-449-7500
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ (1) No ____
As of January 31, 1995, the number of shares outstanding of the registrant's
common stock, $.01 par value was 15,963,819 shares.
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<PAGE>
IN HOME HEALTH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- December 31, 1994 and September 30, 1994................. 2-3
Consolidated Statements of Income -- For the three months ended December 31, 1994 and
1993................................................................................... 4
Consolidated Statements of Cash Flows -- For the three months ended December 31, 1994
and 1993............................................................................... 5
Notes to Unaudited Consolidated Financial Statements.................................... 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................. 9-12
</TABLE>
1
<PAGE>
ITEM 1. "ITEM 1" IS HEREBY AMENDED TO READ AS FOLLOWS:
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30,
1994 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................ $ 718 $ 911
Accounts receivable, net......................................... 20,471 20,318
Prepaid income tax............................................... -- 459
Deferred income tax.............................................. 800 800
Prepaid expenses and other current assets........................ 1,563 1,438
----------- -----------
Total current assets......................................... 23,552 23,926
----------- -----------
Property:
Furniture and equipment.......................................... 9,431 9,007
Computer equipment............................................... 7,263 7,057
Leasehold improvements........................................... 687 654
----------- -----------
Total.......................................................... 17,381 16,718
Accumulated depreciation......................................... (5,613) (4,993)
----------- -----------
Property -- net.............................................. 11,768 11,725
----------- -----------
Other Assets:
Accounts receivable.............................................. 14,603 13,830
Goodwill, net.................................................... 5,867 5,906
Covenants not to compete, net.................................... 50 128
Deposits......................................................... 572 559
Other assets..................................................... 583 652
----------- -----------
Total other assets........................................... 21,675 21,075
----------- -----------
Total Assets....................................................... $ 56,995 $ 56,726
----------- -----------
----------- -----------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
LIABILITIES
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30,
1994 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt............................. $ 2,360 $ 2,286
Accounts payable................................................. 3,717 3,821
Accrued liabilities:
Third party.................................................... 6,893 7,666
Compensation................................................... 4,036 3,486
Income taxes................................................... 510 --
Insurance...................................................... 3,336 2,960
Other.......................................................... 504 488
----------- -----------
Total current liabilities.................................... 21,356 20,707
----------- -----------
Long-Term Debt..................................................... 3,128 3,304
Deferred Revenue................................................... 1,632 1,632
Deferred Rent Payable.............................................. 514 516
Deferred Income Tax................................................ 1,455 2,085
Commitments and Contingencies...................................... -- --
Shareholders' Equity:
Preferred stock -- authorized 1,000 shares....................... -- --
Common stock -- $.01 par value: authorized -- 40,000 shares;
issued and outstanding -- December 31 -- 15,964 shares;
September 30 -- 15,944 shares................................... 160 159
Additional paid-in capital....................................... 23,833 23,828
Retained earnings................................................ 4,917 4,495
----------- -----------
Total shareholders' equity................................... 28,910 28,482
----------- -----------
Total Liabilities and Shareholders' Equity......................... $ 56,995 $ 56,726
----------- -----------
----------- -----------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(AMOUNTS IN
THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenue (Net of Medicare Reserves of $281, $131 for 1994 and 1993 respectively)............ $ 32,334 $ 29,780
--------- ---------
Operating Expenses:
Direct costs of revenue (primarily payroll related costs)................................ 18,210 16,342
General, administrative and selling expenses............................................. 13,129 12,063
--------- ---------
Total operating expenses............................................................... 31,339 28,405
--------- ---------
Income from Operations..................................................................... 995 1,375
--------- ---------
Interest:
Interest expense......................................................................... 213 203
Interest income.......................................................................... -- (6)
--------- ---------
Net interest expense................................................................... 213 197
--------- ---------
Income Before Income Taxes................................................................. 782 1,178
Income Tax Expense......................................................................... 360 532
--------- ---------
Net Income................................................................................. $ 422 $ 646
--------- ---------
--------- ---------
Net Income Per Common and Common Equivalent Share:
Primary.................................................................................. $ .03 $ .04
--------- ---------
--------- ---------
Fully Diluted............................................................................ $ .03 $ .04
--------- ---------
--------- ---------
Weighted Average Common and Common Equivalent Shares Outstanding:
