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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO 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, 1997
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
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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.
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Based on the closing sale price of $1.3125 on the NASDAQ National Market System,
as of November 13, 1997 the aggregate market value of the registrant's common
stock held by nonaffiliates was $12,572,325.
As of November 13, 1997 the number of shares outstanding of the registrant's
common stock, $.01 par value was 16,398,781 shares.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held March 4, 1998, (the "1998 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.
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TABLE OF CONTENTS
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Page(s)
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PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . 10
PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters . . . . . . . 11
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 12-17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 18-34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART III Item 10. Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 35
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 35
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . 35-36
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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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 38
offices and four pharmacies in 19 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. In October 1995, the Company
consummated transactions with ManorCare Health Services, a wholly owned
subsidiary of Manor Care, Inc., whereby ManorCare Health Services 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
ManorCare Health Services contemplates that the Company will continue to operate
in the lines of business in which it currently engages.
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 1997, approximately 51% of the Company's revenue was derived
from paraprofessional services provided by home health aides and
homemaker/companions, 22% was derived from medical/surgical nursing, 9% was
attributable to rehabilitation services, 5% from infusion pharmacy products, 2%
from critical care nursing, 9% 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:
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SEPTEMBER 30
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1997 1996 1995
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Medicare, cost reimbursement (1) 56% 70% 76%
Insurance and County Governments 19% 14% 12%
Private payors 16% 14% 12%
Medicare Hospice Benefit, per diem based 9% 2% -
--- --- ---
100% 100% 100%
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(1) Fiscal 1997 revenue was impacted by the $17,101,000 adjustment to
Medicare reserves. See Note 5 to the financial statements.
The Company's goal is to reduce the cost reimbursement Medicare program
revenue percentage by focusing on increasing the revenue from potentially more
profitable payor sources.
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.
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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 clients.
OPERATING DIVISIONS
The Company has 38 office locations consisting of 28 branches and 10
satellites. Each of the Company's branches has two divisions, a Visit Division
and an Extended Hours Division. In addition, 24 branches have a Hospice
Division. 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.
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.
The Company also provides pharmaceutical drugs, fluids and supplies
through its infusion pharmacies. The Company operates four infusion pharmacies
which operate with one or more full time pharmacists who collaborate with the
client's physician, nurse and other health care providers.
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
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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, account
representatives 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 account
representatives to offer clinical or technical expertise. The account
representatives 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. Each market is responsible for making contractual arrangements with
hospitals, HMOs, governments, clients and large physician groups.
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 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.
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, while 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, the Company's 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.
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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.
As a provider of services under the Medicare and Medicaid programs,
the Company is subject to the Medicare and Medicaid anti-kickback statute, also
known as "fraud and abuse laws." These laws prohibit any offer, payment,
solicitation or receipt of any form of remuneration to induce the referral of
business reimbursable under Medicare or state health programs or in return for
the purchase, lease or order of items or services covered by Medicare or state
health programs. Violations of the fraud and abuse laws can result in the
imposition of substantial civil and criminal penalties and, potentially,
exclusion from Medicare and state health programs. In addition, several states
in which the Company operates have laws that prohibit certain direct or indirect
payments or fee-splitting arrangements between health care providers if such
arrangements are designed to induce or to encourage the referral of patients to
a particular provider.
Congress adopted legislation in 1989, known as the "Stark"
legislation, that generally prohibits or restricts a physician from referring a
Medicare beneficiary's clinical laboratory services to any entity in which such
physician (or a member of his immediate family) has an ownership or individual
interest or with which such physician has a financial relationship, and
prohibits such entity from billing for or receiving reimbursement on account of
such referral, unless a specified exemption is available. Additional
legislation became effective as of January 1, 1993 known as "Stark II,"
expanding the Stark legislation to referrals of services eligible for Medicaid
reimbursement and "designated health services," including home health services,
durable medical equipment and outpatient prescription drugs. Pursuant to Stark
II, physicians who own an interest in the Company or who are compensated by the
Company will be prohibited from seeking reimbursement for services rendered to
such patients unless an exception applies. Ownership interests are excepted if
the interest held is a publicly traded security in a company having
shareholders' equity of at least $75 million.
Several of the states in which the Company conducts business have
enacted statutes similar in scope and purpose to the federal fraud and abuse
laws and the Stark laws. There is no authority interpreting the state fraud and
abuse laws in a manner that applies to the Company's operations. These laws are
generally based upon the federal fraud and abuse law, so that the interpretation
of the federal law may govern the application of the state laws.
The federal government has increased significantly the financial and
human resources allocated to enforcing the fraud and abuse laws. In May 1995,
the Clinton Administration instituted Operation Restore Trust ("ORT"), a health
care fraud and abuse initiative focusing on nursing homes, home health care
agencies and durable medical equipment companies located in the five states with
the largest Medicare populations. The states initially targeted included
California, Florida, Illinois, New York and Texas. ORT has been responsible for
millions of dollars in civil and criminal restitution, fines, recovery of
overpayments and the exclusion of a number of individuals and corporations from
the Medicare program. ORT has been expanded to all fifty states, with a
specific concentration on twelve states including Arizona, Colorado, Georgia,
Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee,
Virginia and Washington. Private insurers and various state enforcement
agencies also have increased their scrutiny of health care providers' practices
and claims, particularly in the home health and durable medical equipment areas.
No assurance can be given that the practices of the Company, if reviewed, would
be found to be in compliance with such laws or with any future laws, as such
laws ultimately may be interpreted.
Additionally, the Health Care Financing Administration of the U.S.
Department of Health and Human Services ("HCFA"), the federal agency
responsible for the rules governing Medicare and Medicaid, has implemented
"Wedge Surveys" in at least 13 states, including Connecticut, Florida,
Tennessee, Illinois, Indiana, Massachusetts, Minnesota, Ohio, Oklahoma,
Texas, Utah, Virginia and Wyoming. In these surveys, HCFA completes ORT-type
surveys on a much smaller scale. Generally, HCFA reviews a small, limited
number of claims over a two-month period and extrapolates the percentage
which was paid in error to all claims paid for the period under review.
Assuming the reviewer uncovered nothing significant, the home health agency
then has the option to repay the amount determined by HCFA or undergo a
broader review of its claims. If the survey uncovers significant problems,
the matter may be referred for further review.
While the Company believes that it is in material compliance with the
fraud and abuse laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. It is the
Company's policy to monitor its compliance with such requirements and to take
appropriate actions to ensure such compliance.
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Although
Congress has failed to pass comprehensive health care reform legislation, the
Company anticipates that Congress
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and state legislatures will continue to review and assess alternative health
care delivery and payment systems and will in the future propose and adopt
legislation effecting fundamental changes in the health care delivery system.
Legislative debate regarding changes to the health care delivery system and
payment systems is expected to continue in the future. The recently passed
Balanced Budget Act of 1997 ("Budget Act") contains numerous changes in
reimbursement to health care providers and is expected to have a significant
impact on the health care industry. Additionally, the level of net revenues
and profitability of the Company, like those of other health care providers,
will also be effected by the continuing efforts of other payors to contain or
reduce the costs of health care by lowering reimbursement rates, increasing
case management review of services, negotiating reduced contract pricing and
capitation arrangements.
Congress passed the Budget Act as part of its plan to reduce the
growth in Medicare expenditures to health care providers. The Budget Act
contains provisions which impact a number of types of health care providers.
The following provisions, which apply to home health care providers are a few of
the provisions, discussed in further detail below, which are expected to effect
the Company in the future: (i) implementation of a prospective payment system
for home nursing services by October 1999 and (ii) reductions in cost limits and
implementation of a per-patient cap for home nursing services.
