<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT
-
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 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 Identification No.)
incorporation or organization)
CARLSON CENTER, SUITE 500
601 CARLSON PARKWAY
MINNETONKA, MINNESOTA 55305-5214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-449-7500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $ .01 PER SHARE
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
Based on the closing sale price of $1.9375 on the NASDAQ National Market System,
as of December 2, 1996 the aggregate market value of the registrant's common
stock held by nonaffiliates was $18,440,013.
As of December 2, 1996 the number of shares outstanding of the registrant's
common stock, $.01 par value was 16,295,897 shares.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held March 6, 1997, (the "1997 Proxy
Statement"), a definitive copy of which will be filed within 120 days of the
close of the past fiscal year, is incorporated by reference into Part III of
this Form 10-K.
<PAGE>
TABLE OF CONTENTS
Page(s)
PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 3-8
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . . . 8
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters . . . . . . . . . . . . 9
Item 6. Selected Financial Data. . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 10-13
Item 8. Financial Statements and Supplementary Data. . . . . 14-29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . 14
PART III Item 10. Directors and Executive Officers . . . . . . . . . . 30
Item 11. Executive Compensation . . . . . . . . . . . . . . . 30
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . 30
Item 13. Certain Relationships and Related Transactions . . . 30
PART IV Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . . . 30-31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2
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PART I
ITEM 1. BUSINESS
In Home Health, Inc. (the "Company") specializes in providing
comprehensive health care services to clients of all ages in their homes. The
Company's services include nursing, infusion therapy, hospice, rehabilitation,
personal care and homemaking. The Company currently provides services from 43
offices and eleven pharmacies in 20 geographic markets located in 14 states
under the trade names "In Home Health" or "Home Health Plus".
The Company was incorporated in Minnesota in 1983 and is the successor
to the business of a non-profit corporation which provided home health services
in Minneapolis-St. Paul beginning in 1977. The Company began expansion into new
markets in 1984 with the opening of an office in St. Louis. All expansion into
new geographic markets subsequent to St. Louis has been through acquisitions.
On October 24, 1995 the Company consummated transactions with Manor
Healthcare Corp. ("Manor Healthcare"), a wholly owned subsidiary of Manor Care,
Inc., whereby Manor Healthcare acquired 64% of the voting power of the Company's
voting capital stock and the Company received net cash proceeds of approximately
$18 million. The agreement with Manor Healthcare contemplates that the Company
will continue to operate in the lines of business in which it currently engages.
INDUSTRY BACKGROUND
Home health care is one of the fastest growing sectors of the
healthcare industry. One of the major factors of this rapid growth is the
ability of home health care to assist in containing the rising costs of health
care. Consumers of all types, including governmental bodies, insurance
companies and private payors are realizing the cost benefit of health care
provided in the home versus the high cost of institutional health care. This
realization combined with the aging population, the preference of receiving care
in the comfort of the home and the advances in medical technology allowing
increased treatments to be provided in the home are all attributing to the
continued growth of the home health care industry.
PRODUCTS AND SERVICES
The Company offers its clients a broad range of professional and
support services to meet medical and personal needs at home. All home health
services are provided under a plan of care and orders from the client's
physician. Services are available on a 24-hour a day basis every day of the
year. Office hours are from 7 a.m. to 6 p.m. Monday through Friday, although
personnel are available to respond to emergencies and fulfill service requests
at all times.
In fiscal 1996, approximately 49% of the Company's revenue was derived
from paraprofessional services provided by home health aides and
homemaker/companions, 29% was derived from medical/surgical nursing, 12% was
attributable to rehabilitation services, 4% from infusion pharmacy products, 2%
from critical care nursing, 2% from hospice services and 2% from medical
supplies.
The Company receives payment for its services from various sources.
The following summarizes the Company's revenue by payor source:
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Medicare, cost reimbursement 70% 76% 74%
Insurance and County Governments 14% 12% 14%
Private payors 14% 12% 12%
Medicare Hospice Benefit, per diem based 2% - -
---- ---- ----
100% 100% 100%
</TABLE>
The Company's goal is to reduce the cost reimbursement Medicare program revenue
percentage by focusing on increasing the revenue from other potentially more
profitable payor sources.
3
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The Company's services are provided by a variety of personnel:
Critical Care Registered Nurses provide specialized nursing such as
pain management, respiratory care and infusion therapy.
Registered Nurses provide a broad range of nursing care including
skilled observation and assessment, teaching and technical procedures.
Licensed Practical/Vocational Nurses perform many technical nursing
procedures, such as injections and dressing changes.
Pharmacists prepare and dispense drug and nutritional therapies by
physician order and monitor the client's treatment.
Home Health Aides provide personal care such as bathing, assistance
with walking, and other procedures that do not require professional
nursing expertise.
Homemakers/Companions assist with meal preparation and housekeeping,
and provide companionship that can help maintain independent living.
Physical Therapists assist clients to restore strength and range of
joint motion for improved function; and retrain clients in all areas
of ambulation and mobility.
Occupational Therapists assist clients to become independent in
activities of daily living, such as feeding, dressing, hygiene, and
social activities.
Speech Pathologists retrain clients to deal with speech, swallowing,
language or hearing impediments to improve communication abilities.
Social Workers assist clients and their families to deal with
financial, personal and social concerns resulting from health
problems.
Spiritual Care Counselors coordinate the spiritual needs of clients
and families and provide spiritual services in the home or inpatient
facility as needed.
Nutritionists assist with dietary modifications and therapeutic diets
for the client.
OPERATING DIVISIONS
The Company has 43 office locations consisting of 30 branches and
twelve satellites and one private duty site. Each of the Company's branches has
two divisions, a Visit Division and an Extended Hours Division. In addition, 25
branches have a hospice division. The Company's satellite locations provide
Visit Division services only. The Visit Division provides clients with short-
term care, usually up to two hours per visit. The Extended Hours Division
provides clients with care up to 24 hours per day. Hospice provides palliative
care through an interdisciplinary team to the terminally ill client and the
client's family. Hospice services are available to patients at home, in skilled
nursing and assisted living facilities and in the hospital. The Visit Division
charges by the visit, the Extended Hours Division charges by the hour and the
Hospice Division charges by the day. In October 1996, the Company acquired a
company in Baltimore which provides private duty services in Maryland.
Each division operates with a registered nurse manager and a staff of
professionals, including one or more home care coordinators who are registered
nurses. The client is assigned to a registered nurse or therapist for case
management. The home care coordinator establishes a plan of care for each
client with the client's physician, supervises the services received by the
client, and assesses the client's response to and need for continued care.
Rehabilitation, nursing and other personnel provide services according to the
physician's plan of care.
As an expansion of the Visit Division services, the Company provides
pharmaceutical drugs, fluids and supplies through its infusion pharmacies. The
Company operates eleven infusion pharmacies which operate with one or more full
time pharmacists who collaborate with the client's physician, nurse and other
health care providers.
4
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The Company's pharmacists prepare and dispense drug and nutritional
therapies by physician order and monitor the client's response to treatment.
The pharmacist is available to the client's physician and the Company's nurses
24 hours a day, 7 days a week, to answer questions regarding drug actions and
interactions, dosage requirements and interpretation of laboratory data. The
pharmacist and nurse may jointly visit clients in their home to evaluate their
response to treatment. The pharmacist is responsible for complying with State
and Federal regulations regarding the operation of an infusion pharmacy.
Pharmacy quality assurance procedures are followed to assure all therapies are
appropriate and that Company standards are being followed.
QUALITY ASSURANCE
In addition to the basic requirements necessary for licensure and
certification, the Company has implemented several practices to help assure high
quality home care service. Clients are sent evaluation surveys bi-monthly to
detect and correct weaknesses. Survey results are reviewed quarterly, along
with a sampling of client charts, by a committee of physicians, nurses and
therapists. This committee determines if the medical needs were identified and
addressed in the plan of care. Each branch has an advisory board composed of
consumers and business and health professionals that meets at least annually to
review programs and developments and to make recommendations to the management
team. The Company has a Code of Ethics and Client Bill of Rights that are
provided to all employees and clients.
MARKETING
Home health providers are usually referred to potential clients by
other health care professionals. The Company seeks to build strong
relationships with these professionals. The Company has identified many
potential referral sources for home health services. These referral sources
include physicians, hospitals, nursing homes, managed care organizations,
community organizations, and other home care agencies. Word of mouth is also
responsible for a significant number of home care referrals. One of the
Company's goals is to broaden the referral base among managed care
organizations, hospitals, nursing homes, physicians and health insurance payors
by establishing and maintaining strong working relationships with them.
In each geographic area in which the Company operates, customer
relations managers are responsible for establishing and maintaining
relationships with referral sources. They contact physicians, hospitals,
nursing homes, managed care organizations and other health care providers to
explain the services provided by the Company. Other health care professionals
within the Company, such as pharmacists or nurse specialists, may accompany the
customer relations manager to offer clinical or technical expertise. The
customer relations managers are backed by a professional health care liaison
team consisting of home care coordinators that are primarily registered nurses.
The team takes referrals, assesses clients and identifies their needs,
emphasizes the benefits of the Company's services, coordinates care and
communicates with the referral source. The Director of Customer Relations in
each market is responsible for making contractual arrangements with hospitals,
HMOs, governments, clients and large physician groups.
GEOGRAPHIC EXPANSION
There were no acquisitions in fiscal 1996 or 1995. The Company
entered three new geographic markets (Greensboro, NC; Toledo, OH and San
Antonio, TX) and opened one office in an existing market in fiscal 1994.
