<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 1997
COMMISSION FILE NO. 0-17490
IN HOME HEALTH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1458213
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 CARLSON PARKWAY
SUITE 500
MINNETONKA, MINNESOTA 55305-5214
(Address of principal executive offices)
(Zip Code)
612-449-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X (1) No
-- --
As of March 31, 1997, the number of shares outstanding of the registrant's
common stock, $.01 par value was 16,295,897 shares.
<PAGE>
IN HOME HEALTH, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
March 31, 1997 and September 30, 1996 2-3
Consolidated Statements of Operations -
For the three and six months ended March 31,
1997 and 1996 4
Consolidated Statements of Cash Flows -
For the six months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11-14
PART II. OTHER INFORMATION 15
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
March 31, 1997 Sept. 30,
(Unaudited) 1996
-------------- --------
Current Assets:
Cash and cash equivalents $11,910 $18,617
Accounts receivable, net of allowances
of $701 and $802 in March 1997 and
September 1996, respectively 18,787 19,418
Prepaid income tax 578 1,037
Deferred income tax 3,255 3,389
Prepaid expenses and other current assets 1,408 1,592
------- --------
Total current assets 35,938 44,053
------- --------
Property:
Furniture and equipment 9,833 9,954
Computer equipment and software 8,600 8,561
Leasehold improvements 907 823
------- --------
Total 19,340 19,338
Accumulated depreciation (10,635) (9,437)
------- --------
Property - net 8,705 9,901
------- --------
Other Assets:
Accounts receivable 24,039 22,018
Goodwill, net 5,558 5,590
Other assets 1,043 1,121
------- --------
Total other assets 30,640 28,729
------- --------
Total Assets $75,283 $82,683
------- --------
------- --------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 1997 Sept. 30,
(Unaudited) 1996
-------------- --------
Current Liabilities:
Current maturities of long-term debt $ 1,124 $ 1,455
Accounts payable 2,811 3,662
Accounts payable - related party 894 1,006
Accrued liabilities:
Third party 12,448 13,568
Compensation 4,712 6,859
Insurance 6,372 6,133
Other 440 487
------- --------
Total current liabilities 28,801 33,170
------- --------
Long-Term Debt 549 1,080
Deferred Revenue 609 820
Deferred Rent Payable 225 267
Deferred Income Tax 1,787 1,822
Commitments and Contingencies -- --
Redeemable Convertible Preferred Stock -
$1.00 par value, $20,000 redemption value,
authorized 200 shares; issued and outstanding
March 31 and September 30 - 200 shares 18,913 18,766
Shareholders' Equity:
Preferred stock - authorized 800 shares -- --
Common stock - $.01 par value:
authorized - 40,000 shares;
issued and outstanding -
March 31 - 16,296 shares;
September 30 - 16,541 shares 163 165
Additional paid-in capital 23,475 23,978
Retained earnings 761 2,615
------- --------
Total shareholders' equity 24,399 26,758
------- --------
Total Liabilities and Shareholders' Equity $75,283 $82,683
------- --------
------- --------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
March 31 March 31
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenue (net of Medicare reserves of
$210, $400, $451, $850 for the
respective periods) $31,375 $31,792 $62,960 $64,260
------- ------- ------- -------
Operating Expenses:
Direct costs of revenue
(primarily payroll related costs) 17,717 17,141 34,898 35,027
General, administrative
and selling expenses 14,376 14,569 28,884 29,042
------- ------- ------- -------
Total operating expenses 32,093 31,710 63,782 64,069
------- ------- ------- -------
Income (Loss) From Operations (718) 82 (822) 191
------- ------- ------- -------
Interest:
Interest income 180 353 403 558
Interest expense (63) (107) (152) (241)
------- ------- ------- -------
Net interest income 117 246 251 317
------- ------- ------- -------
Income (Loss) Before Income Taxes (601) 328 (571) 508
Income Tax Expense (Benefit) (80) 202 (64) 284
------- ------- ------- -------
Net Income (Loss) $ (521) $ 126 $ (507) $ 224
------- ------- ------- -------
------- ------- ------- -------
Loss Applicable to Common Stock $(1,194) $ (546) $(1,854) $ (950)
------- ------- ------- -------
------- ------- ------- -------