Currently, Medicare reimburses participating Medicare-certified home
health agencies for the reasonable costs incurred to provide covered visits to
eligible beneficiaries, subject to certain cost limits which vary according to
geographic regions of the country. The Budget Act requires HCFA to implement a
prospective payment system for home health agencies by October 1, 1999, with up
to a four-year phase-in period. Prospective rates determined by Health and
Human Services ("HHS") would reflect a 15% reduction to the cost limits and
per-patient limits as of September 30, 1999. In the event the implementation
deadline is not met, the reduction will be applied to the reimbursement system
then in place. The impact of such a change, if implemented, on the Company's
results of operations cannot be predicted with any certainty at this time and
would depend, to a large extent, on the reimbursement rates for home nursing
established on an interim basis and under the prospective payment system. There
can be no assurances that such reimbursement rates, if enacted, would cover the
costs incurred by the Company to provide home nursing services. Two of the
Company's markets are participating in a test program related to proposed
legislation to amend the current cost reimbursement program.
Until prospective payment takes effect on October 1, 1999, the Budget
Act sets up an interim payment system ("IPS") that provides for lowering of
reimbursement limits for home health visits. As amended, cost limit increases
for fiscal 1995 and 1996 were eliminated. In addition, for cost reporting
periods beginning on October 1, 1997, home health agencies cost limits will be
determined as the lesser of (i) their actual costs (ii) cost limits based on
105% of median costs of freestanding home health agencies or (iii) an
agency-specific per-patient cost cap, based on 98% of 1994 costs adjusted for
inflation. The Company is unable to determine the effect of the IPS until HCFA
finalizes related regulatory guidance on the implementation of the IPS. The new
cost limits will apply to the Company for the cost reporting period beginning
October 1, 1997. A reduction in these cost limits could have a significant
effect on the Company's results of operations; however, the effect of such
reductions cannot be predicted with any level of certainty.
Various other provisions included in the Budget Act may have an impact
on the Company's business and results of operations. Venipuncture will no
longer be considered a covered home care service unless it is performed in
connection with other skilled nursing services. The Company is currently
assessing the potential impact on this provision; however, the effect of such
reductions cannot be predicted with any level of certainty at this time.
Additionally, the Company will be required to have surety bonds of at least
$50,000 for each Medicare-certified nursing agency.
INSURANCE
General and professional liability insurance is maintained by the
Company which includes coverage up to $100,000,000 per location. 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.
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EMPLOYEES
On September 30, 1997, the Company employed 1,250 persons on a
full-time basis and approximately 2,250 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 "Earnings Per Share" which is
effective for reporting periods ending after December 15, 1997. Earlier
adoption is not permitted. The Company does not expect the new standard to have
a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No.131 "Disclosures about Segments of
an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Company has not determined the impact of
adoption of the standard.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and members of the Board of Directors for the
Company are as follows:
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NAME AGE POSITION(S) HELD
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Wolfgang von Maack (4) 57 Chief Executive Officer, President and Director
Thomas R. Gross 44 Chief Financial Officer
Kari K. Schell 38 Vice President - Treasurer and Corporate Secretary
James J. Lynn 55 Director
Joseph R. Buckley (1) (2) (3) 50 Director and Chairman
James H. Rempe (1) (2) (3) 67 Director
Donald C. Tomasso (1) (3) 52 Director
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(1) Messrs. 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.
(4) Mr. von Maack was elected to the Board of Directors effective June 6,
1997.
Mr. von Maack has served as President and Chief Executive Officer of
the Company since May 1997. He has also been Senior Vice President, Healthcare
Services of ManorCare Health Services, Inc. since June 1990 and was Vice
President, Operations of ManorCare Health Services, Inc. from March 1988 to June
1990.
Mr. Gross has served as Vice President - Controller of the Company
since September 1993 and has been Chief Financial Officer since March 1997.
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.
Ms. Schell has served as Vice President - Treasurer and Corporate
Secretary since March 1997, Treasurer from March 1996 to March 1997, and General
Accounting Manager from November 1992 to March 1996. Previously she was
employed by Super Valu Stores, Inc. for two years and by Deloitte & Touche LLP
for nine years in various management and accounting positions.
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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 ManorCare Health
Services, Inc. and Manor Care, Inc. since March 1996, Director of Vitalink
Pharmacy Services, Inc. since July 1996, and was President, Assisted Living
Division of ManorCare Health Services, Inc. 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.
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 ManorCare Health Services, Inc. since December 1980 and with
Choice Hotels International, Inc. and its predecessors from February 1981 until
November 1996. He is a Director of Vitalink Pharmacy Services, Inc. and served
as its Secretary from January 1983 to January 1997.
Mr. Tomasso is an Executive Vice President of Manor Care, Inc. and
President of ManorCare Health Services, Inc. since September 1996, and
previously as President, Long Term Care Division, of ManorCare Health Services,
Inc. from February 1995 to August 1996, as President and Chief Operating Officer
of ManorCare Health Services, Inc. from May 1991 to February 1995 and as a
Director of ManorCare Health Services, Inc. since June 1991. He was Chairman
and Chief Executive Officer of Vitalink Pharmacy Services, Inc. from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995.
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 38 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
The Company has several pending cases which challenge the disallowance of
reimbursement by the fiscal intermediaries of the U.S. Department of Health and
Human Services ("HHS") for various categories of costs incurred by the Company
in providing services to Medicare beneficiaries. These cases are pending before
HHS's Provider Reimbursement Review Board ("PRRB"), an administrative tribunal,
or before the United States District Court for the District of Minnesota
("District Court"). Each case involves specific Company branch offices for
specific fiscal years, but has precedential value for the same type of costs for
other branch office fiscal years. Following a PRRB ruling, either the Company
or the fiscal intermediary may request that HHS review the PRRB decision. If
HHS declines review, the PRRB's decision is viewed as the final agency decision.
If HHS reviews the PRRB decision, the HHS decision based on that review is the
final agency decision. The Company may then seek judicial review in United
States District Court. The pending cases are summarized below:
1. The Company has various cases challenging disallowances of costs
related to the Company's Home Care Coordinators/Community Liaisons ("HCCs") and
related supervisory personnel. The disputes concern whether the HCCs in certain
of the Company's offices sufficiently documented their activities such that
allegedly non-reimbursable activities could be distinguished from reimbursable
activities. The disputes concern costs incurred from July 1, 1988 through
September 30, 1994 and amount to $10.1 million of reimbursement.
In the first case, in September 1996, in response to an August 1996
unfavorable ruling by HHS, the Company filed a complaint in U.S. District Court.
This case involves certain offices in fiscal years ending September 30, 1989,
1990, 1991 and 1992, and has a reimbursement impact of $1.7 million. In August
1997, the U.S. District Court ruled that the Company was not entitled to
Medicare reimbursement of HCC costs incurred by some of its offices prior to
June 1992, finding that the documentation was insufficient to
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differentiate between reimbursable and non-reimbursable activities, but was
entitled to partial reimbursement of the costs by those offices for the period
from June through September 1992, based on daily activity records.
In August 1997, in a second case involving certain offices in fiscal
years ending September 30, 1990, 1991, 1992 and 1993 and amounting to $2.8
million in reimbursement, the PRRB also ruled that a portion of the HCC costs
incurred by some of the Company's offices should be reimbursed. The PRRB
concluded that the costs for intake coordination activities are reimbursable,
and that the costs for assessment/evaluation, patient status and coordination
are reimbursable where patient names are provided. The PRRB found, with
respect to education activities and the provision of information to referral
sources, that repeat visits to the same referral sources would be viewed as
marketing and patient solicitation, which is non-reimbursable. In each of
these decisions, the Medicare intermediaries' determinations that all
community liaison costs are non-reimbursable was reversed and it was ordered
that the matter be remanded for further action or audit. The Company did not
appeal the District Court decision. HHS did not review the PRRB decision,
which the Company, in October 1997, appealed in the District Court. The
Company is involved in settlement negotiations with respect to these issues.