Greensboro was an expansion utilizing a Certificate of Need acquired in 1993.
The other two markets were added through acquisitions. In October 1996, the
Company acquired a company in Baltimore which provides private duty services in
Maryland. These acquisitions all met the Company's goals of entering the
largest U.S. metropolitan markets and brings the number of geographic markets in
which the Company operates to 20.
COMPETITION
The home health care business has become highly competitive. There
are three different types of providers involved in home health services:
INSTITUTIONS: Hospitals and public health agencies typically provide
only short term, intermittent care. Some larger institutions have
entered into the extended hours, hospice and home infusion markets.
NATIONAL SPECIALIZED HOME CARE PROVIDERS: These companies typically
provide specialized care; for example, hospice, AIDS or infusion
therapy, in multiple geographic markets. In the area of infusion
therapy there are many significant competitors, although one provider
is estimated to serve 40% of the home infusion therapy market.
5
<PAGE>
OTHER INDEPENDENT HOME CARE COMPANIES: These are generally locally
owned and specialize in home care. Some of these organizations
provide only homemaker and chore-person services, and others provide a
broad range of home care services.
The Company believes that the primary competitive factors are the
price of the services and quality considerations such as responsiveness, the
technical ability of the professional staff and the ability to provide
comprehensive services.
Many of the Company's competitors are large and established
organizations with significantly greater resources than the Company. Large
hospital systems may enjoy a particular competitive advantage due to their ready
access to a large client base.
REGULATION
As a provider of health care services, the Company is subject to laws
and regulations administered by the various states. As a result of their
certification in the Medicare program, branches are subject to certain federal
laws and regulations. The Company's provision of pharmaceuticals and other
supplies for home infusion therapy subjects the Company to additional
regulation, such as the need for licensing as a pharmacy and the need to comply
with various federal and state laws and regulations governing pharmacies and the
handling of pharmaceuticals. The Company has all necessary licenses and permits
for its current operations.
Providers of home health services may be subject to increasing
regulation in the future. Compliance with laws and regulations could increase
the cost and time necessary to allow the Company to operate successfully and may
affect the Company in other respects not presently foreseeable.
In order to receive Medicare reimbursement, the Company must satisfy
conditions for participation established by the United States Department of
Health and Human Services relating to standards of medical care. Loss of
certification in the Medicare program would result in the loss of a significant
portion of the Company's revenues.
Four of the Company's branches are participating in a test program
related to proposed legislation to amend the current cost reimbursement Medicare
program. The proposed legislation which establishes a prospective pay system
provides set fees for services. This program would allow companies to
potentially profit from Medicare provided services. The prospective pay system
is still in the formative stages and could have a significant impact on the
profitability of Medicare related revenues.
INSURANCE
General and professional liability insurance are maintained by the
Company which includes coverage up to $65,000,000 per occurrence and
$131,000,000 per year. There can be no assurance that the Company will not be
subject to claims in excess of its insurance coverage or that such insurance
will continue to be available. To date, the Company has had no professional
liability losses.
SERVICE MARKS AND TRADEMARKS
The Company operates under the names "In Home Health" and "Home Health
Plus", which are registered service marks. The Company believes that because
its business derives principally from referrals by other health care providers,
it is not materially dependent on any trademarks or service marks.
EMPLOYEES
On September 30, 1996, the Company employed 1,150 persons on a full-
time basis and approximately 2,600 persons on a part-time basis. Substantially
all of the part-time employees were in direct health care. None of the
Company's employees are represented by unions.
6
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and members of the Board of Directors for the
Company are as follows:
NAME AGE POSITION(S) HELD
---- --- ----------------
Mark L. Gildea (1) 44 Chief Executive Officer and
Director
Thomas R. Gross 43 Acting Chief Financial Officer and
Vice President - Controller
Jeffrey M. Jasnoff 36 Vice President - Human Resources
James J. Lynn 54 Director
Joseph R. Buckley 49 Director
(1) (2) (3)
James H. Rempe 66 Director
(1) (2) (3)
Donald C. Tomasso 51 Director
(1) (3)
(1) Messrs. Gildea, Buckley, Rempe and Tomasso were elected as
members of the Board of Directors effective October 24, 1995.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Mr. Gildea has served as Chief Executive Officer of the Company since
October 24, 1995. Previously he served as President, Alternate Site Services
Division of Manor Healthcare from December 1994 through February 1996 and as
Vice President of Managed Care of Manor Healthcare from December 1993 to
December 1994. Prior to joining Manor Healthcare, he was employed as Executive
Vice President of Option Care, Inc. from October, 1992 to December, 1993. He
was previously employed by Caremark, Inc. for over 10 years where he held
various positions including Area Vice President.
Mr. Gross has served as Vice President - Controller of the Company
since September 1993 and has been Acting Chief Financial Officer since October
1996. Previously he was employed by Honeywell Inc. for fifteen years in various
management, analyst and accounting positions in its Space and Aviation, Home and
Building Control, Research and Development and Corporate Financial Business
Units.
Mr. Jasnoff has served as Vice President of Human Resources of the
Company since October 24, 1995. Previously he served as the Director of Human
Resources for the Medbridge Division of Manor Care. Prior to joining Manor Care
he was the Director of Human Resources for Genesis Health Ventures in
Pennsylvania and was also employed by Subaru of America where he held various
national human resource management positions.
Mr. Lynn has been a director of the Company since 1987 and has served
as Director of Management Development of the Company since October 1995. He had
served as Vice President - Marketing and Human Resources of the Company on a
nominal basis from 1986 to 1990. Since 1981 Mr. Lynn has been a principal of
Lynn & Associates, a management consulting company of which Mr. Lynn is the
founder and President.
Mr. Buckley has served as Executive Vice President of Manor Healthcare
and Manor Care, Inc. since March 1996, Director of Vitalink since July 1996,
and was President, Assisted Living Division of Manor Healthcare from February
1995 to March 1996, and Senior Vice President - Information Resources and
Development of Manor Care, Inc. from June 1990 to February 1995. He previously
served as Vice President - Information Resources of Manor Care, Inc. from July
1989 to June 1990 and as Vice President - Real Estate of Manor Care, Inc. from
September 1983 to July 1989.
7
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Mr. Rempe has served as Senior Vice President, General Counsel and
Secretary of Manor Care, Inc. since August 1981. He has served in the same
capacity with Manor Healthcare since December 1980 and with Choice Hotels
International, Inc. from February 1981 until November 1996. He is a Director of
Vitalink Pharmacy Services, Inc. and has served as its Secretary since January
1983.
Mr. Tomasso has served as President of Manor Healthcare since
September 1996, and previously as President, Long Term Care Division, of Manor
Healthcare since February 1995, as President and Chief Operating Officer of
Manor Healthcare from May 1991 to February 1995 and as a Director of Manor
Healthcare since June 1991. He has been Chairman and Chief Executive Officer of
Vitalink Pharmacy Services, Inc. since February 1995, a Director since 1991 and
was its Vice Chairman from September 1991 to February 1995. From September 1990
through March 1991 he was President of AMF Bowling Centers, Inc. Mr. Tomasso
was previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of its Roy Rogers
Division.
ITEM 2. PROPERTIES
The Company's executive offices are located in Minnetonka, Minnesota,
a suburb of Minneapolis, in approximately 27,900 square feet of leased space.
The Company's 43 office locations each lease approximately 2,000 to
7,000 square feet of office space in their respective locations. The Company's
leased properties are suitable and adequate for its current needs and additional
space is expected to be available as needed at competitive rates.
ITEM 3. LEGAL PROCEEDINGS
On October 28 and November 14, 1994 the Company filed two suits in
Federal District Court for the District of Minnesota against the U.S. Department
of Health and Human Services (HHS) and several regional members of the Blue
Cross Association which HHS used to administer the Medicare program. One of
these suits concerns the Company's reimbursement claim for personnel costs
relating to the Company's community liaison positions, which Medicare auditors
contend are nonreimbursable sales costs. In June 1996, the HHS Provider
Reimbursement Review Board (PRRB) ruled that approximately 53% of the
approximately $1.7 million in costs at issue in the case were reimbursable.
This ruling was reversed in August 1996 by the Health Care Financing
Administration (HCFA) and the case in U.S. District Court is now an appeal of
that administrative action. The second suit concerns reimbursement of certain
costs of physical therapists employed by the Company, which Medicare auditors
contend are subject to certain ceilings. In March 1996 the PRRB ruled that all
of the disputed costs in that case were reimbursable to the Company, and in May
1996 the ruling was reversed by HCFA. The District Court case is now an appeal
of that administrative action.
The Company has several cases pending before the PRRB concerning
reimbursement from Medicare for community liaison employee costs in other years,
the costs of physical therapists employed by the Company, the allocation of
administrative and general costs to branch operations and certain corporate
expenses. See Note 5 of the financial statements for discussion of the Medicare
cost reimbursement disputes.
The Company is also a party to various other claims and legal
proceedings which management believes are in the normal course of business and
will not involve any material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
8
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is traded on the NASDAQ National Market
System under the symbol "IHHI". As of December 2, 1996 there were approximately
1,329 record holders of the common stock.