Primary.................................................................................. 16,149 16,052
--------- ---------
--------- ---------
Fully Diluted............................................................................ 16,149 16,052
--------- ---------
--------- ---------
</TABLE>
4
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................................................ $ 422 $ 646
Adjustments:
Depreciation and amortization........................................................... 810 680
Accounts receivable..................................................................... (926) (4,203)
Prepaid expenses and other assets....................................................... (146) (101)
Accounts payable........................................................................ (104) (949)
Accrued liabilities..................................................................... 1,138 198
Deferred liabilities.................................................................... (632) (8)
--------- ---------
Net cash provided (used) by operating activities...................................... 562 (3,737)
--------- ---------
Cash Flows from Investing Activities:
Acquisition of property................................................................... (235) (366)
Advances to officers and employees........................................................ 17 (53)
--------- ---------
Net cash used by investing activities................................................. (218) (419)
--------- ---------
Cash Flows from Financing Activities:
Payment of long term debt................................................................. (543) (606)
Notes payable to banks.................................................................... -- 2,500
Issuance of common stock.................................................................. 6 17
--------- ---------
Net cash provided (used) by financing activities...................................... (537) 1,911
--------- ---------
Cash and Cash Equivalents:
Net decrease.............................................................................. (193) (2,245)
Beginning of period....................................................................... 911 3,081
--------- ---------
End of period......................................................................... $ 718 $ 836
--------- ---------
--------- ---------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest................................................................................ $ 226 $ 201
--------- ---------
--------- ---------
Income taxes............................................................................ $ 21 $ 29
--------- ---------
--------- ---------
Noncash Investing and Financing Activities:
Property acquired by capital lease........................................................ $ 441 $ 345
--------- ---------
--------- ---------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the financial position
of the Company and its subsidiaries as of December 31, 1994 and the results of
operations and its cash flows for the three month periods ended December 31,
1994 and 1993. The results of operations for any interim period are not
necessarily indicative of the results for the year. These interim consolidated
financial statements should be read in conjunction with the Company's annual
financial statements and related notes in the Company's Form 10-K.
2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed by dividing
net income by the weighted average number of common stock and dilutive common
stock equivalents outstanding. Common stock equivalents result from dilutive
stock options and warrants. Any differences in common stock equivalents for
primary and fully diluted shares are the result of the quoted market price of
the Company's common stock being higher at the end of the period than the
average market price during the period.
3. MEDICARE COST REIMBURSEMENT
Approximately 75% of revenue for the three months ended December 31, 1994
was derived from services provided to Medicare beneficiaries. Payment for these
services is made by the Medicare program based on reimbursable costs incurred in
rendering the services. Payments are made via an interim payment rate as
services are rendered. Cost reports are filed with Medicare on an annual basis,
which are subject to audit and retroactive adjustment by Medicare. The Company
reports revenue only for those costs that it believes are probable (as defined
in Statement of Financial Accounting Standards No. 5) of recovery under the
applicable Medicare statutes and regulations and reports its accounts receivable
balances at net realizable value. The Company utilizes an extensive system of
internal controls to ensure such proper reporting of revenues. The Company
employs personnel with significant Medicare reimbursement experience to prepare
its cost reports and to monitor its operations on an ongoing basis to identify
and minimize those costs which are not reimbursed. As a part of its system of
internal controls, the Company uses a detailed analysis process in calculating
its Medicare revenue at the time services are rendered. This process considers
the nature and amounts of the disputed costs (as described in more detail below)
along with several authoritative, legal and historical sources of information
including:
- Applicable statutes and regulations, such as those contained in
the Title XVIII of the Social Security Act, particularly Sec.
1861 (V) (1) (A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost
Related to Patient Care", Health Care Financing Administration
(HCFA) Publication 11 "Home Health Agency Manual", applicable
sections of HCFA Publication 15-1 "Provider Reimbursement
Manual" and intermediary letters and program memoranda issued
by HCFA.
- Administrative decisions and rulings on related issues by the
Provider Reimbursement Review Board and Administrative Law
Judges.
- Judicial decisions from Federal District Courts on relevant
cases.
- Consultation with independent industry experts such as Medicare
Cost Reimbursement Consultants.
- Opinions of outside legal counsel who specialize in dealing
with Medicare reimbursement issues.
- Historical knowledge gained internally from past Medicare
audits.
6
<PAGE>
IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. MEDICARE COST REIMBURSEMENT (CONTINUED)
- Meetings and other communication with Medicare Intermediaries,
Blue Cross Association and HCFA.