The Company, in March 1996, challenged additional disallowances of HCC
costs for various offices in fiscal years ending September 30, 1993 and 1994,
and these cases, involving $5.6 million in reimbursement, are at the early
stages of formation before the PRRB. The Company believes it is likely that
these cases will be resolved in accordance with the final outcomes in the above
two cases.
2. In May 1996, the Company filed a case in the District Court challenging
the application of certain HHS Salary Equivalency Guidelines to its employee
physical therapists. The Company maintains, among other things, that the
Guidelines are only applicable to physical therapists who are independent
contractors. The reimbursement impact (i.e., ignoring other challenged
disallowances, the amount by which the Company's Medicare reimbursement is
reduced) of the disallowances in dispute, representing costs incurred in the
fiscal year ending September 30, 1992, is approximately $207,000. Similar
disallowances have also been made in fiscal years ending September 30, 1991,
1993 and 1994, amounting to $214,000, $280,000 and $276,000, respectively. The
final determination of this case will likely have a precedential impact on other
such disallowances. In March 1996 the PRRB ruled in favor of the Company, but
in May 1996, HHS reversed that decision. In March 1997 the District Court set
HHS's decision aside as providing an insufficient explanation. In October 1997,
HHS issued a new decision purporting to clarify its previous decision. The
Company has again appealed to the District Court and expects a decision sometime
in 1998.
3. In August 1997, the Company filed a case in District Court challenging
disallowances of certain so-called "stock maintenance costs," e.g. the costs of
annual reports, 10-Ks, 10-Qs, news releases, annual meetings, mailing of
proxies, stock transfer agent fees, accounting and legal fees for SEC related
services. This case involves the fiscal years ending September 30, 1989, 1990,
1991 and 1992, and has a reimbursement impact of $295,000. Similar
disallowances totaling $502,000, for the fiscal years ending September 30, 1993,
1994, 1995, 1996 and 1997, would likely be recovered by the Company if it is
successful in this case. In May 1997 the PRRB ruled in favor of the Company,
but in July 1997 HHS reversed that decision. The Company has appealed to the
District Court and it expects a decision sometime in 1998.
4. In March 1996, the Company filed a case before the PRRB challenging the
disallowance of certain pharmacist costs. This case involves the fiscal years
ending September 30, 1991, 1992, 1993 and 1994, and has a reimbursement impact
of $978,000. The PRRB is scheduled to hear the case in February 1998. Similar
disallowances totaling $1,037,000, for the fiscal years ending September 30,
1992, 1993 and 1994, would likely be reversed to the extent the Company is
successful in this case.
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 1997.
10
<PAGE>
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 November 13, 1997 there were
approximately 1,221 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
-----------------------------------------------
1997 1996
---------------------- --------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 2 3/16 $ 1 11/16 $ 3 1/8 $ 2 1/16
Second Quarter 2 1/8 1 5/8 2 3/4 2 3/16
Third Quarter 1 3/4 1 1/16 2 1/2 1 7/8
Fourth Quarter 1 15/16 1 1/4 2 5/16 1 3/4
</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
---------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenue $ 110,139 $ 125,086 $ 129,816 $ 120,485 $103,761
Income (loss) from operations (1) (22,467) (1,814) 3,774 1,353 2,432
Income (loss) before income taxes (21,937) (1,165) 3,007 684 1,952
Net income (loss) (20,157) (982) 1,621 247 1,015
Income (loss) applicable to
common stock (22,852) (3,501) 1,621 247 1,015
Income (loss) per common and
common equivalent share (1.40) (.21) .10 .02 .06
Weighted average common and
common equivalent shares
outstanding - primary 16,348 16,465 16,304 16,013 16,056
(1) Income (loss) from operations is net of restructuring charges of $2,476,000 for fiscal 1997.
BALANCE SHEET DATA
September 30
-------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Current assets $34,004 $44,053 $21,394 $23,926 $28,975
Current liabilities 25,008 33,170 21,289 20,707 19,457
Total assets 50,224 82,683 57,559 56,726 54,379
Long-term debt 278 1,080 2,443 3,304 4,740
Redeemable convertible preferred stock 19,061 18,766 - - -
Shareholders' equity 3,588 26,758 30,509 28,482 27,459
</TABLE>
11
<PAGE>
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
- --------------------------------------------------------------------------------
1996 1995
1997 1996 1995 to 1997 to 1996
---- ---- ---- ------- --------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100 % 100 % 100% (12)% (4)%
Direct Costs of Revenue 64 54 57 5 % (9)%
--- --- ---
Gross Profit 36 46 43 (32)% 4 %
General, Administrative and
Selling Expenses 54 47 40 0 % 15 %
Restructuring Charge 2 - - - -
--- --- --- --- ---
Income (Loss) From Operations (20)% (1)% 3% 1,139 % (148)%
- --------------------------------------------------------------------------------
</TABLE>
Revenue for 1997 decreased 12% as a result of an increase in the Medicare
reserve, which is reported as a deduction from revenue. Medicare reserves
totaled $17,101,000 in 1997, principally as a result of various decisions
received from the Medicare fiscal intermediary, the Provider Reimbursement
Review Board and the U.S. District Court. See Note 5 of the financial
statements for discussion of the Medicare cost reimbursement disputes. Revenue
for 1996 decreased 4%. 1996 revenue increased 4% as a result of pricing and mix
changes and 4% as a result of increased volume from Extended Hours, Infusion and
Hospice services. This was offset by a 12% decrease as a result of reduced
volume in the Visit division.
The breakdown by division of the Company's total revenue is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended September 30
1997 1996 1995
---- ---- ----
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Extended Hours Division 27% 21% 19%
Visit Division 59% 72% 78%
Infusion Pharmacy 5% 4% 3%
Hospice Division 9% 3% 0%
- --------------------------------------------------------------------------------
</TABLE>
Extended Hours Division revenue increased 12% and 7% in 1997 and 1996,
respectively. Hospice revenue increased 235% and 1,054% in 1997 and 1996,
respectively. The increase is a result of thirteen additional markets providing
the hospice service in 1996. Visit Division revenue declined 28% in 1997 as a
result of the Medicare reserve of $17,101,000 and a 9% drop in Visit volume.
Visit Division revenue declined 11% in 1996 as a result of a drop in Visit
volume. Infusion Pharmacy revenue increased 4% and 33% in 1997 and 1996,
respectively. 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 64%, 54% and
57% in 1997, 1996 and 1995, respectively. The change in 1997 was principally a
result of additions to the Medicare reserve. Direct costs, as a percentage of
revenue before Medicare reserves, were 55%, 53% and 56% in 1997, 1996 and 1995,
respectively. The change in 1996 was due to an increase in visit division
revenue resulting from the reimbursement impact of the increase in general,
administrative and selling expenses.
12
<PAGE>
General, administrative and selling expenses as a percent of
revenue increased to 54% in 1997 compared to 47% in 1996 and 40% in 1995.
The increase in percentage in 1997 was principally a result of additions to
the Medicare reserve which lowered total revenue. General, administrative
and selling expenses as a percentage of revenue before Medicare reserves,
were 47%, 47% and 40% in 1997, 1996 and 1995, respectively. The increases in
1997 and 1996 over 1995 were principally due to the addition of certain
management personnel necessary to achieve strategic plans, increased costs
associated with the expansion of the Hospice Division, the loss of revenue
due to reduced volume, increased bad debt expense in fiscal 1997 and a
settlement with the Company's former President and former Chief Financial
Officer in fiscal 1996.
During fiscal 1997, the Company recorded $2,476,000 of restructuring
charges as a result of the implementation of a plan to restructure its field
operations and reduce the Company's cost structure. The charge included
$1,820,000 of costs associated with lease costs and related equipment write-offs
associated with the closing of eight pharmacies, the consolidation of seven
sites in multi-site markets and the relocation of eight other sites to more
economical locations and $361,000 of severance costs related to administrative
staff reductions. As a result of the restructuring, the Company anticipates a
reduction in future general and administrative expenses including rent and
personnel charges. The restructuring plan is expected to be completed by the
end of the third quarter of fiscal year 1998.