Loss Per Common and
Common Equivalent Share $ (.07) $ (.03) $ (.11) $ (.06)
------- ------- ------- -------
------- ------- ------- -------
Weighted Average Common
and Common Equivalent
Shares Outstanding 16,322 16,443 16,366 16,458
------- ------- ------- -------
------- ------- ------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
1997 1996
---- ----
Cash Flows From Operating Activities:
Net income (loss) $ (507) $ 224
Adjustments:
Depreciation and amortization 1,561 1,620
Accounts receivable (1,390) (1,473)
Prepaid expenses and other assets 222 126
Accounts payable (963) 55
Accrued liabilities (3,075) 4,330
Deferred liabilities (154) (1,158)
------- -------
Net cash provided (used) by
operating activities (4,306) 3,724
------- -------
Cash Flows From Investing Activities:
Business acquisitions (47) --
Acquisition of property (137) (785)
Advances to officers and employees 350 10
------- -------
Net cash provided (used) by
investing activities 166 (775)
------- -------
Cash Flows From Financing Activities:
Payment of long-term debt (862) (998)
Issuance (repurchase) of common stock (505) 24
Issuance of preferred stock and warrants -- 17,720
Preferred dividends paid (1,200) (1,053)
------- -------
Net cash provided (used) by
financing activities (2,567) 15,693
------- -------
Cash and Cash Equivalents:
Net increase (decrease) (6,707) 18,642
Beginning of period 18,617 3,665
------- -------
End of period $11,910 $22,307
------- -------
------- -------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 152 $ 241
------- -------
------- -------
Income taxes $ 24 $ 1,167
------- -------
------- -------
Noncash Investing and Financing Activities:
Property acquired by capital lease $ -- $ 128
------- -------
------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal, recurring accruals) necessary to present fairly
the financial position of the Company and its subsidiaries as of March 31,
1997 and the results of operations for the three and six months and cash
flows for the six month periods ended March 31, 1997 and 1996. The results
of operations for any interim period are not necessarily indicative of the
results for the year. These interim consolidated financial statements should
be read in conjunction with the Company's annual financial statements and
related notes in the Company's Form 10-K.
2. LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Primary loss per common and common equivalent share is computed by
dividing the loss applicable to common stock, as adjusted for the dividends
and accretion on the Preferred Stock 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. Loss per share assuming
full dilution would be substantially the same.
Primary loss per share for the three and six months ended March 31,
1997 and 1996 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Six Months
------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding:
Weighted average outstanding 16,296 16,290 16,338 16,288
Shares issuable in connection with stock
options and warrants less shares
purchasable from proceeds 26 153 28 170
------ ----- ----- ------
Adjusted outstanding 16,322 16,443 16,366 16,458
------ ----- ----- ------
------ ----- ----- ------
Adjusted loss applicable to
common stockholders:
Net income (loss) $ (521) $ 126 $ (507) $ 224
Dividends on preferred stock (600) (599) (1,200) (1,053)
Preferred stock accretion (73) (73) (147) (121)
------ ----- ----- ------
Loss applicable to common stock $(1,194) $ (546) $(1,854) $ (950)
------ ----- ----- ------
------ ----- ----- ------
Loss per common and common
equivalent share $ (.07) $ (.03) $ (.11) $ (.06)
------ ----- ----- ------
------ ----- ----- ------
</TABLE>
3. ACQUISITIONS
Effective October 28, 1996, the Company acquired certain assets of
Community Health Professionals, Inc., a Maryland corporation engaged in
providing home care staffing services and all of the common stock of Health
Careers Institute, Inc., a Maryland corporation engaged in the business of a
post-secondary, non-
<PAGE>
degree school for various health care related classes. The purchase price
totaled $35,000 and the acquisitions were accounted for as purchases for
financial reporting purposes. Goodwill of $47,000 has been recorded as of
March 31, 1997.