This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs. Results of this detailed analysis process are extrapolated to other
unaudited cost reporting years for all of the Company's operations, including
operations that have not yet been audited by Medicare, to estimate the gross
amount of reimbursement that would be affected. The Company, through this
ongoing control and monitoring process, provides a reserve (by means of a
revenue reduction) for any costs incurred which the Company believes are not
probable of recovery. This reserve is reported as a reduction of accounts
receivable for disputed costs for which the Company may not ultimately receive
payment. The Company has also reported as a liability disputed costs for which
it has received payment, which may have to be returned to Medicare. Accordingly,
the Company believes that its accounts receivable are stated at net realizable
value, and that it has recorded all probable liabilities for repayment of
disputed costs.
Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process, taken
certain positions with respect to certain types of costs, claiming that they are
not reimbursable and thus not recoverable by the Company from the Medicare
program. These positions are based on interpretations promulgated after the
period covered by the cost reports and applied retroactively, on interpretations
of cost reimbursement principles that are contrary to the Company's
interpretations, or on what the Company believes to be misapplications of
specific reimbursement principles, that could not have been foreseen at the time
services were rendered and revenue recorded. These positions taken by Medicare
auditors are usually determined from Medicare's Notice of Program Reimbursement
("NPR") which typically are not received until two to three years after the
services are rendered. In those situations where the Company decides to not
challenge an NPR finding, any revenue relating to these costs, as well as the
extrapolated impact, if any, on other open costs reporting years, if not written
off or provided for earlier, is written off as a revenue reduction at that time.
The results of all NPRs are included in the analysis process in calculating net
Medicare revenue as described above.
The Company has received NPRs challenging $11.5 million of costs as of
December 31, 1994. There was an additional $10.8 million of costs at December
31, 1994 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs. Together these amounts ($22.3 million at December
31, 1994) comprise the total amount the Company considers to be disputed costs.
The major cost category in dispute, accounting for approximately half of total
disputed costs, is the treatment of certain personnel costs relating to the
Company's community liaison positions, which Medicare auditors allege are
unreimbursable sales costs; other costs in dispute relate to the cost of
physical therapists employed by the Company, the method of allocation of
administrative and general costs to branch operations, certain corporate
expenses, and cost transfers within branch operations. The amount of disputed
costs has increased over the last several years as the Company's operations have
grown, Medicare auditors have taken positions to disallow certain costs in
certain cost reports as non- reimbursable, and the Company has extrapolated that
amount of costs that may be challenged to other unaudited cost reporting years.
The normal Medicare administrative appeal process may take several years to
resolve these types of disputes.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and the Health Care Financing Administration, and is
vigorously pursuing these matters through
7
<PAGE>
IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. MEDICARE COST REIMBURSEMENT (CONTINUED)
administrative and legal channels. The disputed cost analysis process related to
the community liaison and physical therapist positions (which comprise 62% of
disputed costs) encompassed all of the authoritative, legal and historical
sources discussed above. Based on this review the Company believes that the
majority of the community liaison costs are probable of recovery, and that a
relatively small portion of these costs are not probable of recovery. The
Company has established, and is continuing to add to, a reserve for the portion
of these costs not considered probable of recovery. Since the reserves have been
established, the Company has continued to review whether their level is
appropriate. Nothing has occurred in the legal or administrative process which
the Company is pursuing concerning the disputes which has caused the Company to
conclude that the reserve should be changed. Therefore, no change has been made
in the rate of reserve used to record additional reserves on community liaison
related costs incurred on an ongoing basis. On the physical therapist issue, the
Company believes Medicare has no basis in the regulations for its disallowance
of certain costs related to physical therapists employed by the Company, and
therefore the Company has not established a reserve for these disputed costs.
The Company has filed two suits against the U.S. Department of Health and Human
Services ("HHS") and several members of the Blue Cross Association which act as
fiscal intermediaries to administer the Medicare program. The two suits related
to the community liaison and physical therapist issues discussed above allege
that the defendants have unjustly withheld payments that are owed to the Company
for services it provided to Medicare beneficiaries from fiscal 1989 through
fiscal 1994. Legal opinions have been received on both the community liaison and
physical therapist issues from an attorney specializing in Medicare
reimbursement issues indicating that it is probable that the Company will
prevail in both issues.