The closing sale price for the common stock as reported by NASDAQ for
each quarter of the two most recent fiscal years were:
<TABLE>
<CAPTION>
Year Ended September 30
-------------------------------------------------------
1996 1995
-------------------- ---------------------
High Low High Low
----- ------ ------ -------
<S> <C> <C> <C> <C>
First Quarter 3 1/8 2 1/16 2 5/8 1 13/16
Second Quarter 2 3/4 2 3/16 2 9/16 1 3/4
Third Quarter 2 1/2 1 7/8 2 15/16 2 3/16
Fourth Quarter 2 5/16 1 3/4 3 3/32 2 9/16
</TABLE>
These prices do not include retail markups, markdowns or commissions and may not
represent actual transactions.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended September 30
----------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Revenue $ 125,086 $ 129,816 $ 120,485 $ 103,761 $ 75,072
Income (loss) from operations (1,814) 3,774 1,353 2,432 3,840
Income (loss) before income taxes (1,165) 3,007 684 1,952 3,716
Net income (loss) (982) 1,621 247 1,015 2,303
Income (loss) applicable to
common stock (3,501) 1,621 247 1,015 2,303
Income (loss) per common and
common equivalent shares (.21) .10 .02 .06 .15
Weighted average common and
common equivalent shares
outstanding - primary 16,465 16,304 16,013 16,056 15,780
BALANCE SHEET DATA
September 30
---------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Current assets $ 44,053 $ 21,394 $ 23,926 $ 28,975 $ 25,955
Current liabilities 33,170 21,289 20,707 19,457 9,072
Total assets 82,683 57,559 56,726 54,379 38,761
Long-term debt 1,080 2,443 3,304 4,740 3,552
Redeemable convertible preferred stock 18,766 - - - -
Shareholders' equity 26,758 30,509 28,482 27,459 24,976
</TABLE>
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table indicates the percentage relationship of income
and expense items to revenue as set forth in the Company's consolidated
statements of operations and the percentage changes from year to year.
<TABLE>
<CAPTION>
Percent of Revenues Percent Change
- ----------------------------------------------------------------------------------------------------
1995 1994
1996 1995 1994 to 1996 to 1995
---- ---- ---- ------- -------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100% 100% 100% (4)% 8%
Direct Costs of Revenue 54 57 58 (9)% 7%
--- --- ---
Gross Profit 46 43 42 4% 9%
General, Administrative and
Selling Expenses 47 40 41 15% 5%
--- --- ---
Income (Loss) From Operations (1)% 3% 1% (148)% 179%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Revenue for 1996 decreased 4%. Revenue decreased 12% as a result of
reduced volume in the Visit division. This is offset by a 4% increase in
revenue as a result of pricing and mix changes and a 4% increase related to
increased volume from Extended Hours, Infusion and Hospice services. Revenue
for 1995 increased 8% over 1994 as a result of increased services provided in
existing markets (11%) and acquisitions obtained during 1994 (2%), offset by
pricing and mix changes (7%). In 1994, the Company entered the Toledo, Ohio and
San Antonio, Texas markets through acquisitions and expanded into the
Greensboro, North Carolina market. There were no acquisitions or expansions
into new markets during 1996 or 1995.
The breakdown by division of the Company's total revenue is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Year Ended September 30
1996 1995 1994
---- ---- ----
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Extended Hours Division 21% 19% 18%
-- -- --
-- -- --
Visit Division - Service 72% 78% 78%
Infusion Product 4% 3% 4%
-- -- --
76% 81% 82%
-- -- --
-- -- --
Hospice Division 3% 0% 0%
-- -- --
-- -- --
- -------------------------------------------------------------------------------------
</TABLE>
Extended Hours Division revenue increased 7% and 11% in 1996 and 1995,
respectively. Hospice revenue increased from $270,000 in 1995 to $3,117,000 in
1996. The increase is a result of thirteen additional markets providing the
hospice service in 1996. Overall Visit Division revenue declined 9% in 1996 as
a result of service revenue decreasing 11%, offset by infusion product revenue
increasing 33%. Visit Division revenue increased 7% in 1995. The increases in
extended hours, infusion product and hospice revenue are due to the Company's
focus on increasing non-Medicare business lines. These increases were offset by
reduced volume in the Visit Division.
Direct costs of revenue, as a percentage of sales, were 54%, 57% and
58% in 1996, 1995 and 1994, respectively. The change in 1996 was due to an
increase in general, administrative and selling expenses which results in
increased Visit Division revenue. The change in 1995 was principally a result
of the decrease in additions to the Medicare reserve as a percent of revenue.
Direct costs, as a percentage of revenue before Medicare reserves, were 53%, 56%
and 56% in 1996, 1995 and 1994, respectively.
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General, administrative and selling expenses as a percent of revenue
increased to 47% in 1996 compared to 40% in 1995 and 41% in 1994. The increase
is primarily due to the addition of certain management personnel necessary to
achieve strategic plans, increased costs associated with the expansion of the
Hospice Division, fourth quarter charges to record a settlement totaling
$1,600,000 with the Company's former President and former Chief Financial
Officer and other various relocations and severance agreements during the year.
Net interest income for 1996 was $649,000 compared to net interest
expense of $767,000 in 1995 and $669,000 in 1994. Interest income is a result
of earnings on the cash proceeds from the investment by Manor Healthcare on
October 24, 1995 (see Note 10 to the accompanying financial statements).
Income tax benefit was 16% of loss before tax in 1996. Income taxes
were 46% and 64% of pretax income for 1995 and 1994, respectively. The
fluctuation in effective tax rates is due to changes in the proportion of non-
deductible expenses to pretax income or loss.
Income (loss) applicable to common shareholders was ($3,501,000),
$1,621,000 and $247,000 for the years 1996, 1995 and 1994, respectively. The
primary reasons for the change from 1995 to 1996 are dividend and accretion
expenses on preferred stock issued to Manor Healthcare (see Note 6 to the
financial statements) of $2,519,000, settlements totaling $1,600,000 to the
Company's former President and former Chief Financial Officer, other relocation
and severance expenses and volume declines within the Visit Division. The
principal reason for the change in profitability from 1994 to 1995 was the
larger addition to the Medicare reserves in 1994. Additions to the Medicare
reserves totaled $2,067,000 in 1996, $1,435,000 in 1995 and $3,861,000 in 1994.
LIQUIDITY & CAPITAL RESOURCES
During fiscal 1996 the Company's cash and cash equivalents increased
$14,952,000 to $18,617,000 at September 30, 1996. The increase in cash was
principally a result of the issuance of preferred stock and common stock
warrants to Manor Healthcare (see Note 10 to the financial statements).
Approximately 72%, 76% and 74% of revenue for 1996, 1995 and 1994,
respectively, was derived from services provided to Medicare beneficiaries.
Primarily all of the payments for these services are 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 seek to 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
11
<PAGE>
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, 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 $17.8 million of costs as of
September 30, 1996. There was an additional $16.0 million of costs at September
30, 1996 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs. Together these amounts ($33.8 million at
September 30, 1996) comprise the total amount the Company considers to be
disputed costs. The major cost category in dispute, accounting for
approximately 57% 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 and certain
corporate expenses. These disputed costs (including the extrapolated impact) of
$33.8 million at September 30, 1996 arose in the fiscal years ended September
30, 1996 ($6.6 million), 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5
million), 1992 ($4.4 million), and 1991 ($2.1 million). 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 66% 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 the 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.
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 received in March a favorable ruling on the
physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB).
In May 1996, this ruling was reversed by the Health Care Financing
Administration. The Company has appealed the decision to the U.S. Federal
District Court in Minneapolis. Because the PRRB previously ruled in the
Company's favor, the Company believes it has a strong basis for a favorable
outcome on such an appeal. In June 1996, the PRRB ruled that approximately 53%
of the $1,700,000 of community liaison costs subject to review as part of this
hearing were reimbursable to the Company. In August 1996, the Health Care
Financing Administration reversed this ruling. The Company had previously
recorded a reserve equal to 16% of all revenue related to the $1,700,000 of
costs as well as other personnel costs relating to the Company's community
liaison position. After careful assessment of the PRRB and Health Care
Financing Administrator decisions and the facts and documentation supporting the
nature of
12
<PAGE>
the personnel costs at issue, the Company continues to believe that the majority
of the community liaison costs are recoverable under the Medicare program. The
Company has concluded that the reserve on this issue in total remains
appropriate and have appealed the decision to the U.S. Federal District Court in
Minneapolis.
The Company, based on its analysis process, believes that recovery of
$7,239,000 of total disputed costs (including the extrapolated impact) may not
be probable and, accordingly, has established reserves which totaled that amount
as of September 30, 1996. 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 September 30, 1996 were $33,244,000, including
the receivables (net of reserves) for disputed costs of $25,014,000. As of
September 30, 1996 the Company had received $13,568,000 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
$22,018,000 as of September 30, 1996 have been classified as a non-current
asset.
Operating activities provided $2,747,000, $5,135,000 and $982,000
in cash during 1996, 1995 and 1994, respectively. Total accounts receivable
(current and long-term) increased 31% during 1996, decreased 7% during 1995
and increased 18% during 1994. The increase in 1996 was due primarily to the
increase in disputed costs. The decrease during 1995 was due to improved
collection efforts and timing of payments from Medicare. The increase in
1994 was due to the Medicare disputes noted above.
Investing activities used $1,695,000, $772,000 and $1,519,000 in cash
during 1996, 1995 and 1994, respectively. In connection with expansion of the
Company's operations, the Company acquired property and purchased software,
which was funded by $1,494,000 in cash and $148,000 of capitalized leases in
1996, $785,000 in cash and $1,256,000 of capitalized leases in 1995 and $995,000
in cash and $753,000 of capitalized leases in 1994. The Company acquired two
companies during 1994 with $341,000 in cash, issuance of 10,000 shares of common
stock and the assumption of $264,000 in notes payable.