Neither of the acquisitions are individually significant and the
operations of the acquired businesses are included in the statement of
operations from the dates of acquisition.
4. COMMITMENTS AND CONTINGENCIES
Approximately 62% of revenue for the six months ended March 31, 1997
was derived from services provided to Medicare beneficiaries through cost
reimbursement programs. 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
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
<PAGE>
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 $18.2 million of costs as of
March 31, 1997. There was an additional $18.2 million of costs at March 31,
1997 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs. Together these amounts ($36.4 million at
March 31, 1997) comprise the total amount the Company considers to be
disputed costs. The major cost category in dispute, accounting for
approximately 59% 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 $36.4 million at March 31, 1997 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), 1991
($2.1 million) and $2.6 million for the six months ended March 31, 1997. 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 68% 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
<PAGE>
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 1996 a favorable
ruling on the physical therapist issue by the Health and Human Services
Provider Reimbursement Review Board (PRRB). In May 1996, this ruling was
reversed by the Health Care Financing Administration. The Company appealed
the decision to the U.S. Federal District Court in Minneapolis. During the
second quarter of fiscal 1997, the Company was notified that the U.S.
District Court granted the Company's motion to set aside the decision by the
Health Care Financing Administration which denied the Company reimbursement
of some of its costs for providing physical therapy services provided in
1992. The Court found that the Health Care Financing Administration had
provided an insufficient explanation of its decision, and therefore, the
decision was arbitrary and capricious. The Court remanded the matter to the
Secretary of the Health Care Financing Administration for further proceedings
consistent with its order. 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 has appealed the
decision to the U.S. Federal District Court in Minneapolis.
The Company, based on its analysis process, believes that recovery of
$7,678,000 of total disputed costs (including the extrapolated impact) may
not be probable and, accordingly, has established reserves which totaled that
amount as of March 31, 1997. 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 March 31, 1997 were
$34,490,000, including the receivables (net of reserves) for disputed costs
of $28,760,000. As of March 31, 1997 the Company had received $12,448,000 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 $24,039,000 as of March 31, 1997 have been classified as a
non-current asset.
5. STOCK BASED COMPENSATION
In fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), 'Accounting for Stock-Based
Compensation'. SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and nonemployees and encourages a new
method of accounting for employee stock compensation awards based on their
estimated fair value at the date of grant and the recognition of associated
compensation expense over the service period in the income statement. Companies
are permitted to continue following Accounting Principles Board Opinion No. 25
<PAGE>
(APB 25), 'Accounting for Stock Issued to Employees', but must disclose pro
forma net income and pro forma earnings per share, as if the fair value
method of SFAS 123 had been applied, in a footnote to the financial
statements. The fair value measurement and recognition provisions of SFAS
123 must be applied to all stock-based arrangements with nonemployees. As
permitted by SFAS 123, the Company has elected to continue following the
guidance of APB 25 for measurement and recognition of stock-based
transactions with employees. SFAS 123 disclosures are not required on an
interim reporting basis unless a complete set of financial statements is
presented.
6. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
which will be effective in fiscal 1998. The Company does not expect the
impact of the new standard to have a material effect on the financial
statements.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's level of operation and financial condition. This discussion should
be read with the consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
Revenue for the three and six months ended March 31, 1997 decreased 1%
and 2%, respectively, over the same periods in the prior year. The decline
in revenue is primarily a result of a 14% decrease in Visit division volume
through March 31, 1997, offset by a 38% increase in Extended Hours, Infusion
and Hospice revenue.
Direct costs of revenue, as a percentage of sales, were 56% and 55%
for the three and six months ended March 31, 1997 versus 54% and 55% for the
same periods of the previous year. Increase for the three months ended
March 31, 1997 is a result of margin pressures in the Extended Hours,
Infusion and Hospice divisions.