The Company, based on its analysis process, believes that recovery of
$5,242,000 of total disputed costs (including the extrapolated impact) may not
be probable and, accordingly, has established reserves which totaled that amount
as of December 31, 1994. The net amount of disputed costs which the Company
believes is probable of recovery has been included in revenues in the respective
years in which services were rendered and, to the extent not paid to the
Company, is included in accounts receivable. Total accounts receivable (net of
reserves) due from Medicare at December 31, 1994 were $28,916,000, including the
receivables (net of reserves) for disputed costs of $17,068,000. As of December
31, 1994 the Company had received $6,893,000 in payments from Medicare for
disputed costs. Medicare may seek repayment for such amounts and accordingly,
the potential liability for repayments is recorded as Accrued Liabilities --
Third Party. The Company believes it is probable that it has not incurred any
other liability to repay disputed costs. In view of the expectation that
resolution of the disputed costs will not likely be accomplished within the next
twelve months, related net receivables of $14,603,000 as of December 31, 1994
have been classified as a non-current asset.
- --------------------------------------------------------------------------------
The balance of the Liquidity Subsection will not change.
8
<PAGE>
ITEM 2. "ITEM 2" IS HEREBY AMENDED TO READ AS FOLLOWS:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's level
of operation and financial condition. This discussion should be read with the
consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
Revenue for the three months ended December 31, 1994, increased by 9% over
the same period in the prior year. The increase is the result of industry
growth, the Company's marketing efforts and improved name recognition.
Direct costs of revenue, as a percentage of sales, were 56% for the three
months ended December 31, 1994 as compared to 55% for the comparable prior year
period. The change was due to increased volume which resulted in a larger
increase in direct costs relative to the increase in general, administrative and
selling expense. Direct costs, as a percentage of revenue before the Medicare
reserves, were 56% and 55% for the three month periods ended December 31, 1994
and 1993, respectively.
With the growth in the Companys operations, revenues and direct costs of
revenues have grown at a greater pace than general, administrative and selling
expenses. The disproportionate increases in these elements, combined with the
greater increase in direct costs of revenue in relation to the increase in
revenue, resulted in a decrease in gross profit for the three months ended
December 31, 1994 to 44% as compared to 45% the comparable prior year period.
Gross profit, as a percentage of revenue before the Medicare reserves, was 44%
and 45% for the three months ended December 31, 1994 and 1993, respectively.
Management's plans to address the decline in operating profit include
increasing the volume of the more profitable Extended Hours Division through
increased marketing and contracting efforts. In addition, the Company will
pursue an increase in its more profitable infusion products revenue.
General administrative and selling expenses, as a percent of revenue,
remained unchanged at 41% for the three months ended December 31, 1994 and 1993.
For the three months ended December 31, 1994 and 1993, respectively, the
Company has recorded income tax expense at 46% and 45% of income before income
taxes. The increase in the effective tax rate is the result of higher
non-deductible expenses.
Net income for the three month period ended December 31, 1994 was $422,000
compared to $646,000 in the same period during the previous year. This change
was principally due to the increase in the Medicare revenue reserves combined
with costs exceeding reimbursement ceilings in three of the new markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $193,000 to $718,000 at
December 31, 1994. Accounts receivable classified as current increased from
$20,318,000 at September 30, 1994 to $20,471,000 at December 31, 1994. Both of
the changes relate to disputes concerning payment for services to Medicare
beneficiaries. Approximately 75% of revenue for the three months ended December
31, 1994 was derived from services provided to Medicare beneficiaries. Payment
for these services is made by the Medicare program based on reimbursable costs
incurred in rendering the services. Payments are made via an interim payment
rate as services are rendered. Cost reports are filed with Medicare on an annual
basis, which are subject to audit and retroactive adjustment by Medicare. The
Company reports revenue only for those costs that it believes are probable (as
defined in Statement of Financial Accounting Standards No. 5) of recovery under
the applicable Medicare statutes and regulations and reports its accounts
receivable balances at net realizable value. The Company utilizes an
9
<PAGE>
extensive system of internal controls to ensure such proper reporting of
revenues. The Company employs personnel with significant Medicare reimbursement
experience to prepare its cost reports and to monitor its operations on an
ongoing basis to identify and minimize those costs which are not reimbursed. As
a part of its system of internal controls, the Company uses a detailed analysis
process in calculating its Medicare revenue at the time services are rendered.
This process considers the nature and amounts of the disputed costs (as
described in more detail below) along with several authoritative, legal and
historical sources of information including:
- Applicable statutes and regulations, such as those contained in
the Title XVIII of the Social Security Act, particularly Sec.