Net interest income for 1997 was $530,000 and for 1996 was $649,000
compared to net interest expense of $767,000 in 1995. Interest income is a
result of earnings on the cash proceeds from the investment by ManorCare Health
Services on October 24, 1995 (see Note 10 to the accompanying financial
statements).
Income tax benefit was 8% of the loss before tax in 1997 and 16% of
the loss before tax in 1996. Income taxes were 46% of pretax income for 1995.
The 1997 tax rate was impacted by a valuation allowance against the Company's
net operating loss carry forward and certain other deferred tax assets. Tax
rates for 1996 and 1995 were impacted by changes in the proportion of
non-deductible expenses to pretax income or loss.
Income (loss) applicable to common shareholders was ($22,852,000),
($3,501,000) and $1,621,000 for the years 1997, 1996 and 1995, respectively.
The principal reason for the increased loss from 1996 to 1997 was the increase
in Medicare reserves and the restructuring charge of $2,476,000 in 1997.
Additions to the Medicare reserves totaled $17,101,000 in 1997, $2,067,000 in
1996 and $1,435,000 in 1995. The primary reasons for the change from 1995 to
1996 are dividend and accretion expenses on preferred stock issued to ManorCare
Health Services (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.
LIQUIDITY & CAPITAL RESOURCES
During fiscal 1997 the Company's cash and cash equivalents decreased
$4,764,000 to $13,853,000 at September 30, 1997. The decrease in cash was
principally a result of the payment of preferred stock dividends (see Note 6 to
the financial statements).
Approximately 65%, 72% and 76% of revenue for the years ended
September 30, 1997, 1996 and 1995, respectively, was derived from services
provided to Medicare beneficiaries. Payments for these services are made by the
Medicare program based on reimbursable costs incurred in rendering the services.
Medicare makes interim payments as services are rendered, and the Company files
cost reports 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 attempt
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 "Health
Insurance Manual", applicable sections of HCFA Publication 15-1 "Provider
Reimbursement Manual" and intermediary letters and program memoranda issued
by HCFA.
13
<PAGE>
- - Administrative decisions and rulings on related issues by the Department of
Health and Human Services' Provider Reimbursement Review Board ("PRRB") 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, the 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, 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 also reports as a
liability disputed costs for which it has received payment, but 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
fiscal intermediaries are usually determined from Medicare's Notices 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 disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and HCFA, and is vigorously pursuing these matters
through administrative and legal channels. The normal Medicare administrative
appeal process may take several years to resolve these types of disputes. The
Company has established a reserve for the portion of these costs not considered
probable of recovery. As additional costs are incurred, the Company is
increasing the reserve to cover such additional costs that are not considered
probable of recovery. Since the reserves have been established, the Company has
continued to review whether the level is appropriate.
The Company currently has NPRs challenging $15.2 million of costs as
of September 30, 1997. There was an additional $4.5 million of costs at
September 30, 1997 related to open cost reporting years that are similar to the
costs that have been challenged on NPRs. Together these amounts ($19.7 million
at September 30, 1997) comprise the total amount the Company considers to be
disputed costs. The major cost categories in dispute are the treatment of
certain personnel costs relating to the Company's community liaison positions,
pharmacy indirect expenses, the cost of physical therapists employed by the
Company and certain other branch and corporate expenses.
During fiscal 1997, the Company settled various disputed NPRs and
received decisions from the PRRB and the U.S. District Court regarding the
community liaison and other disputed costs. In the fourth quarter of fiscal
1997 the Company was also notified by HCFA that pharmacy expenses retroactive to
fiscal 1995 would be challenged. As a result, a Medicare reserve of $14.0
million was recorded during the third quarter of fiscal 1997 and $2.8 million
was recorded during the fourth quarter of fiscal 1997.
In August 1997, the Company received two rulings in which it was
determined that community liaison costs are reimbursable to the degree that
they are documented clearly enough to establish a differentiation between
reimbursable and non-reimbursable activities. The rulings were from the U.S.
District Court and from the PRRB. The U.S. District Court ruled that the
Company was not entitled to Medicare reimbursement of community liaison costs
incurred by some of its offices prior to June 1992 due to insufficient
documentation, but was entitled to partial reimbursement of the costs by
those offices for the period from June through September 1992, based on daily
activity records. The PRRB also ruled that a portion of community liaison
costs incurred by
14
<PAGE>
some of its offices from fiscal 1991 through 1993 should be reimbursed. The
PRRB specifically concluded that the costs for intake coordination activities
are allowable, and that the costs for assessment/evaluation, patient status
and coordination are allowable where patient names are provided. The PRRB
found, with respect to education activities and the provision of information
to referral sources, that repeat visits to the same referral sources would be
viewed as marketing and patient solicitation, which is unallowable. In each
of these decisions, the Medicare intermediaries' determinations that all
community liaison costs are non-reimbursable was reversed, and it was ordered
that the matter be remanded for further action or audit. Because the
decisions of the Court and the PRRB clarified the definition of allowable
activities and the required documentation to support allowable activities,
the Company has changed its determination of recoverability on all community
liaison costs. Of the total disputed costs of $8,324,000 at September 30,
1997 regarding the community liaison issues, the Company has established
reserves of $7,118,000. The Company believes that in applying the decisions
of the U.S. District Court and the PRRB, the remaining $1,206,000 of costs
are recoverable.
The Company received, in March 1996, a favorable ruling by the PRRB on
the physical therapist issue. In May 1996, this ruling was reversed by the HCFA
Administrator. 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 HCFA which denied the Company reimbursement of some of its costs
for providing physical therapy services provided in 1992. The Court found that
HCFA 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 Department of Health and Human Services for further proceeding
consistent with its Order. In October 1997, HCFA, in response to the U.S.
District Court's Order, issued its revised decision in which it again ruled that
the physical therapist costs at issue are not reimbursable by Medicare. The
Company has appealed HCFA's revised order to the U.S. District Court. The
Company's legal counsel in this matter, Lindquist & Vennum P.L.L.P. of
Minneapolis, Minnesota, has advised the Company that in its opinion it is
probable that the Company will ultimately prevail in the courts and be
reimbursed for the physical therapy costs which are disputed in this case.
As of September 30, 1997, the Company, based on its analysis process,
believes that recovery of $16,800,000 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, 1997. Total accounts
receivable (net of reserves) due from Medicare at September 30, 1997 were
$9,813,000, including the receivables (net of reserves) for disputed costs of
$2,891,000. As of September 30, 1997 the Company had received $6,789,000 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
$2,891,000 as of September 30, 1997 have been classified as a non-current asset.
The ultimate settlement of the $6,789,000 liability for payments for
Medicare for disputed costs will impact the Company's cash flow depending on
when settlement is reached and the method of repayment. The Company intends to
meet both its short and long term liquidity needs with its current cash balances
and future cash flows from operations.
Operating activities used $781,000 in cash during 1997 and provided
$2,747,000 and $5,135,000 in cash during 1996 and 1995, respectively. Total
accounts receivable (current and long-term) decreased 59% during 1997, increased
31% during 1996 and decreased 7% during 1995. The decrease during 1997 was due
primarily to the additions to the Medicare reserve of $17,101,000. 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.
Investing activities provided $253,000 in cash during 1997. Investing
activities used $1,695,000 and $772,000 in cash during 1996 and 1995,
respectively. In connection with expansion of the Company's operations, the
Company acquired property and purchased software, which was funded by $97,000 of
cash in 1997, $1,494,000 in cash and $148,000 of capitalized leases in 1996, and
$785,000 in cash and $1,256,000 of capitalized leases in 1995.