General, administrative and selling expenses for the three and six
months ended March 31, 1997 were 46%, respectively, versus 46% and 45% for
the same periods of the previous year. These expenses have increased as a
percentage of sales as a result of the decrease in revenue without a
corresponding reduction in general, administrative and selling expenses.
Net interest income for the three and six month periods ended March 31,
1997 was $117,000 and $251,000 versus $246,000 and $317,000 for the same
periods of the previous year. The decrease in interest income is due to less
interest bearing cash and cash equivalents resulting from approximately
$4.9 million in payments for previously accrued settlements and severance
agreements and repayment of prior year Medicare overpayments.
Net loss totaled $507,000 for the six months ended March 31, 1997
versus net income of $224,000 through the six month period ended March 31,
1996. Net loss for the three months ended March 31, 1997 totaled $521,000
versus net income of $126,000 for the same period of the prior year. The
net loss is a result of profit margins below expectations on Extended Hours,
Hospice and Infusion revenue coupled with a decline in Visit division volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $6,707,000 to
$11,910,000 at March 31, 1997. During the first quarter of fiscal 1997 the
Company paid out $2.3 million for previously accrued settlements and
severance agreements with former employees, and $2.6 million in repayments of
Medicare overpayments during fiscal 1996. The Company also paid $1.2 million
in preferred dividends to Manor Healthcare Corp. for the six months ended
March 31, 1997. In addition, total accounts receivable increased
$1.4 million for the six months ended March 31, 1997 principally as a result
of increases in
<PAGE>
disputed costs with Medicare, timing of payments from Medicare and an
increase in receivables related to the hospice program.
Approximately 62% of revenue for the six months ended March 31, 1997
was derived from services provided to Medicare beneficiaries through cost
reimbursement programs. 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
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.
<PAGE>
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 $18.2 million of costs as of
March 31, 1997. There was an additional $18.2 million of costs at March 31,
1997 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs. Together these amounts ($36.4 million at
March 31, 1997) comprise the total amount the Company considers to be
disputed costs. The major cost category in dispute, accounting for
approximately 59% 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 $36.4 million at March 31, 1997 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), 1991
($2.1 million) and $2.6 million for the six months ended March 31, 1997. 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 68% 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.
<PAGE>
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 1996 a favorable
ruling on the physical therapist issue by the Health and Human Services
Provider Reimbursement Review Board (PRRB). In May 1996, this ruling was
reversed by the Health Care Financing Administration. The Company appealed
the decision to the U.S. Federal District Court in Minneapolis. During the
second quarter of fiscal 1997, the Company was notified that the
U.S. District Court granted the Company's motion to set aside the decision by
the Health Care Financing Administration which denied the Company
reimbursement of some of its costs for providing physical therapy services
provided in 1992. The Court found that the Health Care Financing
Administration had provided an insufficient explanation of its decision, and
therefore, the decision was arbitrary and capricious. The Court remanded the
matter to the Secretary of the Health Care Financing Administration for
further proceedings consistent with its order. 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 has appealed the
decision to the U.S. Federal District Court in Minneapolis.
The Company, based on its analysis process, believes that recovery of
$7,678,000 of total disputed costs (including the extrapolated impact) may
not be probable and, accordingly, has established reserves which totaled that
amount as of March 31, 1997. 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 March 31, 1997 were
$34,490,000, including the receivables (net of reserves) for disputed costs
of $28,760,000. As of March 31, 1997 the Company had received $12,448,000 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 $24,039,000 as of March 31, 1997 have been classified as a
non-current asset.
The Company has letter of credit facilities from a commercial bank
totaling $3,348,000. These credit facilities are collateralized by secured
investments and will expire on December 15, 1997.
The Company's current cash and cash equivalents are expected to
provide sufficient capital to fund the Company's operations and expansion
plans through fiscal 1997.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - None.
ITEM 2 - CHANGE IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
The Company held its Annual Meeting of Shareholders on
March 6, 1997. The shareholders present in person or
in proxy voted to re-elect the existing board of
directors. Each nominee received the number of votes
indicated below. There were no broker non-votes with
respect to the election of directors.