1861 (V) (1) (A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost
Related to Patient Care", Health Care Financing Administration
(HCFA) Publication 11 "Home Health Agency Manual", applicable
sections of HCFA Publication 15-1 "Provider Reimbursement
Manual" and intermediary letters and program memoranda issued
by HCFA.
- Administrative decisions and rulings on related issues by the
Provider Reimbursement Review Board and Administrative Law
Judges.
- Judicial decisions from Federal District Courts on relevant
cases.
- Consultation with independent industry experts such as Medicare
Cost Reimbursement Consultants.
- Opinions of outside legal counsel who specialize in dealing
with Medicare reimbursement issues.
- Historical knowledge gained internally from past Medicare
audits.
- Meetings and other communication with Medicare Intermediaries,
Blue Cross Association and HCFA.
This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs. Results of this detailed analysis process are extrapolated to other
unaudited cost reporting years for all of the Company's operations, including
operations that have not yet been audited by Medicare, to estimate the gross
amount of reimbursement that would be affected. The Company, through this
ongoing control and monitoring process, provides a reserve (by means of a
revenue reduction) for any costs incurred which the Company believes are not
probable of recovery. This reserve is reported as a reduction of accounts
receivable for disputed costs for which the Company may not ultimately receive
payment. The Company has also reported as a liability disputed costs for which
it has received payment, which may have to be returned to Medicare. Accordingly,
the Company believes that its accounts receivable are stated at net realizable
value, and that it has recorded all probable liabilities for repayment of
disputed costs.
Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process, taken
certain positions with respect to certain types of costs, claiming that they are
not reimbursable and thus not recoverable by the Company from the Medicare
program. These positions are based on interpretations promulgated after the
period covered by the cost reports and applied retroactively, on interpretations
of cost reimbursement principles that are contrary to the Company's
interpretations, or on what the Company believes to be misapplications of
specific reimbursement principles, that could not have been foreseen at the time
services were rendered and revenue recorded. These positions taken by Medicare
auditors are usually determined from Medicare's Notice of Program Reimbursement
("NPR") which typically are not received until two to three years after the
services are rendered. In those situations where the Company decides to not
challenge an NPR finding, any revenue relating to these costs, as well as the
extrapolated impact,
10
<PAGE>
if any, on other open costs reporting years, if not written off or provided for
earlier, is written off as a revenue reduction at that time. The results of all
NPRs are included in the analysis process in calculating net Medicare revenue as
described above.
The Company has received NPRs challenging $11.5 million of costs as of
December 31, 1994. There was an additional $10.8 million of costs at December
31, 1994 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs. Together these amounts ($22.3 million at December
31, 1994) comprise the total amount the Company considers to be disputed costs.
The major cost category in dispute, accounting for approximately half of total
disputed costs, is the treatment of certain personnel costs relating to the
Company's community liaison positions, which Medicare auditors allege are
unreimbursable sales costs; other costs in dispute relate to the cost of
physical therapists employed by the Company, the method of allocation of
administrative and general costs to branch operations, certain corporate
expenses, and cost transfers within branch operations. The amount of disputed
costs has increased over the last several years as the Company's operations have
grown, Medicare auditors have taken positions to disallow certain costs in
certain cost reports as non- reimbursable, and the Company has extrapolated that
amount of costs that may be challenged to other unaudited cost reporting years.
The normal Medicare administrative appeal process may take several years to
resolve these types of disputes.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and the Health Care Financing Administration, and is
vigorously pursuing these matters through administrative and legal channels. The
disputed cost analysis process related to the community liaison and physical
therapist positions (which comprise 62% of disputed costs) encompassed all of
the authoritative, legal and historical sources discussed above. Based on this
review the Company believes that the majority of the community liaison costs are
probable of recovery, and that a relatively small portion of these costs are not
probable of recovery. The Company has established, and is continuing to add to,
a reserve for the portion of these costs not considered probable of recovery.
Since the reserves have been established, the Company has continued to review
whether their level is appropriate. Nothing has occurred in the legal or
administrative process which the Company is pursuing concerning the disputes
which has caused the Company to conclude that the reserve should be changed.