During 1997, financing activities principally used $1,480,000 in cash
for the payment of long-term debt and $2,400,000 for the payment of preferred
dividends. Financing activities generated $17,719,000 in cash during 1996 as a
result of issuance of preferred stock and warrants (as mentioned in Note 10 to
the financial statements). Issuance of stock in 1996 was 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 in cash during 1995,
principally for repayment of long-term debt.
The Company has letter of credit facilities for $3,127,000. The
letters of credit are collateralized by secured investments and will expire in
1997 and 1998.
15
<PAGE>
Overall, In Home Health believes that cash provided by operations
along with its existing cash balances of $13,853,000 will be sufficient to
finance its current operations through at least fiscal 2000.
FORWARD LOOKING INFORMATION
The Company faces a number of risks. Information contained in this
section is forward looking and involves risks and uncertainties that could
significantly effect expected results. The Company's outlook for fiscal 1998 is
predominantly based upon its interpretation of what it considers key economic
assumptions.
The majority of the Company's revenue is derived from services
provided to Medicare beneficiaries. Currently, Medicare reimburses
participating Medicare-certified home health agencies for the reasonable costs
incurred to provide covered visits to eligible beneficiaries, subject to certain
cost limits which vary according to geographic regions of the country. This
does not allow the Company to generate a profit from these services. In fact,
due to certain limitations on the nature and amount of the costs that are
reimbursable, the Company incurs a loss on the Medicare business.
During 1997, several cost reimbursement issues that were in dispute
for several years have been resolved through decisions by the PRRB and the U.S.
District Court. As a result of these decisions and other communications from
HCFA, it became clear that some costs incurred by the Company would not be
reimbursed by Medicare. Although the Company has restructured its operations
and eliminated a portion of these nonreimbursable costs, the Company will
continue to incur some costs that are not reimbursed by Medicare, as it believes
they constitute a necessary function to the conduct of its business.
The Balanced Budget Act of 1997 requires HCFA to implement a
prospective payment system for home health agencies by October 1, 1999, with up
to a four-year phase-in period. Prospective rates determined by HHS would
reflect a 15% reduction to the cost limits and per-patient limits as of
September 30, 1999. In the event the implementation deadline is not met, the
reduction will be applied to the reimbursement system then in place. The impact
of such a change, if implemented, on the Company's results of operations cannot
be predicted with any certainty at this time and would depend, to a large
extent, on the reimbursement rates for home nursing established on an interim
basis and under the prospective payment system. There can be no assurances that
such reimbursement rates, if enacted, would cover the costs incurred by the
Company to provide home nursing services.
Until prospective payment takes effect on October 1, 1999, the Budget
Act sets up an interim payment system (the "IPS") that provides for lowering of
reimbursement limits for home health visits. Cost limit increases for fiscal
1995 and 1996 have been eliminated. In addition, for cost reporting periods
beginning on October 1, 1997, home health agencies cost limits will be
determined as the lesser of (i) their actual costs (ii) cost limits based on
105% of median costs of freestanding home health agencies or (iii) an
agency-specific per-patient cost cap, based on 98% of 1994 costs adjusted for
inflation. The Company is unable to determine the effect of the IPS until HCFA
finalizes related regulatory guidance on the implementation of the IPS. The new
cost limits will apply to the Company for the cost reporting period beginning
October 1, 1997. A reduction in these cost limits could have a significant
affect on the Company's results of operations; however, the effect of such
reductions cannot be predicted with any level of certainty.
Various other provisions included in the Budget Act may have an impact
on the Company's business and results of operations. Venipuncture will no
longer be a covered skilled nursing home care service unless it is performed in
connection with other skilled nursing services. The Company is currently
assessing the potential impact of this provision, however, the effect of such
reductions cannot be predicted with any level of certainty at this time.
Additionally, the Company will be required to have surety bonds of at least
$50,000 for each Medicare-certified nursing agency.
In May 1995, the Clinton Administration instituted ORT, a health
care fraud and abuse initiative focusing on nursing homes, home health care
agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. The states initially targeted
included California, Florida, Illinois, New York and Texas. ORT has been
responsible for millions of dollars in civil and criminal restitution, fines,
recovery of overpayments and the exclusion of a number of individuals and
corporations from the Medicare program. ORT has been expanded to all fifty
states, with a specific concentration on twelve states including Arizona,
Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio,
Pennsylvania, Tennessee, Virginia and Washington. Private insurers and
various state enforcement agencies also have increased their scrutiny of
health care providers' practices and claims, particularly in the home health
and durable medical equipment areas. No assurance can be given that the
practices of the Company, if reviewed, would be found to be in compliance
with such laws or with any future laws, as such laws ultimately may be
interpreted.
16
<PAGE>
Additionally, HCFA has implemented "Wedge Surveys" in at least 13
states, including Connecticut, Florida, Tennessee, Illinois, Indiana,
Massachusetts, Minnesota, Ohio, Oklahoma, Texas, Utah, Virginia and Wyoming. In
these surveys, HCFA completes ORT-type surveys on a much smaller scale.
Generally, HCFA extrapolates the percentage which was paid in error to all
claims paid for the period under review. Assuming the reviewer uncovered
nothing significant, the home health agency then has the option to repay the
amount determined by HCFA or undergo a broader review of its claims. If the
survey uncovers significant problems, the matter may be referred for further
review.
While the Company believes that it is in material compliance with the
fraud and abuse laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. It is the
Company's policy to monitor its compliance with such requirements and to take
appropriate actions to attempt to ensure such compliance. Although the Company
does not believe it has violated any fraud and abuse laws, there can be no
assurance that future related legislation, either health care or budgetary,
related regulatory changes or interpretations of such regulations, will not have
a material adverse effect on the future operations of the Company.
The Company is also effected by settlements which may be reached with
the Department of Health and Human Services regarding cost reports and its
ability to establish and maintain close working relationships with referral
sources, including payors, hospitals, physicians and other health care
professionals.
As a result of these developments, the Company is not able to conclude
that it is more likely than not that it will be able to generate future earnings
which will allow it to utilize its NOLs and, accordingly, has established a
valuation allowance against the NOLs.