Financing activities generated $18,250,000 in cash during 1996 as a
result of issuance of preferred stock and warrants (as mentioned in Note 10 to
the financial statements) and issuance of common stock, offset by payments of
preferred dividends of $2,253,000 and repayments of long-term debt of
$2,097,000. Financing activities used $1,609,000 and $1,633,000 in cash during
1995 and 1994, respectively, principally for repayment of long-term debt.
The Company has letter of credit facilities for $5,435,000. The
letters of credit are collateralized by secured investments and will expire on
December 12, 1996.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 15-16
Consolidated Statements of Operations . . . . . . . . . . . . 17
Consolidated Statements of Shareholders' Equity. . . . . . . . 18
Consolidated Statements of Cash Flows . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . 20-28
Independent Auditors' Report . . . . . . . . . . . . . . . . . 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
14
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 18,617 $ 3,665
Accounts receivable, net of allowances
of $802 and $867 in 1996 and 1995,
respectively 19,418 14,130
Prepaid income tax 1,037 -
Deferred income tax 3,389 2,129
Prepaid expenses and other current assets 1,592 1,470
------ ------
Total current assets 44,053 21,394
------ ------
Property:
Furniture and equipment 9,954 9,997
Computer equipment and software 8,561 7,480
Leasehold improvements 823 807
------ ------
Total 19,338 18,284
Accumulated depreciation (9,437) (7,163)
------ ------
Property - net 9,901 11,121
------ ------
Other Assets:
Accounts receivable 22,018 17,592
Goodwill, net 5,590 5,748
Other assets 1,121 1,704
------ ------
Total other assets 28,729 25,044
------ ------
Total Assets $ 82,683 $ 57,559
------ ------
------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
IN HOME HEATH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 1,455 $ 2,041
Accounts payable 3,662 4,468
Accounts payable - related party 1,006 -
Accrued liabilities:
Third party 13,568 4,480
Compensation 6,859 4,142
Insurance 6,133 5,127
Income tax - 240
Other 487 791
------ ------
Total current liabilities 33,170 21,289
------ ------
Long-Term Debt 1,080 2,443
Deferred Revenue 820 1,242
Deferred Rent Payable 267 351
Deferred Income Tax 1,822 1,725
Commitments and Contingencies - -
Redeemable Convertible Preferred Stock - $1.00 par value,
$20,000 redemption value, authorized 200 shares;
issued and outstanding 1996 - 200 shares; 1995 - none 18,766 -
Shareholders' Equity:
Preferred stock - authorized 800 shares - -
Common stock - $.01 par value:
authorized - 40,000 shares;
issued and outstanding -
1996 - 16,541 shares
1995 - 16,277 shares 165 163
Additional paid-in capital 23,978 24,230
Retained earnings 2,615 6,116
------ ------
Total shareholders' equity 26,758 30,509
------ ------
Total Liabilities and Shareholders' Equity $ 82,683 $ 57,559
------ ------
------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue (net of Medicare reserves of
$2,067, $1,435 and $3,861 in 1996,
1995 and 1994, respectively) $ 125,086 $ 129,816 $ 120,485
-------- -------- --------
Operating Expenses:
Direct costs of revenue
(primarily payroll related costs) 67,108 74,082 69,411
General, administrative and selling expenses 59,792 51,960 49,721
-------- -------- --------
Total operating expenses 126,900 126,042 119,132
-------- -------- --------
Income (loss) from operations (1,814) 3,774 1,353
Interest:
Interest expense (450) (790) (698)
Interest income 1,099 23 29
-------- -------- --------
Net interest income (expense) 649 (767) (669)
Income (loss) before income taxes (1,165) 3,007 684
Income tax expense (benefit) (183) 1,386 437
-------- -------- --------
Net income (loss) $ (982) $ 1,621 $ 247
-------- -------- --------
-------- -------- --------
Income (loss) applicable to common stock $ (3,501) $ 1,621 $ 247
-------- -------- --------
-------- -------- --------
Income (loss) per common and
common equivalent share $ (.21) $ .10 $ .02
-------- -------- --------
-------- -------- --------
Weighted average common and
common equivalent shares
outstanding - primary 16,465 16,304 16,013
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
------------ paid-in Retained
Shares Amount capital earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balance - September 30, 1993 15,518 $ 155 $23,056 $4,248
Common stock issued for:
Employee stock plans 266 3 745 -
Acquisitions 10 - 28 -
Exchange for warrants 150 1 (1) -
Net income - - - 247
------ ----- ------ -----
Balance - September 30, 1994 15,944 159 23,828 4,495
Common stock issued for:
Employee stock plans 442 5 685 -
Exchange for options (109) (1) (283) -
Net income - - - 1,621
------ ----- ------ -----
Balance - September 30, 1995 16,277 163 24,230 6,116
Common stock issued for:
Employee stock plans 270 2 541 -
Exchange for options (6) - (12) -
Offering costs - - (2,281) -
Issuance of warrants - - 1,500 -
Net loss - - - (982)
Preferred dividends - - - (2,253)
Preferred stock accretion - - - (266)
------ ----- ------ -----
Balance - September 30, 1996 16,541 $ 165 $23,978 $2,615
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (982) $ 1,621 $ 247
Adjustments:
Depreciation and amortization 3,227 3,226 3,233
Accounts receivable (9,714) (760) (5,008)
Prepaid expenses and other assets (582) (833) (210)
Accounts payable (806) 647 (216)
Accounts payable - related party 1,006 - -
Accrued liabilities 12,267 3,478 1,196
Deferred revenue (422) (390) 1,632
Deferred rent payable (84) (165) (20)
Deferred income tax (1,163) (1,689) 128
------ ------ ------
Net cash provided by operating activities 2,747 5,135 982
------ ------ ------
Cash Flows From Investing Activities:
Acquisition of property (1,494) (785) (995)
Advances to officers and employees (201) 13 (135)
Acquisition of businesses - - (389)
------ ------ ------
Net cash used by investing activities (1,695) (772) (1,519)
------ ------ ------
Cash Flows From Financing Activities:
Payment of long-term debt (2,097) (2,015) (2,381)
Issuance of preferred stock and warrants 17,719 - -
Preferred dividends paid (2,253) - -
Issuance of common stock 531 406 748
------ ------ ------
Net cash provided (used) by financing activities 13,900 (1,609) (1,633)
------ ------ ------
Cash and Cash Equivalents:
Net increase (decrease) 14,952 2,754 (2,170)
Beginning of year 3,665 911 3,081
------ ------ ------
End of year $ 18,617 $ 3,665 $ 911
------ ------ ------
------ ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - In Home Health specializes in high-quality health services to
clients in their own homes, including infusion therapy, high-tech nursing,
hospice, rehabilitation and personal care.
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of In Home Health, Inc. and its subsidiaries (the "Company"). All
material intercompany accounts and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS - Securities which are readily convertible into cash with
original maturities of three months or less are considered cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The book value of accounts
receivable; cash and cash equivalents; accounts payable and accrued
liabilities approximates fair value due to the short-term nature of these
balances.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
NOTES RECEIVABLE FROM OFFICERS - Included in prepaid expenses and other
current assets are advances to officers of the Company in the amount of
$342,000 and $150,000 as of September 30, 1996 and 1995, respectively.
PROPERTY AND PROPERTY UNDER CAPITALIZED LEASES - Property and property
under capitalized leases are stated at cost and depreciated or amortized
over estimated useful lives (from three to twelve years) using the
straight-line method. Property acquired by capital lease for the years
ended September 30, 1996, 1995 and 1994 was $148,000, $1,256,000 and
$753,000, respectively.
GOODWILL - Costs in excess of net assets of acquired businesses have been
capitalized and are being amortized over 40 years. Accumulated
amortization was $737,000 and $578,000 at September 30, 1996 and 1995,
respectively.
DEFERRED REVENUE - Deferred revenue relates to the timing difference in
recording certain software development costs for financial statement
purposes and Medicare cost reporting purposes. Incremental costs relating
to the development of software for certain major management information
system projects undertaken during 1992 through 1994 have been capitalized
and are included in computer equipment and software on the balance sheet.
For Medicare cost reimbursement purposes, the Company includes in
reimbursable costs the amount of expenditures in the year they were
incurred. The Company has reported an amount of deferred revenue,
representing the Medicare impact of the difference between the reimbursable
costs reported on the Medicare cost reports and the unamortized balance of
capitalized software development costs. The deferred revenues are being
recorded to revenue when the amortization of the related software
development expenses is recorded (over a five year period). Unamortized
software development costs are $1,186,000 and $1,799,000 as of September
30, 1996 and 1995, respectively.
DEFERRED RENT PAYABLE - Deferred rent payable has been recorded for long-
term office space operating leases which contain initial rent inducements.
Rental expense is being amortized on a straight-line basis over the terms
of the operating leases.
INCOME TAXES - Deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities in accordance with SFAS No. 109 "Accounting for Income Taxes".
REVENUE RECOGNITION - Revenues are recognized at the time the service is
provided to the client. The Company records revenue for services to
Medicare beneficiaries at the time the services are rendered and based on
the Medicare cost reimbursement principles. Under those principles,
Medicare reimburses the Company for the reasonable costs (as defined)
incurred in providing care to Medicare beneficiaries. The Company reports
as reimbursable costs in the Medicare cost reports only those
20
<PAGE>
costs it believes to be reimbursable under the applicable Medicare cost
reimbursement principles. In determining the amount of revenue to be
recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement
principles in effect at that time. Accordingly, this process results in
recording revenue only for the costs that the Company believes are
reasonably assured of recovery. Refer to Note 5 for additional
information.
2. INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary income (loss) per common and common equivalent share is computed by
dividing the income (loss) applicable to common stock, as adjusted for the
dividends and accretion on the preferred stock (see Note 6) by the weighted
average number of shares of common stock and common stock equivalents,
consisting of dilutive stock options and warrants, outstanding during the
period. Income (loss) per share assuming full dilution would be
substantially the same.
Primary income (loss) per share for the years ended September 30, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Shares outstanding:
Weighted average outstanding 16,340 16,062 15,656
Shares issuable in connection with stock
options and warrants less shares
purchasable from proceeds 125 242 357
------ ------ ------
Adjusted outstanding 16,465 16,304 16,013
------ ------ ------
------ ------ ------
Adjusted net income (loss) applicable to
common stockholders:
Net income (loss) $ (982) $ 1,621 $ 247
Dividends on preferred stock (2,253) - -
Preferred stock accretion (266) - -
------ ------ ------
Income (loss) applicable to common stock $(3,501) $ 1,621 $ 247
------ ------ ------
------ ------ ------
Income (loss) per common and common
equivalent share $ (.21) $ .10 $ .02
------ ------ ------
------ ------ ------
</TABLE>
3. ACQUISITIONS
There were no acquisitions during the years ended September 30, 1996 and
1995. The Company acquired all of the issued and outstanding capital stock
of two home health care companies during the year ended September 30, 1994.
The acquisitions, accounted for as purchases for financial reporting
purposes, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
CONSIDERATION: TOTAL VALUE OF GOODWILL
ACQUISITION CASH CONSIDERATION RECORDED
COMPANY NAME DATE COMMON STOCK PAID
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ENS, Inc. January, 1994 $ 41 $ 69 $ 232
10 shares
- ---------------------------------------------------------------------------------------------------
RI Partners and RHC
Partners May, 1994 $ 300 $ 300 $ 516
-
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
The purchase price has been allocated to the net assets acquired, including
intangible assets, based on their fair market values at the acquisition
dates. The net assets acquired in these acquisitions consisted primarily
of accounts receivable and current liabilities. The consolidated
statements of operations include the results of operations of these
companies since their respective acquisition dates. The fair market value
of the common stock issued for the acquisitions in 1994 was $28,000. The
Company incurred $95,000 of costs in 1994 in connection with the
acquisitions.
4. LONG-TERM DEBT
Long-term debt consists of obligations under capitalized leases with
interest rates up to 13.2%, due through July 2000.
Future minimum payments as of September 30, 1996 are as follows (in
thousands):
YEAR ENDING
SEPTEMBER 30
-----------------------
1997 $ 1,715
1998 849
1999 242
2000 44
-----
Total minimum payments 2,850
Less amounts
representing interest 315
-----
Present value of future
minimum payments 2,535
Less current maturities 1,455
-----
Long-term debt $ 1,080
-----
-----
Assets recorded under capital leases are included in property at cost of
$7,032,000 and $9,885,000, and accumulated depreciation of $2,997,000 and
$3,719,000 at September 30, 1996 and 1995, respectively. Interest paid for
the years ended September 30, 1996, 1995 and 1994 was $450,000, $779,000
and $687,000, respectively.
5. MEDICARE COST REIMBURSEMENT
Approximately 72%, 76% and 74% of revenue for the years ended September 30,
1996, 1995 and 1994, respectively, was derived from services provided to
Medicare beneficiaries. Primarily all of the payments for these services
are 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 seek to
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.
22
<PAGE>
- 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, 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 $17.8 million of costs as of
September 30, 1996. There was an additional $16.0 million of costs at
September 30, 1996 related to open cost reporting years that are similar to
the costs that have been challenged on NPRs. Together these amounts ($33.8
million at September 30, 1996) comprise the total amount the Company
considers to be disputed costs. The major cost category in dispute,
accounting for approximately 57% 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 and certain corporate expenses. These disputed
costs (including the extrapolated impact) of $33.8 million at September 30,
1996 arose in the fiscal years ended September 30, 1996 ($6.6 million),
1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4
million), and 1991 ($2.1 million). 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 66% 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
the 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
23
<PAGE>
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.
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 received in March a favorable ruling
on the physical therapist issue by the HHS Provider Reimbursement Review
Board (PRRB). In May 1996, this ruling was reversed by the Health Care
Financing Administration. The Company has appealed the decision to the
U.S. Federal District Court in Minneapolis. Because the PRRB previously
ruled in the Company's favor, the Company believes it has a strong basis
for a favorable outcome on such an appeal. In June 1996, the PRRB ruled
that approximately 53% of the $1,700,000 of community liaison costs subject
to review as part of this hearing were reimbursable to the Company. In
August 1996, the Health Care Financing Administration reversed this ruling.
The Company had previously recorded a reserve equal to 16% of all revenue
related to the $1,700,000 of costs as well as other personnel costs
relating to the Company's community liaison position. After careful
assessment of the PRRB and Health Care Financing Administrator's decisions
and the facts and documentation supporting the nature of the personnel
costs at issue, the Company continues to believe that the majority of the
community liaison costs are recoverable under the Medicare program. The
Company has concluded that the reserve on this issue in total remains
appropriate and have appealed the decision to the U.S. Federal District
Court in Minneapolis.
The Company, based on its analysis process, believes that recovery of
$7,239,000 of total disputed costs (including the extrapolated impact) may
not be probable and, accordingly, has established reserves which totaled
that amount as of September 30, 1996. 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 September
30, 1996 were $33,244,000, including the receivables (net of reserves) for
disputed costs of $25,014,000. As of September 30, 1996 the Company had
received $13,568,000 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 $22,018,000 as of September
30, 1996 have been classified as a non-current asset.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was issued to Manor Healthcare on
October 24, 1995 (see Note 10 to the financial statements). The preferred
shares may be redeemed in cash at the option of the holder or the Company
on and after the fifth anniversary of their issuance. The redeemable
preferred shares have voting rights on an as-if converted basis, and are
initially convertible into 10 million common shares at an initial
conversion price of $2.00 per share. The redeemable preferred shares bear
dividends payable quarterly at 12% per annum. The redeemable preferred
stock will accrete over five years from its fair value of $18,500,000 on
the date of issuance to its redeemable value of $20,000,000 as of the
redemption date.
7. COMMITMENTS AND CONTINGENCIES
The Company is obligated under several noncancelable operating leases for
office space and equipment. Total rental expense for all operating leases
was $4,237,000, $4,005,000 and $3,666,000, for the years ended September
30, 1996, 1995 and 1994, respectively.
Future minimum rental payments as of September 30, 1996 for operating
leases with noncancelable terms in excess of one year are as follows (in
thousands):
24
<PAGE>
YEAR ENDING
SEPTEMBER 30
---------------------
1997 $ 3,221
1998 2,280
1999 1,766
2000 920
2001 639
Thereafter 117
-----
Total minimum payments $ 8,943
-----
-----
The Company has letter of credit facilities totaling $5,435,000. The
letters of credit are collateralized by secured investments and will expire
on December 12, 1996.
The Company is a party to various claims and legal proceedings which
management believes are in the normal course of business and will not
involve any material loss.
8. CAPITAL TRANSACTIONS
STOCK OPTION PLAN
The Company has adopted a stock option plan to provide for the granting of
options to purchase up to a maximum of 3,800,000 shares of common stock.
The options are granted at exercise prices equal to the fair market value
of the common stock at the date of grant. The following is a summary of
stock option activity (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------
AVAILABLE
FOR GRANT OUTSTANDING EXERCISE PRICES
--------- ----------- ---------------
<S> <C> <C> <C>
Balance - September 30, 1993 514 1,403 $ .53 to $5.94
Options granted (360) 360 $ 1.88 to $4.06
Options exercised - (117) $ .54 to $2.69
Options canceled 211 (211) $ 1.03 to $5.94
----- -----
Balance - September 30, 1994 365 1,435 $ .53 to $5.63
Additional options authorized 650 -
Options granted (637) 637 $ 1.75 to $3.06
Options exercised - (314) $ .53 to $2.50
Options canceled 273 (273) $ 1.03 to $5.44
----- -----
Balance - September 30, 1995 651 1,485 $ .53 to $5.63
Additional options authorized 650 -
Options granted (1,130) 1,130 $ 2.13 to $3.09
Options exercised - (118) $ 1.03 to $3.00
Options canceled 432 (432) $ 1.03 to $5.31
----- -----
Balance - September 30, 1996 603 2,065 $ .53 to $5.63
----- -----
----- -----
</TABLE>
At September 30, 1996, options for the purchase of 747,000 shares of common
stock are currently exercisable at prices ranging from $.53 to $5.63 per
share.
In 1995, two officers of the Company surrendered 109,000 shares of common
stock to the Company at fair market value in lieu of cash payment for the
exercise of 194,000 options.
25
<PAGE>
WARRANTS
As of September 30, 1996, private warrants issued in October 1995 to
purchase 6,000,000 shares of common stock and expiring in October 1998 are
exercisable at $3.75 per share (see Note 10 to the financial statements).
STOCK PURCHASE PLAN
The Company has a plan whereby eligible employees may purchase the
Company's common stock at the lower of 85% of the market price at the time
of grant or the time of purchase. There are 700,000 shares reserved for
this plan of which 151,000 shares were issued on September 30, 1996 at
$1.86 per share, 124,000 shares were issued on September 30, 1995 at $1.96
per share and 144,000 shares were issued on September 30, 1994 at $1.96 per
share. At September 30, 1996 there were 83,115 shares available for future
offerings.