Therefore, no change has been made in the rate of reserve used to record
additional reserves on community liaison related costs incurred on an ongoing
basis. On the physical therapist issue, the Company believes Medicare has no
basis in the regulations for its disallowance of certain costs related to
physical therapists employed by the Company, and therefore the Company has not
established a reserve for these disputed costs. The Company has filed two suits
against the U.S. Department of Health and Human Services ("HHS") and several
members of the Blue Cross Association which act as fiscal intermediaries to
administer the Medicare program. The two suits related to the community liaison
and physical therapist issues discussed above allege that the defendants have
unjustly withheld payments that are owed to the Company for services it provided
to Medicare beneficiaries from fiscal 1989 through fiscal 1994. Legal opinions
have been received on both the community liaison and physical therapist issues
from an attorney specializing in Medicare reimbursement issues indicating that
it is probable that the Company will prevail in both issues.
The Company, based on its analysis process, believes that recovery of
$5,242,000 of total disputed costs (including the extrapolated impact) may not
be probable and, accordingly, has established reserves which totaled that amount
as of December 31, 1994. The net amount of disputed costs which the Company
believes is probable of recovery has been included in revenues in the respective
years in which services were rendered and, to the extent not paid to the
Company, is included in accounts receivable. Total accounts receivable (net of
reserves) due from Medicare at December 31, 1994 were $28,916,000, including the
receivables (net of reserves) for disputed costs of $17,068,000. As of December
31, 1994 the Company had received $6,893,000 in payments from Medicare for
disputed costs. Medicare may seek repayment for such amounts and accordingly,
the potential liability for repayments is recorded as Accrued Liabilities --
Third Party. The Company believes it is probable that
11
<PAGE>
it has not incurred any other liability to repay disputed costs. In view of the
expectation that resolution of the disputed costs will not likely be
accomplished within the next twelve months, related net receivables of
$14,603,000 as of December 31, 1994 have been classified as a non-current asset.
- --------------------------------------------------------------------------------
The balance of the Liquidity Subsection will not change.
Operating activities provided $562,000 in cash for the period ended December
31, 1994, compared to using $3,737,000 during the comparable prior year quarter.
The average age of accounts receivable was essentially unchanged from September
30, 1994.
Investing activities used $218,000 in cash for the period ended December 31,
1994 compared to $419,000 during the comparable prior year quarter. Investing
activities consist primarily of property purchases for branch operations.
Financing activities used $537,000 in cash during the period ended December
31, 1994 principally
to make scheduled payments of long-term debt. Financing activities provided
$1,911,000 in cash during the period ended December 31, 1993 due to borrowing of
$2,500,000 under the bank line of credit agreement, which was offset in part by
payment of long-term debt.
The Company has a line of credit with a commercial bank that will expire in
December 1995. Under the credit line, the Company may borrow or obtain letters
of credit, all of which in the aggregate may not exceed the lesser of $7.5
million or a borrowing base (which was $8,314,000 at December 31, 1994) that
consists of 80% of eligible accounts receivable. Substantially all the Company's
receivables and general intangible assets are pledged to secure the credit line.
As of December 31, 1994 the Company had no outstanding borrowings and had
utilized $4,130,000 of the credit facility as the basis for a letter of credit.
The interest rate on the line of credit is prime plus .75% (9.5% at August 4,
1995). The credit agreement obligates the Company to, among other things,
maintain certain financial ratios and limits the payment of dividends. As of
December 31, 1994, the Company was not in compliance with a covenant of the
credit agreement, but has obtained a waiver of this non-compliance. The bank has
advised the Company that it does not intend to renew the line of credit
agreement beyond the expiration date. The bank has also advised the Company that
the letter of credit must be replaced by December 15, 1995 or the bank will draw
upon the line of credit to fund a collateral account to accommodate any cash
requirements of the letter of credit. The Company is currently considering
possible alternative sources of financing, which may include establishment of a
line of credit with a new lender or other financing of certain accounts
receivable and fixed assets.
Because of the pending Medicare disputes and their effect on liquidity, the
Company has significantly reduced its efforts to expand its business. This
posture is expected to continue until a significant portion of the Medicare cost
disputes are resolved, and it is uncertain when this will occur. The Company
continues to lease the majority of its capital additions (primarily office
furniture and equipment). Currently the Company has no other material
commitments which will require a significant use of cash.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 2 on Form 10-Q/A to Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
IN HOME HEALTH, INC.
---------------------------------------------
Registrant
Date: September 6, 1995 /s/ JUDY M. FIGGE
---------------------------------------------
Judy M. Figge
PRESIDENT
CHIEF EXECUTIVE OFFICER
Date: September 6, 1995 /s/ KENNETH J. FIGGE
---------------------------------------------
Kenneth J. Figge
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
</TABLE>
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