At September 30, 1997, the Company had federal operating loss
carryforwards of $11,000,000 which will expire in 2012. Management believes it
is more likely than not that certain of these net operating loss carryforwards
may expire unused and, accordingly, has established a valuation allowance
against them.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Consolidated Statements of Operations . . . . . . . . . . . 19
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 20-21
Consolidated Statements of Shareholders' Equity . . . . . . 22
Consolidated Statements of Cash Flows . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . 24-25
Independent Auditors' Report . . . . . . . . . . . . . . . 34
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
18
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,853 $ 18,617
Accounts receivable, net of allowances
of $2,029 and $802 in 1997 and 1996,
respectively 14,125 19,418
Prepaid income tax 3,907 1,037
Deferred income tax 1,540 3,389
Prepaid expenses and other current assets 579 1,592
------- -------
Total current assets 34,004 44,053
------- -------
Property:
Furniture and equipment 9,621 9,954
Computer equipment and software 7,506 8,561
Leasehold improvements 727 823
------- -------
Total 17,854 19,338
Accumulated depreciation ( 10,501) (9,437)
------- -------
Property - net 7,353 9,901
------- -------
Other Assets:
Accounts receivable, long-term 2,891 22,018
Goodwill, net 5,432 5,590
Other assets 544 1,121
------- -------
Total other assets 8,867 28,729
------- -------
Total Assets $50,224 $82,683
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
IN HOME HEATH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 777 $ 1,455
Accounts payable 4,255 3,662
Accounts payable - related party 59 1,006
Accrued liabilities:
Third party 6,789 13,568
Compensation 4,034 6,859
Insurance 6,704 6,133
Restructuring 1,807 -
Other 583 487
------- -------
Total current liabilities 25,008 33,170
------- -------
Long-Term Debt 278 1,080
Deferred Revenue 398 820
Deferred Rent Payable 248 267
Deferred Income Tax 1,643 1,822
Commitments and Contingencies - -
Redeemable Convertible Preferred Stock - $1.00
par value, $20,000 redemption value, authorized
200 shares; issued and outstanding 1997 - 200
shares; 1996 - 200 shares 19,061 18,766
Shareholders' Equity:
Preferred stock - authorized 800 shares - -
Common stock - $.01 par value:
authorized - 40,000 shares; issued and
outstanding - 1997 - 16,399 shares,
1996 - 16,541 shares 164 165
Additional paid-in capital 23,661 23,978
Retained earnings (deficit) (20,237) 2,615
------- -------
Total shareholders' equity 3,588 26,758
------- -------
Total Liabilities and Shareholders' Equity $ 50,224 $ 82,683
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue (net of Medicare reserves of
$17,101, $2,067 and $1,435 in 1997,
1996 and 1995, respectively) $ 110,139 $ 125,086 $ 129,816
------- ------- -------
Operating Expenses:
Direct costs of revenue (primarily payroll related costs) 70,570 67,108 74,082
General, administrative and selling expenses 59,560 59,792 51,960
Restructuring charge 2,476 - -
------- ------- -------
Total operating expenses 132,606 126,900 126,042
------- ------- -------
Income (loss) from operations (22,467) (1,814) 3,774
Interest:
Interest expense (265) (450) (790)
Interest income 795 1,099 23
------- ------- -------
Net interest income (expense) 530 649 (767)
Income (loss) before income taxes (21,937) (1,165) 3,007
Income tax expense (benefit) (1,780) (183) 1,386
------- ------- -------
Net income (loss) $(20,157) $ (982) $ 1,621
------- ------- -------
------- ------- -------
Income (loss) applicable to common stock $(22,852) $ (3,501) $ 1,621
------- ------- -------
------- ------- -------
Income (loss) per common and
common equivalent share $ (1.40) $ (.21) $ .10
------- ------- -------
------- ------- -------
Weighted average common and
common equivalent shares
outstanding - primary 16,348 16,465 16,304
------- ------- -------
------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Retained
Common Stock paid-in earnings
Shares Amount capital (deficit)
----- ----- ------ --------
<S> <C> <C> <C> <C>
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
Common stock issued for:
Employee stock plans 103 1 185 -
Repurchase from former officers (245) (2) (502) -
Net loss - - - (20,157)
Preferred dividends - - - (2,400)
Preferred stock accretion - - - (295)
------ ---- ------ -------
Balance - September 30, 1997 16,399 $ 164 $23,661 $(20,237)
------ ---- ------ -------
------ ---- ------ -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(20,157) $ (982) $ 1,621
Adjustments:
Depreciation and amortization 3,344 3,227 3,226
Accounts receivable 24,420 (9,714) (760)
Prepaid expenses and other assets (2,133) (582) (833)
Accounts payable 593 (806) 647
Accounts payable - related party (947) 1,006 -
Accrued liabilities (7,130) 12,267 3,478
Deferred revenue (422) (422) (390)
Deferred rent payable (19) (84) (165)
Deferred income tax 1,670 (1,163) (1,689)
------ ------ ------
Net cash provided (used) by operating activities (781) 2,747 5,135
------ ------ ------
Cash Flows From Investing Activities:
Acquisition of property (97) (1,494) (785)
Repayments (advances) to officers and employees 350 (201) 13
------ ------ ------
Net cash provided (used) by investing activities 253 (1,695) (772)
------ ------ ------
Cash Flows From Financing Activities:
Payment of long-term debt (1,480) (2,097) (2,015)
Issuance of preferred stock and warrants - 17,719 -
Preferred dividends paid (2,400) (2,253) -
Issuance (repurchase) of common stock (356) 531 406
------ ------ ------
Net cash provided (used) by financing activities (4,236) 13,900 (1,609)
------ ------ ------
Cash and Cash Equivalents:
Net increase (decrease) (4,764) 14,952 2,754
Beginning of year 18,617 3,665 911
End of year $ 13,853 $ 18,617 $ 3,665
------ ------ ------
------ ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - In Home Health, Inc. 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 as of September 30, 1996. There were no advances to officers at
September 30, 1997.
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 and 1995 was $148,000 and $1,256,000,
respectively. There was no property acquired under capitalized leases for
the year ended September 30, 1997.
GOODWILL - Costs in excess of net assets of acquired businesses have been
capitalized and are being amortized over 40 years. Accumulated
amortization was $895,000 and $737,000 at September 30, 1997 and 1996,
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 $573,000 and $1,186,000 as of September 30,
1997 and 1996, 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".
Valuation allowances are established when necessary to reduce deferred tax
assets to amounts which are more likely than not to be realized.
24
<PAGE>
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 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 net income (loss), 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, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Shares outstanding (in thousands):
Weighted average outstanding 16,325 16,340 16,062
Shares issuable in connection with stock
options and warrants less shares
purchasable from proceeds 23 125 242
------ ------ ------
Adjusted outstanding 16,348 16,465 16,304
------ ------ ------
------ ------ ------
Adjusted income (loss) applicable to
common stockholders (in thousands):
Net income (loss) $(20,157) $ (982) $ 1,621
Dividends on preferred stock (2,400) (2,253) -
Preferred stock accretion (295) (266) -
------ ------ ------
Income (loss) applicable to common stock $(22,852) $(3,501) $ 1,621
------ ------ ------
------ ------ ------
Income (loss) per common and common
equivalent share $ (1.40) $ (.21) $ .10
------ ------ ------
------ ------ ------
</TABLE>
3. RESTRUCTURING CHARGE
During fiscal 1997, the Company has recorded $2,476,000 in restructuring
charges as a result of the implementation of a plan to restructure its
field operations and reduce the Company's cost structure. The charge
includes $1,820,000 of costs associated with lease costs and related
equipment write-offs associated with the closing of eight pharmacies, the
consolidation of seven sites in multi-site markets, the relocation of eight
other sites to more economical locations and $361,000 of severance costs
related to administrative staff reductions.
As of September 30, 1997, $1,807,000 of costs, comprised of lease costs and
related equipment write-offs associated with vacated sites remain to be
paid out, are included in other current liabilities. The restructuring
plan is expected to be completed by the end of the third quarter of fiscal
year 1998.
25
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of obligations under capitalized leases with
interest rates up to 11.3%, due through July 2000.
Future minimum payments as of September 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30
-----------------
<S> <C>
1998 $ 906
1999 271
2000 65
-------
Total minimum payments 1,242
Less amounts
representing interest 187
-------
Present value of future
minimum payments 1,055
Less current maturities 777
-------
Long-term debt $ 278
-------
-------
</TABLE>
Assets recorded under capital leases are included in property at cost of
$4,631,000 and $7,032,000, and accumulated depreciation of $1,918,000 and
$2,997,000 at September 30, 1997 and 1996, respectively. Interest paid for
the years ended September 30, 1997, 1996 and 1995 was $265,000, $450,000
and $779,000, respectively.
5. MEDICARE COST REIMBURSEMENT
Approximately 65%, 72% and 76% of revenue for the years ended September 30,
1997, 1996 and 1995, respectively, was derived from services provided to
Medicare beneficiaries. Payments for these services are made by the
Medicare program based on reimbursable costs incurred in rendering the
services. Medicare makes interim payments as services are rendered, and
the Company files cost reports 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 attempt 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 "Health
Insurance 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 Department of
Health and Human Services' Provider Reimbursement Review Board ("PRRB") 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, the Blue
Cross Association and HCFA.
26
<PAGE>
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, 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 also reports as a liability disputed costs
for which it has received payment, but 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 fiscal intermediaries are usually
determined from Medicare's Notices 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 disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and HCFA, and is vigorously pursuing these matters
through administrative and legal channels. The normal Medicare
administrative appeal process may take several years to resolve these types
of disputes. The Company has established a reserve for the portion of
these costs not considered probable of recovery. As additional costs are
incurred, the Company is increasing the reserve to cover such additional
costs that are not considered probable of recovery. Since the reserves
have been established, the Company has continued to review whether the
level is appropriate.