9. INCOME TAXES
The income tax provision for the years ended September 30, 1996, 1995 and
1994 consisted of (in thousands):
<TABLE>
<CAPTION>
1996 FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
Current $ 883 $ 97 $ 980
Deferred (1,026) (137) (1,163)
------- ------- -------
$ (143) $ (40) $ (183)
------- ------- -------
------- ------- -------
1995 FEDERAL STATE TOTAL
------- ----- -----
Current $ 2,505 $ 593 $ 3,098
Deferred (1,380) (332) (1,712)
------- ------- -------
$ 1,125 $ 261 $ 1,386
------- ------- -------
------- ------- -------
1994 FEDERAL STATE TOTAL
------- ----- -----
Current $ 483 $ 46 $ 529
Deferred (138) 46 (92)
------- ------- -------
$ 345 $ 92 $ 437
------- ------- -------
------- ------- -------
</TABLE>
The income tax expense differs from the amount computed by applying the
Federal statutory rate to income before income taxes for each of the years
ended September 30, 1996, 1995 and 1994 as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at Federal statutory rate $ (396) $ 1,022 $ 233
State income taxes,
net of Federal benefit 21 231 92
Officers life insurance 35 24 24
Goodwill amortization 41 33 44
Meals and entertainment 106 81 32
Other 10 (5) 12
------ ------ ------
Income tax expense (benefit) $ (183) $ 1,386 $ 437
------ ------ ------
------ ------ ------
</TABLE>
The tax benefit related to the exercise of employee stock options is
recorded as additional paid-in-capital.
Income taxes paid during the years ended September 30, 1996, 1995 and 1994
were $2,257,000, $2,376,000 and $31,000, respectively.
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1996 and 1995 are as
follows:
26
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Bad debt allowance $ 299 $ - $ 335 $ -
Depreciation and amortization - 1,730 - 2,031
Insurance accruals 2,464 - 1,397 -
Capitalized items expensed
for taxes - 500 - 372
Deferred revenue - (306) - (479)
Vacation 341 - 318 -
Contract settlement 220 - - -
Other 65 (102) 79 (199)
------ ------ ------ ------
$ 3,389 $ 1,822 $ 2,129 $ 1,725
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
10. RELATED PARTY TRANSACTIONS
On October 24, 1995, the Company closed an agreement with Manor Healthcare,
a wholly owned subsidiary of Manor Care, Inc., a national health care and
international lodging firm. Pursuant to this agreement, the Company
conducted a cash self-tender offer and purchased 6,750,000 shares of its
common stock (41% of outstanding) at $3.40 per share and Manor Healthcare
purchased 6,750,000 shares from the Company at $3.40 per share. In
addition, Manor Healthcare invested $20 million to purchase redeemable
convertible preferred shares and a warrant to purchase 6,000,000 shares of
common stock at an exercise price of $3.75 per share (see Notes 6 and 8).
The Purchase Agreement with Manor Healthcare also contemplated that the
Company and Manor Healthcare would enter into agreements or arrangements
which they deem prudent and mutually beneficial for the provision of
services between them on terms that are fair to each party. The Company
and Manor Healthcare entered into an agreement dated February 27, 1996
whereby Manor Healthcare or its parent company, Manor Care, Inc. will
provide to the Company certain administrative services, financial and
treasury management services, reimbursement services, legal services,
accounting services and other similar types of services through June 30,
1996. The Company continues to operate under this agreement which is
renewable for three month periods and is terminable upon 90 day notice.
Administrative fees of $1,006,000 were accrued from October 24, 1995 based
on a time allocation method which Manor Healthcare utilized to charge
administrative services to all of its subsidiaries. Management believes
that the foregoing charges are reasonable allocations of the costs incurred
by Manor Healthcare on the Company's behalf. Based solely on this accrual,
$1,006,000 was payable (but not paid) to Manor Healthcare at September 30,
1996.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $32,468 $31,792 $30,302 $30,524
Income (loss) from operations 109 82 179 (2,184)
Loss applicable to common stock (404) (546) (560) (1,991)
Loss per common and common
equivalent share (.02) (.03) (.03) (.12)
</TABLE>
27
<PAGE>
FISCAL 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $32,334 $32,593 $32,239 $32,650
Income from operations 995 1,018 820 941
Income applicable to common stock 422 421 347 431
Income per common and common
equivalent share .03 .03 .02 .02
</TABLE>
During the fourth quarter of fiscal 1996, the Company recorded one time
charges of $1,600,000 for a settlement with the former President and former
Chief Financial Officer on October 22, 1996 and $700,000 for relocations
and other severance agreements. The Company also repurchased 244,805
shares of common stock at market value as part of the settlement with the
former officers.
12. RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which will be effective in fiscal 1997. The Company has not
determined the effect of the new standard on the financial statements.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
In Home Health, Inc.:
We have audited the accompanying consolidated balance sheets of In Home Health,
Inc. as of September 30, 1996 and 1995 and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended September 30, 1996. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14(a)2.
These consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of In Home Health, Inc. as of
September 30, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 12, 1996
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this Item with respect to directors will be
contained in the section entitled "Election of Directors" in the Company's 1997
Proxy Statement, and is incorporated herein by reference.
Information concerning executive officers is set forth in the section
entitled "Executive Officers of the Registrant" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item will be contained in the section
entitled "Executive Compensation and Other Information" in the Company's 1997
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item will be contained in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item will be contained in the section
entitled "Election of Directors - Certain Transactions" in the Company's 1997
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements filed with this Form 10-K are
listed in Item 8 above.
2. FINANCIAL STATEMENT SCHEDULES
The schedules required to be filed as part of this Annual Report on
Form 10-K are listed below with their location in this report.
PAGE
----
In Home Health, Inc.:
Independent Auditors' Report. . . . . . . . . . . . . . . . . . 29
Schedules for the Years Ended September 30, 1996, 1995 and 1994:
II - Valuation and Qualifying Accounts and Reserves . . . . 34
All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements
or notes thereto.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1996.
30
<PAGE>
(c) EXHIBITS:
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation, as amended. (i)
3.2 Restated Bylaws. (i)
4.1 Form of specimen Common Stock certificate. (ii)
4.2 Form of specimen certificate for Series A Preferred Stock.
(i)
4.3 Certificate of Designation of the Series, Number of Shares
in Series, Dividend Rate, Redemption Price, Liquidation
Price, Conversion Right and Other Rights and Preferences of
the Series A Preferred Stock ($1.00 par value) of In Home
Health, Inc. (i)
10.1 Management Incentive Plan in place for fiscal 1996.
10.2 Lease agreement dated October 24, 1991 with Minnesota CC
Properties, as amended. (i)
10.3 The Company's 1987 Stock Option Plan, as amended. (i)
10.4 The Company's 1995 Stock Option Plan, as amended. (i)
10.5 Asset purchase agreement between In Home Health, Inc., Carol
I. Peake and ENS, Inc. dated January 14, 1994. (iii)
10.6 Partnership purchase agreement between In Home Health, Inc.
and Riata Health Care, Inc., Red Health Care, Inc., Crimson
Health Care, Inc., William W. Sullivan, Jr., Warren Neely
and Dennis Gutzman dated May 23, 1994. (iv)
10.7 Asset purchase agreement between In Home Health, Inc., RI
Investments, Inc. Green Investments, Inc., Maroon
Investments, Inc., William W. Sullivan, Jr., Warren Neely,
Dennis Gutzman and RI Partners dated May 23, 1994. (iv)
10.8 Securities Purchase and Sale Agreement dated May 2, 1995, as
amended between the Company and Manor Healthcare Corp. (v)
10.9 Employment Agreement between the Company and Judy M. Figge
dated May 2, 1995. (v)
10.10 Employment Agreement between the Company and Kenneth J.
Figge dated May 2, 1995. (v)
10.11 Employment Agreement between the Company and James J. Lynn
dated October 24, 1995. (v)
10.12 Employment Agreement between the Company and Cathy R. Reeves
dated October 24, 1995. (v)
10.13 Employment Agreement between the Company and Margaret L.
Maxon dated October 24, 1995. (v)
10.14 Letter of Credit Agreement dated December 14, 1995 with
Harris Trust and Savings Bank. (i)
10.15 Administrative Services Agreement dated February 27, 1996
between In Home Health, Inc. and Manor Care, Inc.
11 Computation of Per Share Earnings
23 Independent Auditors' Consent
27 Financial Data Schedule
(i) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1995.
(ii) Incorporated herein by reference to the Registrant's
Registration Statement (Form S-18) No. 33 -17228C.
(iii) Incorporated herein by reference to the Registrant's current
report on Form 8-K dated January 17, 1994.
(iv) Incorporated herein by reference to the Registrant's current
report on Form 8-K dated May 26, 1994.
(v) Incorporated herein by reference to the Registrant's current
report on Form 8-K dated May 2, 1995.
(vi) Filed as Appendix II to the Company's definitive Proxy
Statement for the Special Meeting of Shareholders held
October 23, 1995.
31
<PAGE>
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, thereunto duly authorized, in Minnetonka,
Minnesota.
IN HOME HEALTH, INC.
By: /s/ Mark L. Gildea
------------------------------------
Mark L. Gildea, Chief Executive Officer
Date: December 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Mark L. Gildea Chief Executive Officer December 27, 1996
- ------------------------- and Director
Mark L. Gildea (principal executive officer)
/s/ Thomas R. Gross Acting Chief December 27, 1996
- ------------------------- Financial Officer
Thomas R. Gross and Vice President -
Controller
/s/ James J. Lynn Director December 27, 1996
- -------------------------
James J. Lynn
/s/ Joseph R. Buckley Director December 27, 1996
- -------------------------
Joseph R. Buckley
/s/ Donald C. Tomasso Director December 27, 1996
- -------------------------
Donald C. Tomasso
/s/ James H. Rempe Director December 27, 1996
- -------------------------
James H. Rempe
32
<PAGE>
IN HOME HEALTH, INC.