Nominees Votes For Withheld
-------- ---------- --------
Mark L. Gildea 17,765,753 352,537
James J. Lynn 17,753,408 364,882
Donald C. Tomasso 17,789,684 328,606
Joseph Buckley 17,780,325 337,965
James M. Rempe 17,787,899 330,391
The shareholders approved the amendment to the 1991 Employee Stock
Purchase Plan by a vote of 17,357,712 shares in favor, 569,663 shares
against, 81,300 shares abstaining and zero broker non-voted.
The shareholders ratified the selection of Deloitte & Touche LLP as
the Company's independent auditors for 1997 by a vote of 17,928,785
shares in favor, 126,227 shares against, 63,278 abstaining and zero
shares broker non-voted.
ITEM 5 - OTHER INFORMATION - None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q report to be signed on its behalf
by the undersigned thereunto duly authorized.
In Home Health, Inc.
------------------------
Registrant
Date: May 8, 1997 /s/Mark L. Gildea
------------------------
Mark L. Gildea
Chief Executive Officer
Date: May 8, 1997 /s/Thomas R. Gross
------------------------
Thomas R. Gross
Chief Financial Officer
<PAGE>
EXHIBIT (11)
IN HOME HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Net Income (loss) $ (521) $ 126 $ (507) $ 224
Preferred stock accretion (73) (73) (147) (121)
Dividends on preferred stock (600) (599) (1,200) (1,053)
-------- --------- --------- --------
Loss applicable to common stock $ (1,194) $ (546) $ (1,854) $ (950)
-------- --------- --------- --------
-------- --------- --------- --------
Shares:
Weighted average number of shares
outstanding during the period 16,296 16,290 16,338 16,288
Shares issuable in connection with stock
options and warrants less shares
assumed purchasable from proceeds 26 153 28 170
-------- --------- --------- --------
Total shares 16,322 16,443 16,366 16,458
-------- --------- --------- --------
-------- --------- --------- --------
Loss per Common and
Common Equivalent Share $ (.07) $ (.03) $ (.11) $ (.06)
-------- --------- --------- --------
-------- --------- --------- --------
ASSUMING FULL DILUTION (1):
Net Income (loss) $ (521) $ 126 $ (507) $ 224
Preferred stock accretion (73) (73) (147) (121)
Dividends on preferred stock (600) (599) (1,200) (1,053)
-------- --------- --------- --------
Loss applicable to common stock $ (1,194) $ (546) $ (1,854) $ (950)
-------- --------- --------- --------
-------- --------- --------- --------
Shares:
Weighted average number of shares
outstanding during the period 16,296 16,290 16,338 16,288
Shares issuable in connection with stock
options and warrants less shares
assumed purchasable from proceeds 26 157 28 170
-------- --------- --------- --------
Total shares 16,322 16,447 16,366 16,458
-------- --------- --------- --------
-------- --------- --------- --------
Loss per Common and
Equivalent Share $ (.07) $ (.03) $ (.11) $ (.06)
-------- --------- --------- --------
-------- --------- --------- --------
</TABLE>
(1) Because assumed conversion of redeemable preferred stock would be
antidilutive, fully diluted earnings per share is equivalent to primary
earnings per share with respect to the preferred stock.
17
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,910
<SECURITIES> 0
<RECEIVABLES> 43,527
<ALLOWANCES> 701
<INVENTORY> 0
<CURRENT-ASSETS> 35,938
<PP&E> 19,340
<DEPRECIATION> 10,635
<TOTAL-ASSETS> 75,283
<CURRENT-LIABILITIES> 28,801
<BONDS> 0
0
18,913
<COMMON> 163
<OTHER-SE> 24,236
<TOTAL-LIABILITY-AND-EQUITY> 75,283
<SALES> 0
<TOTAL-REVENUES> 62,960
<CGS> 0
<TOTAL-COSTS> 34,898
<OTHER-EXPENSES> 28,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (251)
<INCOME-PRETAX> (571)
<INCOME-TAX> (64)
<INCOME-CONTINUING> (507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