The Company currently has NPRs challenging $15.2 million of costs as of
September 30, 1997. There was an additional $4.5 million of costs at
September 30, 1997 related to open cost reporting years that are similar to
the costs that have been challenged on NPRs. Together these amounts ($19.7
million at September 30, 1997) comprise the total amount the Company
considers to be disputed costs. The major cost categories in dispute are
the treatment of certain personnel costs relating to the Company's
community liaison positions, pharmacy indirect expenses, the cost of
physical therapists employed by the Company and certain other branch and
corporate expenses.
During fiscal 1997, the Company settled various disputed NPRs and received
decisions from the PRRB and the U.S. District Court regarding the community
liaison and other disputed costs. In the fourth quarter of fiscal 1997 the
Company was also notified by HCFA that pharmacy expenses retroactive to
fiscal 1995 would be challenged. As a result, a Medicare reserve of $14.0
million was recorded during the third quarter of fiscal 1997 and $2.8
million was recorded during the fourth quarter of fiscal 1997.
In August 1997, the Company received two rulings in which it was determined
that community liaison costs are reimbursable to the degree that they are
documented clearly enough to establish a differentiation between
reimbursable and non-reimbursable activities. The rulings were from the
U.S. District Court and from the PRRB. The U.S. District Court ruled that
the Company was not entitled to Medicare reimbursement of community liaison
costs incurred by some of its offices prior to June 1992 due to
insufficient documentation, but was entitled to partial reimbursement of
the costs by those offices for the period from June through September 1992,
based on daily activity records. The PRRB also ruled that a portion of
community liaison costs incurred by some of its offices from fiscal 1991
through 1993 should be reimbursed. The PRRB specifically concluded that
the costs for intake coordination activities are allowable, and that the
costs for assessment/evaluation, patient status and coordination are
allowable where patient names are provided.
27
<PAGE>
The PRRB found, with respect to education activities and the provision of
information to referral sources, that repeat visits to the same referral
sources would be viewed as marketing and patient solicitation, which is
unallowable. In each of these decisions, the Medicare intermediaries'
determinations that all community liaison costs are non-reimbursable was
reversed, and it was ordered that the matter be remanded for further action
or audit. Because the decisions of the Court and the PRRB clarified the
definition of allowable activities and the required documentation to
support allowable activities, the Company has changed its determination of
recoverability on all community liaison costs. Of the total disputed costs
of $8,324,000 at September 30, 1997 regarding the community liaison issues,
the Company has established reserves of $7,118,000. The Company has
appealed HCFA's revised order to the U.S. District Court. The Company's
legal counsel in this matter, Lindquist & Vennum P.L.L.P. of Minneapolis,
Minnesota, has advised the Company that in its opinion it is probable that
the Company will ultimately prevail in the courts and be reimbursed for the
physical therapy costs which are disputed in this case.
The Company received, in March 1996, a favorable ruling by the PRRB on the
physical therapist issue. In May 1996, this ruling was reversed by the
HCFA Administrator. 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 HCFA which denied the Company
reimbursement of some of its costs for providing physical therapy services
provided in 1992. The Court found that HCFA 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
Department of Health and Human Services for further proceeding consistent
with its Order. In October 1997, HCFA, in response to the U.S. District
Court's Order, issued its revised decision in which it again ruled that the
physical therapist costs at issue are not reimbursable by Medicare. The
Company, based on its assessment and the opinion of legal counsel,
continues to believe this position is without merit and that the Company
will ultimately be reimbursed for the disputed physical therapy case.
As of September 30, 1997, the Company, based on its analysis process,
believes that recovery of $16,800,000 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, 1997.
Total accounts receivable (net of reserves) due from Medicare at September
30, 1997 were $9,813,000, including the receivables (net of reserves) for
disputed costs of $2,891,000. As of September 30, 1997 the Company had
received $6,789,000 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 $2,891,000 as of September
30, 1997 have been classified as a non-current asset.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was issued to ManorCare Health
Services, Inc. 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 is being accreted over five years from its fair
value of $18,500,000 on the date of issuance to its redemption value of
$20,000,000.
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 $4,852,000, $4,237,000 and $4,005,000, for the years ended September
30, 1997, 1996 and 1995, respectively.
Future minimum rental payments as of September 30, 1997 for operating
leases with noncancelable terms in excess of one year are as follows (in
thousands):
28
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30
---------------------
<S> <C>
1998 $ 3,388
1999 2,900
2000 1,878
2001 1,529
2002 634
-------
Total minimum payments $10,329
-------
-------
</TABLE>
The Company has letter of credit facilities totaling $3,127,000. The
letters of credit are collateralized by secured investments and will expire
in 1997 and 1998.
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 stock option plans 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>
1997 1996 1995
------------------- ------------------- ------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Exercise Exercise Exercise
Price Price Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 2,065 $2.85 1,485 $2.81 1,435 $2.85
Granted 754 1.82 1,130 2.76 637 2.08
Exercised (10) .53 (118) 1.25 (314) 1.24
Canceled (1,727) 2.70 (432) 2.91 (273) 3.16
------- ----- -----
Outstanding
at end of
year 1,082 2.39 2,065 2.85 1,485 2.81
----- ----- -----
----- ----- -----
Options
exercisable
at year-end 477 2.88 747 3.24 698 3.17
</TABLE>
At September 30, 1997, there are 1,057,000 shares available for grant.
In fiscal 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.
STOCK REPURCHASE
In fiscal 1997, the Company repurchased 245,000 shares of common stock at
fair market value from two former officers as part of a settlement
agreement. All of their outstanding stock options were canceled.
WARRANTS
As of September 30, 1997, 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).
29
<PAGE>
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 1,500,000 shares reserved for
this plan of which 93,000 shares were issued on September 30, 1997 at $1.54
per share, 151,000 shares were issued on September 30, 1996 at $1.86 per
share and 124,000 shares were issued on September 30, 1995 at $1.96 per
share. At September 30, 1997 there were 790,000 shares available for
future offerings.
FAS 123
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------- --------------------------------------
Outstanding Weighted-Average Weighted-Average Exercisable
Range of Exercise as of Remaining Exercise Price as of Weighted-Average
Prices 9/30/97 Contractual Life 9/30/97 Exercise Price
in Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.99 556,000 8.3 $1.78 115,000 $1.59
$2.00 - $2.99 282,000 7.8 $2.38 158,000 $2.45
$3.00 - $3.99 145,000 6.3 $3.30 105,000 $3.38
$4.00 - $4.99 84,000 4.9 $4.39 84,000 $4.39
$5.00 - $5.99 15,000 5.2 $5.38 15,000 $5.38
--------- -------
1,082,000 7.6 $2.39 477,000 $2.88
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation", ("SFAS 123") but continues to apply Accounting Principles
Board Opinion No. 25 and related interpretations in the accounting for its
stock option plans. If the Company had adopted the expense recognition
provisions of SFAS No. 123 for purposes of determining compensation expense
related to stock options granted during the years ended September 30, 1997
and 1996, loss applicable to common stock and loss per common and common
equivalent share would have been changed to the pro forma amounts shown
below:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Loss Applicable to Common Stock
As reported $(22,852,000) $(3,501,000)
Pro forma $(23,708,000) $(4,029,000)
Loss per common and common equivalent share
As reported $ (1.40) $ (.21)
Pro forma $ (1.45) $ (.24)
</TABLE>
The fair value of each option granted during 1997 and 1996 was estimated on
the grant date using the Black-Scholes option pricing model with the
following assumptions: no dividend yield; a risk free interest rate of
6.462% and 6.073% during fiscal year 1997 and 1996, respectively; expected
volatility of the market price of the Company's common stock of 68% and
155% during fiscal year 1997 and 1996, respectively; turnover of 37% and
26% during fiscal year 1997 and 1996, respectively, and expected option
life ranging between four and five years. Based upon these assumptions,
the weighted average fair value at grant date of options granted during
fiscal 1997 and 1996 was $1.13 and $2.32, respectively.