SCHEDULE AND EXHIBIT INDEX
SCHEDULE PAGE
----
II Valuation and Qualifying Accounts and Reserves 34
EXHIBIT
10.1 Management Incentive Plan in place for fiscal 1996 35
10.15 Administrative Services Agreement dated February 27, 1996
between In Home Health, Inc. and Manor Care, Inc. 38
11 Computation of Earnings per Share 48
23 Independent Auditors' Consent 49
27 Financial Data Schedule 50
33
<PAGE>
SCHEDULE II
IN HOME HEALTH, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------
(2)
(1) Charged Balance
Balance at Charged to to Other at
Beginning Costs and Accounts- Deductions End of
Classification of Period Expenses Describe -Describe Period
(B) (A)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
- ----
Allowance for Doubtful
Accounts - Current $ 867 $ 560 $ - $ 625 $ 802
Medicare Reserve 6,396 - 2,067 1,224 7,239
1995
- ----
Allowance for Doubtful Accounts
- Current $ 1,029 $ 856 $ - $ 1,018 $ 867
Medicare Reserve 4,961 - 1,435 - 6,396
1994
- ----
Allowance for Doubtful Accounts
- Current $ 859 $ 914 $ - $ 744 $ 1,029
Medicare Reserve 1,100 - 3,861 - 4,961
</TABLE>
(A) Write-off of bad debts, net of recoveries and acquisition balances.
(B) Adjustment to Medicare reserve.
34
<PAGE>
IN HOME HEALTH, INC.
MANAGEMENT INCENTIVE PLAN
FISCAL YEAR 1996
Employee Name:
Position Title:
Maximum Benefit %:
In Home Health has annual incentive plans for key positions. The purpose of
these plans is:
* To ensure a competitive total compensation package for key
management and support positions.
* To attract, retain and motivate qualified employees in key
management and support positions.
* To stimulate higher performance levels by clarifying and
strengthening the links between an individual's
contributions and their compensation.
* To assure that corporate goals and objectives are an
integral part of every employee's performance.
ELIGIBILITY
The plans are intended to include those management and support personnel who
have measurable effects on financial results. Positions will be identified by
the Executive Management Team and the Compensation Committee of the Board of
Directors.
TOTAL COMPENSATION OPPORTUNITY
The total compensation package, composed of base salary and benefits, plus the
management incentive plan, is designed to provide participants with an
opportunity to earn above average compensation for meeting and exceeding the
plan objectives.
ANNUAL INCENTIVE MOTIVATION
An incentive will be motivational if:
1. the opportunity is large enough to be of significance to the
individual, and
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<PAGE>
2. the individual perceives that he/she can reasonably impact and/or
control the expected results which are set forth in the compensation
plan.
INCENTIVE ELEMENTS
For fiscal year 1996, the emphasis will be placed on Net Income.
No bonus will be paid to any manager where a loss occurs in their area of
responsibility, even if the loss was planned or if the Company incurs a loss for
the year.
GENERATION OF INCENTIVE POOL
Each year, incentive dollars will be integrated into the operating budget based
on performance projections for individuals and the corporation.
INCENTIVE PAYMENTS
Incentive payments will be paid annually. Payments will be made when the
audited results of the preceding fiscal year are available and the individual
incentive amount has been approved by the appropriate department head and at
least one executive officer. The incentive amount is a percentage of base
salary in effect on the last day of the fiscal year.
NEW HIRES
Participants hired during the year must be employed for at least 6 of the 12
months of the fiscal year in order to be eligible for the incentive. A prorated
payment may be made based on the number of full months (6 to 11 months) worked
during the fiscal year. Exceptions to this policy must receive the prior
written approval of the Chief Executive Officer.
TRANSFERS, PROMOTIONS AND LEAVES
If an employee is transferred or promoted into an incentive eligible position
during the fiscal year, he/she will be eligible for incentive when they complete
at least six (6) months of employment in the position. A prorated payment may
be made based on the number of full months (six to eleven) worked in the
eligible position.
If the employee is promoted from one eligible position to another eligible
position and is in the higher position at least six months, the amount paid may
be prorated according to the number of months worked in each position. If the
employee is in the new position for less than six months, the incentive will not
be prorated but will be based on the lower position's incentive rate.
An employee transferring into a lower incentive from a higher incentive position
will receive the lower incentive rate for the entire year. An employee who
transfers out of an eligible incentive position any time during the year is
ineligible for any incentive relating to that year.
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<PAGE>
An employee on an unpaid leave of absence will not be paid incentive for the
months or portions of months absent. The amount will be prorated for the full
months worked in an eligible position.
TERMINATION
In the event a participant is terminated for cause, no incentive will be paid.
When a participant voluntarily terminates their position before the incentive
award is due to be paid, payment of the incentive will not be made. Exceptions
to this policy may be made at the discretion of the Chief Executive Officer and
must be in writing. Payments to former employee will be made on the normal
schedule.
REGIONAL OR AREA POSITIONS
All Corporate, area or regional positions will participate in the Company's
Annual Incentive Plan utilizing the Company's consolidated results to determine
their Management Incentive compensation for the year. Branch and Pharmacy
General Managers will participate in the General Managers Incentive Plan.
Details of the pertinent plan will be distributed to the participants.
DURATION OF PLAN
The company may change, modify, or amend this plan at any time. This plan is for
fiscal year 1996 only and no plan for fiscal year 1997 or any other fiscal year
is implied.
PERCENTAGE OF INCENTIVE ELEMENT ACHIEVED % OF MAXIMUM PAYOUT
- ---------------------------------------- -------------------
less than 80.0% 0%
80 - 84.9% 20%
85 - 89.9% 34%
90 - 94.9% 48%
95 - 99.9% 61%
100 - 104.9% 75%
105 - 109.9% 81%
110 - 114.9% 88%
115 - 119.9% 94%
120 + 100%
37
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT entered into as of this 27th day of February, 1996 by and between
Manor Care, Inc., a Delaware corporation (together with its subsidiaries and
affiliates, other than In Home Health, Inc., hereinafter referred to as "Manor
Care") and In Home Health, Inc. a Minnesota corporation (together with its
subsidiaries, hereinafter referred to as "In Home").
WHEREAS, Manor Care and In Home desire to formalize the provision of
services by Manor Care to In Home;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and sufficient consideration, the receipt of which is
acknowledged, the parties agree as follows:
1. SCOPE OF AGREEMENT. Manor Care will, consistent with the terms of
this Agreement, provide, or cause to be provided to In Home, those certain
corporate, administrative and management services listed on Exhibit A ( each
service individually referred to as a "Service" and all services collectively
referred to as the"Services") attached hereto and made part of this Agreement,
and In Home, in consideration thereof, shall pay Manor Care in accordance with
Section 3 below.
2. TERM. This Agreement shall have a retroactive commencement date of
November 1, 1995 and shall terminate as of
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<PAGE>
June 30, 1996. Thereafter, Manor Care agrees to provide the Services on a
quarter-to-quarter basis, beginning July 1, 1996 and continuing until
terminated by either party either as to a particular Service or as to the
Services by means of at least ninety (90) days prior written notice.
3. FEES AND PAYMENT.
A. In Home will pay Manor Care Forty Thousand Dollars ($40,000.00)
per month for certain corporate, administrative and management services listed
in Exhibit A, attached hereto.
B. In addition to the amount paid under Section 3(A) of this
Agreement, In Home will pay Manor Care Three Thousand Dollars ($3,000.00) per
month for any and all services provided by the Manor Care Reimbursement
Department under this Agreement.
C. In Home will pay Manor Care an administrative fee for the support
received from the Manor Care Managed Care Center ("Managed Care Center"). Such
fee shall be equal to five (5) percent of the expenses incurred by the Managed
Care Center. Such expenses are estimated by the parties to be approximately
Fifteen Thousand Dollars ($15,000.00) per month.
D. In Home will reimburse Manor Care for expenses incurred within the
Manor Care Alternate Site Division ("Alternative Site") Departments 020-070,
020-071 and 020-074 for periods from November 1, 1995 forward. This does not
include any portion of the Alternate Site Management Fee originally planned for
Manor Care Fiscal Year 1996 or any expenses which should have been
39
<PAGE>
accrued before November 1, 1995 and which ultimately will be transferred to
Alternate Site Department 020-084 or such new department established for the
same purpose. It is the intent of In Home to absorb the personnel related costs
and other expenses of Alternate Site Departments 020-070, 020-071 and 020-074
into In Home by March, 1996. Thereafter, the only remaining expenses within
Alternative Site Departments 020-070, 020-071 and 020-074 will be for the
personnel and other expenses involved with the management and support of the
Managed Care Center. Alternate Site will transfer $15,000 per month to the
Managed Care Center for the management and support supplied by employees within
Alternate Site and In Home.
E. In Home will reimburse Manor Care for expenses incurred within
the Manor Care Hospice Division Department 022-035 from November 1, 1995
forward. This does not include any portion of the Manor Care Hospice Division
Management Fee originally planned for Manor Care Fiscal Year 1996 or any
expenses which should have been accrued before November 1, 1995 and which will
be transferred to Alternate Site Department 020-084 or such new department
established for the same purpose. It is the intent of In Home to absorb the
personnel related costs and other expenses of the Manor Care Hospice Division
Department 022-035 into In Home by March, 1996.
F. Alternate Site services for which In Home does not receive any
benefit will be expenses separated into an Alternate Site Department 020-084
(Disease Management Department) and will be
40
<PAGE>
included in Manor Care financials. Such expenses will include the planned Manor
Care Fiscal Year 1996 Management Fees for its Alternate Site and Hospice
Division.
G. Reports for Alternate Site Departments 020-070, 020-071, 020-074,
and Hospice Division Department 022-035 will be sent to Tom Gross, the In Home
Vice President and Controller, for review and audit. Any correction from the
incorrect assignment of cost will be corrected as soon as possible in the next
month.
H. In Home will receive a cost allocation from Manor Care's home
office cost report (relating to provisions addressed in Subsections A-E of this
Section 3) to include within In Home's cost report for allowable reimbursement
from Medicare. Any changes in this allocation process requires the approval of
the Audit Committee of In Home.
I. Notwithstanding the above, any of the expenses paid by In Home
under this Agreement for any Manor Care employee (whether actually transitioned
to In Home during the period, or not) shall be returned or credited by Manor
Care in the event that such employee is terminated on or before May 31, 1996
J. The Audit Committees of Manor Care and the special committee of
the In Home Board of Directors will retrospectively review and agree to each
company's fiscal year charges for the administrative service fees described
herein, and prospectively review and agree to the succeeding year's budgeted
administrative service fees. This will be done in both 1996 and all subsequent
years during which this Agreement is in effect.
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<PAGE>
4. PERFORMANCE OF SERVICES. Manor Care shall perform the Services with
the same degree of care, skill and prudence customarily exercised for its own
operations.
5. LIMITATION ON LIABILITY; INDEMNIFICATION. Except as provided in the
following sentence, neither party shall have any liability under this Agreement
to the other party for damage or loss of any type suffered by the other party or
any third party as a result of the performance or non-nonperformance of the
Services provided hereunder and neither party will be responsible for general,
special, indirect, incidental or consequential damages, whether known or
unknown, that the other party or any third party may incur or experience on
account of entering into or relying on this Agreement. Each party shall
indemnify, defend and hold the other party, its directors, officers and
employees harmless from and against all damages, losses and out-of-pocket
expenses (including attorney fees) caused by or arising out of any willful
failure to perform any obligation or agreement herein.
6. ASSIGNMENT. In Home shall not assign or transfer any of its rights
under this Agreement without the prior written consent of Manor Care.
7. NOTICES. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing
42
<PAGE>
and shall be deemed to have been given the earlier of when actually received or
three (3) business days after such writing is deposited in the United States
mail, registered or certified mail, return receipt requested, or sent by Federal
Express or other similar overnight courier services, addressed to the parties as
stated below or to such other address as a party may designate by notice:
If to Manor Care:
Manor Care, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
ATTN: General Counsel
If to In Home:
In Home Health, Inc.
Carlson Center, Suite 500
601 Lake Shore Parkway
Minnetonka, MN 55305-5215
ATTN: Chief Financial Officer
8. GOVERNING LAW. This agreement shall be governed by the laws of the
State of Minnesota.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties and supersedes all proposals, commitments, writings,
negotiations and understandings, oral and written, and all other communications
between the parties relating to the subject matter of this Agreement. This
Agreement may not be amended or otherwise modified except in writing duly
executed by all of the parties. A waiver by any party of any breach or
violation of this Agreement shall not be deemed or construed as a waiver of any
subsequent breach or violation thereof.
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<PAGE>
10. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same document.
11. SEVERABILITY. Should any part, term or condition hereof be declared
illegal or unenforceable or in conflict with any other law, the validity of the
remaining portions or provisions of this Agreement shall not be affected
thereby, and the illegal or unenforceable portions of the Agreement shall be and
hereby are redrafted to conform with applicable law, while leaving the remaining
portions of this Agreement intact.
12. FORCE MAJEURE. No party shall be deemed to have breached this
Agreement or be held liable for any failure or delay in the performance of all
or any portion of its obligations under this Agreement if prevented from doing
so by a cause or causes beyond its control. Without limiting the generality of
the foregoing, such causes include acts of God or the public enemy, fires,
floods, storms, earthquakes, riots, strikes, lock-outs, wars and war-operations,
restraints of government power, communication line or other utility failure or
other circumstances beyond such party's control, or by reason of the judgment,
ruling or order of any court or agency of competent jurisdiction or change of
law or regulation subsequent to the execution of this Agreement.
44
<PAGE>
13. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 7, this
Agreement is solely for the benefit of the parties and their respective
successors and assigns. There are no third party beneficiaries of or to this
Agreement.
14. HEADINGS. Section headings are for convenience only and do not
control or affect the meaning or interpretation of any terms or provisions of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MANOR CARE, INC.
By: /s/ James H. Rempe
-------------------------------------
Its Sr. V.P.
----------------------------------
IN HOME HEALTH, INC.
By: /s/ Mark L. Gildea
-------------------------------------
Its CEO
----------------------------------
45
<PAGE>
EXHIBIT A
SERVICE TO BE PROVIDED
1. LEGAL SERVICES. Manor Care will provide ongoing legal services
necessary to support the day-to-day business activities of In Home. Such
services include, but are not limited to, legal support for development and
implementation of a corporate compliance plan, acquisitions, preparation and
filing of necessary reporting disclosures with the SEC and provision of public
reports to investors upon request, labor and contracting matters. This
Agreement constitutes prior written approval of In Home for Manor Care to engage
outside legal services on behalf of In Home when necessary and to supervise such
outside counsel. In Home will be billed directly for the cost of outside
counsel.
2. CASH MANAGEMENT. Manor Care will provide ongoing cash management
services to maintain cash resources required to carry out daily operating
activities. Services include daily case concentration of depository receipts and
daily funding of disbursement accounts for payroll and general operating
expenditures. Additionally, all cash delivered to Manor Care will earn interest
as provided in that certain Inter-Company Debt and Credit Agreement entered into
between the parties.
3. FINANCE AND ACCOUNTING SERVICES. Manor Care will assist In Home in
conducting any internal audits and in formulating and implementing various
financial plans.
4. INSURANCE SERVICES. Manor Care will assist in providing to In Home
general and professional liability, workers' compensation, comprehensive
automobile liability and property insurance.
5. INFORMATION SERVICES. Manor Care will provide In Home with certain
information support development and planning services.
6. HUMAN RESOURCES & TRAINING. Manor Care will provide In Home with
support in maintaining and expanding In Home's work force through assistance in
development of hiring programs, training programs, and maintenance of an
employee database as may be required by federal, state and local mandates.
7. EMPLOYEE BENEFIT PLANS. Manor Care will, on behalf of In Home,
provide advice and assistance, as needed, with respect to employee benefit
plans, including among others, health, welfare and retirement plans, for the
benefit of In Home employees.
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<PAGE>
8. REAL ESTATE. Manor Care will assist In Home in meeting its expansion
requirements by identifying office space, home health care and hospice locations
and negotiating leases and terms of purchase agreements.
9. OTHER SERVICES. As may be requested by In Home, Manor Care will, from
time to time, provide services not described above, including, but not limited
to, Government Relations, Purchasing and Reimbursement (the "Other Services").
47
<PAGE>
EXHIBIT 11
IN HOME HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
PRIMARY:
Income (loss) applicable to common stock $(3,501) $ 1,621 $ 247
------ ------ ------
------ ------ ------
Shares:
Weighted average number of shares
outstanding during the period 16,340 16,062 15,656
Shares issuable in connection with
stock options and warrants less
shares purchasable from proceeds 125 242 357
------ ------ ------
Total shares 16,465 16,304 16,013
------ ------ ------
------ ------ ------
Income (loss) per common and
common equivalent share $ (.21) $ .10 $ .02
------ ------ ------
------ ------ ------
ASSUMING FULL DILUTION:
Income (loss) applicable to common stock $(3,501) $ 1,621 $ 247
------ ------ ------
------ ------ ------
Shares:
Weighted average number of shares
outstanding during the period 16,340 16,062 15,656
Shares issuable in connection with
stock options and warrants less
shares purchasable from proceeds 125 352 357
------ ------ ------
Total shares 16,465 16,414 16,013
------ ------ ------
------ ------ ------
Income (loss) per common and
common equivalent share $ (.21) $ .10 $ .02
------ ------ ------
------ ------ ------
</TABLE>
48
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
In Home Health, Inc.
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 33-07511, 33-38504, 33-75876 and 33-75830) of our report dated
November 12, 1996, appearing in this Annual Report on Form 10-K of In Home
Health, Inc. for the year ended September 30, 1996.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 24, 1996
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS, THE STATEMENTS OF OPERATIONS AND THE STATEMENTS OF CASH
FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 18617
<SECURITIES> 0
<RECEIVABLES> 42238
<ALLOWANCES> 802
<INVENTORY> 0
<CURRENT-ASSETS> 44053
<PP&E> 19338
<DEPRECIATION> 9437
<TOTAL-ASSETS> 82683
<CURRENT-LIABILITIES> 33170
<BONDS> 0
0
18766
<COMMON> 165
<OTHER-SE> 26593
<TOTAL-LIABILITY-AND-EQUITY> 82683
<SALES> 0
<TOTAL-REVENUES> 125086
<CGS> 0
<TOTAL-COSTS> 67108
<OTHER-EXPENSES> 59792
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (649)
<INCOME-PRETAX> (1165)
<INCOME-TAX> (183)
<INCOME-CONTINUING> (982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (982)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> 0
</TABLE>