30
<PAGE>
The fair value of the employees' stock purchase plan, which was estimated
using the Black-Scholes model with the following assumptions for 1997 and
1996: no dividend yield; a risk free interest rate of 6.462% and 6.073%
during fiscal year 1997 and 1996, respectively; expected volatility of the
market price of the Company's common stock of 68% and 155% during fiscal
year 1997 and 1996, respectively; and expected option life of one year.
Based upon the assumptions, the weighted average fair value of the stock
purchase rights granted in 1997 and 1996 was $1.08 and $1.98, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for
future years. SFAS 123 does not apply to awards granted prior to fiscal
year 1996 and additional awards are anticipated in future years.
9. INCOME TAXES
The income tax provision for the years ended September 30, 1997, 1996 and
1995 consisted of (in thousands):
<TABLE>
<S> <C> <C> <C>
FEDERAL STATE TOTAL
------- ----- ------
1997
Current $(3,308) $(142) $(3,450)
Deferred 1,275 395 1,670
------ ---- ------
$(2,033) $ 253 $(1,780)
------ ---- ------
------ ---- ------
FEDERAL STATE TOTAL
1996 ------- ----- ------
Current $ 883 $ 97 $ 980
Deferred (1,026) (137) (1,163)
------ ---- ------
$ (143) $ (40) $ (183)
------ ---- ------
------ ---- ------
FEDERAL STATE TOTAL
------- ----- ------
1995
Current $ 2,505 $ 593 $ 3,098
Deferred (1,380) (332) (1,712)
------ ---- ------
$ 1,125 $ 261 $ 1,386
------ ---- ------
------ ---- ------
</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, 1997, 1996 and 1995 as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Tax (benefit) at Federal statutory rate $(7,459) $(396) $1,022
State income taxes,
net of Federal benefit (995) 21 231
Officers life insurance 2 35 24
Goodwill amortization 38 41 33
Meals and entertainment 62 106 81
Other (218) 10 (5)
Valuation allowance 6,790 - -
------ ---- -----
Income tax expense (benefit) $(1,780) $(183) $1,386
------ ---- -----
------ ---- -----
</TABLE>
The tax benefit related to the exercise of employee stock options is
recorded as additional paid-in-capital.
31
<PAGE>
Income taxes paid during the years ended September 30, 1997, 1996 and 1995
were $24,000, $2,257,000 and $2,376,000, respectively.
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Bad debt allowance $ 757 $ - $ 299 $ -
Depreciation and amortization - 1,215 - 1,275
Insurance accruals 2,817 - 2,464 -
Capitalized items expensed
for taxes - 651 - 955
Deferred revenue - (149) - (306)
Vacation 300 - 341 -
Restructuring reserve 674 - - -
Contract settlement - - 220 -
Benefit of NOL carryforward 3,734 - - -
Other 48 (74) 65 (102)
------- ------ ------ ------
Subtotal 8,330 1,643 3,389 1,822
Less valuation allowance (6,790) - - -
------- ------ ------ ------
$ 1,540 $ 1,643 $ 3,389 $ 1,822
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
Realization of deferred tax assets associated with the net operating loss
carryforwards is dependent upon generating sufficient taxable income prior
to their expiration. Management believes that it is more likely than not
that certain of these net operating loss carryforwards may expire unused
and that other certain tax assets may not be realized and, accordingly, has
established a valuation allowance against them.
As of September 30, 1997, the Company had federal operating loss
carryforwards of $11,000,000 which will expire in 2012.
10. RELATED PARTY TRANSACTIONS
On October 24, 1995, the Company closed an agreement with ManorCare Health
Services, Inc., 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
ManorCare Health Services, Inc. purchased 6,750,000 shares from the Company
at $3.40 per share. In addition, ManorCare Health Services, Inc. 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 ManorCare Health Services, Inc. also
contemplated that the Company and ManorCare Health Services, Inc. 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 Care, Inc. entered into an
agreement whereby Manor Care, Inc. or ManorCare Health Services, Inc. will
provide to the Company certain administrative services, reimbursement
services, legal services and other similar types of services through
September 30, 1998. Under this agreement, administrative fees of $129,000
and $1,006,000 for years ended September 30, 1997 and 1996, respectively,
were accrued. Management believes that the foregoing charges are
reasonable allocations of the costs incurred by ManorCare Health Services,
Inc. on the Company's behalf. Based on this agreement, $59,000 and
$1,006,000 was payable to ManorCare Health Services, Inc. at September 30,
1997 and 1996, respectively.
32
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $31,585 $31,375 $18,855 $28,324
Loss from operations (104) (718) (15,617) (6,028)
Loss applicable to common stock (660) (1,194) (14,443) (6,555)
Loss per common and common
equivalent share (.04) (.07) (.89) (.40)
</TABLE>
During the fourth quarter of fiscal 1997, the Company recorded adjustments
to its Medicare reserve of $2.8 million. (See Note 5 to the financial
statements.) The Company also experienced an increase in its non-Medicare
aged receivables which resulted in a bad debt expense of $2.4 million.
<TABLE>
<CAPTION>
FISCAL 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
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 STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 "Earnings Per Share" which is
effective for reporting periods ending after December 15, 1997. Earlier
adoption is not permitted. The Company does not expect the new standard to
have a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Company has not determined the
impact of adoption of the standard.
33
<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, 1997 and 1996 and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended September 30, 1997. These consolidated financial statements
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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 17, 1997
34
<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 1998
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 1998
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 1998 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 1998
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 . . . . . . . . . . . . . . . . . . 34
Schedules for the Years Ended September 30, 1997, 1996 and 1995:
II - Valuation and Qualifying Accounts and Reserves . . . . . 38
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 1997.
35
<PAGE>
(c) EXHIBITS:
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation, as amended. (i)
3.2 Restated Bylaws.
4.1 Form of specimen Common Stock certificate. (iii)
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 1997.
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 The Company's 1991 Employee Stock Purchase Plan, as amended.
10.6 Securities Purchase and Sale Agreement dated May 2, 1995, as
amended between the Company and ManorCare Health Services
(iv)
10.7 Letter of Credit Agreement dated September 30, 1997 with
First Bank National Association.
10.8 Letter of Credit Agreement dated December 16, 1996 with
First Bank National Association.
10.9 Employment Agreement between the Company and James J. Lynn
dated October 24, 1995.
10.10 Administrative Services Agreement dated November 15, 1997
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) Incorporate herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996.
(iii) Incorporated herein by reference to the Registrant's
Registration Statement (Form S-18) No. 33-17228C.
(iv) Incorporated herein by reference to the Registrant's current
report on Form 8-K dated May 2, 1995.
36
<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/ Wolfgang von Maack
---------------------------------------------
Wolfgang von Maack, Chief Executive Officer
and President
Date: April 3, 1998
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/ Wolfgang von Maack Chief Executive Officer, April 3, 1998
- ------------------------- President and Director
Wolfgang von Maack (principal executive officer)
/s/ Thomas R. Gross Chief Financial Officer April 3, 1998
- --------------------- (principal financial officer)
Thomas R. Gross
/s/ James J. Lynn Director April 3, 1998
- ---------------------
James J. Lynn
/s/ Joseph R. Buckley Director April 3, 1998
- -----------------------
Joseph R. Buckley
/s/ Donald C. Tomasso Director April 3, 1998
- -----------------------
Donald C. Tomasso
/s/ James H. Rempe Director April 3, 1998
- --------------------
James H. Rempe
37
