<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NO. 0-17490
IN HOME HEALTH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1458213
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
601 CARLSON PARKWAY
SUITE 500
MINNETONKA, MINNESOTA 55305-5214
(Address of principal executive offices)
(Zip Code)
612-449-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x (1) No
--- ---
As of August 15, 1997, the number of shares outstanding of the registrant's
common stock, $.01 par value was 16,295,897 shares.
<PAGE>
IN HOME HEALTH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 1997 and September 30, 1996 2-3
Consolidated Statements of Operations -
For the three and nine months ended June 30,
1997 and 1996 4
Consolidated Statements of Cash Flows -
For the nine months ended June 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11-15
PART II OTHER INFORMATION 16
</TABLE>
1
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ITEM 1. IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 30, 1997 Sept. 30,
(Unaudited) 1996
--------- -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $11,521 $18,617
Accounts receivable, net of allowances
of $1,010 and $802 in June 1997 and
September 1996, respectively 17,913 19,418
Prepaid income tax 4,013 1,037
Deferred income tax 1,540 3,389
Prepaid expenses and other current assets 1,205 1,592
------ ------
Total current assets 36,192 44,053
------ ------
Property:
Furniture and equipment 9,734 9,954
Computer equipment and software 8,239 8,561
Leasehold improvements 772 823
------ ------
Total 18,745 19,338
Accumulated depreciation (10,739) (9,437)
------ ------
Property - net 8,006 9,901
------ ------
Other Assets:
Accounts receivable, long-term 3,868 22,018
Goodwill, net 5,518 5,590
Other assets 901 1,121
------ ------
Total other assets 10,287 28,729
------ ------
Total Assets $54,485 $82,683
------ ------
------ ------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
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IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(AMOUNTS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1997 Sept. 30,
(Unaudited) 1996
--------- ---------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 1,010 $ 1,455
Accounts payable 2,579 3,662
Accounts payable - related party -- 1,006
Accrued liabilities:
Third party 5,576 13,568
Compensation 4,625 6,859
Insurance 6,590 6,133
Other 2,342 487
--------- ---------
Total current liabilities 22,722 33,170
--------- ---------
Long-Term Debt 330 1,080
Deferred Revenue 504 820
Deferred Rent Payable 199 267
Deferred Income Tax 1,749 1,822
Commitments and Contingencies -- --
Redeemable Convertible Preferred Stock -
$1.00 par value, $20,000 redemption value,
authorized 200 shares; issued and outstanding
June 30 and September 30 - 200 shares 18,987 18,766
Shareholders' Equity:
Preferred stock - authorized 800 shares -- --
Common stock - $.01 par value:
authorized - 40,000 shares;
issued and outstanding -
June 30 - 16,296 shares;
September 30 - 16,541 shares 163 165
Additional paid-in capital 23,513 23,978
Retained earnings (deficit) (13,682) 2,615
--------- ---------
Total shareholders' equity 9,994 26,758
--------- ---------
Total Liabilities and Shareholders' Equity $ 54,485 $ 82,683
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue (net of Medicare reserves of
$13,970, $180, $14,421, $1,030 for the
respective periods) $ 18,855 $ 30,302 $ 81,815 $ 94,562
-------- -------- -------- --------
Operating Expenses:
Direct costs of revenue
(primarily payroll related costs) 18,001 15,905 52,899 50,932
General, administrative
and selling expenses 14,444 14,218 43,328 43,260
Restructuring charge 2,027 -- 2,027 --
-------- -------- -------- --------
Total operating expenses 34,472 30,123 98,254 94,192
-------- -------- -------- --------
Income (loss) from operations (15,617) 179 (16,439) 370
Interest:
Interest income 183 268 586 826
Interest expense (51) (114) (203) (355)
-------- -------- -------- --------
Net interest income 132 154 383 471
-------- -------- -------- --------
Income (loss) before income taxes (15,485) 333 (16,056) 841
Income tax expense (benefit) (1,716) 221 (1,780) 505
-------- -------- -------- --------
Net income (loss) $(13,769) $ 112 $(14,276) $ 336
-------- -------- -------- --------
-------- -------- -------- --------
Loss applicable to common stock $(14,443) $ (560) $(16,297) $ (1,510)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per common and
common equivalent share $ (.89) $ (.03) $ (1.00) $ (.09)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common
and common equivalent
shares outstanding 16,311 16,465 16,349 16,430
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(14,276) $ 336
-------- --------
Adjustments:
Depreciation and amortization 2,435 2,396
Accounts receivable 19,655 (5,798)
Prepaid expenses and other assets (2,941) 198
Accounts payable (2,089) (440)
Accrued liabilities (7,914) 7,629
Deferred liabilities 1,392 (1,693)
-------- --------
Net cash provided (used) by operating activities (3,738) 2,628
-------- --------
Cash Flows From Investing Activities:
Business acquisitions (47) --
Acquisition of property (162) (1,206)
Advances to officers and employees 351 42
-------- --------
Net cash provided (used) by investing activities 142 (1,164)
-------- --------
Cash Flows From Financing Activities:
Payment of long-term debt (1,195) (1,568)
Issuance (repurchase) of common stock (505) 127
Issuance of preferred stock and warrants -- 17,720
Preferred dividends paid (1,800) (1,653)
-------- --------
Net cash provided (used) by financing activities (3,500) 14,626
-------- --------
Cash and Cash Equivalents:
Net increase (decrease) (7,096) 16,090
Beginning of period 18,617 3,665
-------- --------
End of period $ 11,521 $ 19,755
-------- --------
-------- --------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 203 $ 355
-------- --------
-------- --------
Income taxes $ 24 $ 1,932
-------- --------
-------- --------
Noncash Investing and Financing Activities:
Property acquired by capital lease $ -- $ 148
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
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IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company and its subsidiaries as of June 30,
1997 and the results of operations for the three and nine months and cash flows
for the nine month periods ended June 30, 1997 and 1996. The results of
operations for any interim period are not necessarily indicative of the results
for the year. These interim consolidated financial statements should be read in
conjunction with the Company's annual financial statements and related notes in
the Company's Form 10-K.
2. LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Primary loss per common and common equivalent share is computed by dividing
the loss applicable to common stock, as adjusted for the dividends and accretion
on the Preferred Stock by the weighted average number of shares of common stock
and common stock equivalents, consisting of dilutive stock options and warrants,
outstanding during the period. Loss per share assuming full dilution would be
substantially the same.
Primary loss per share for the three and nine months ended June 30, 1997
and 1996 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding:
Weighted average outstanding 16,296 16,351 16,296 16,279
Shares issuable in connection with stock
options and warrants less shares
purchasable from proceeds 15 114 53 151
------ ------ ------ ------
Adjusted outstanding 16,311 16,465 16,349 16,430
------ ------ ------ ------
------ ------ ------ ------
Adjusted loss applicable to
common stockholders:
Net income (loss) $(13,769) $ 112 $(14,276) $ 336
Dividends on preferred stock (600) (600) (1,800) (1,653)
Preferred stock accretion (74) (72) (221) (193)
------ ------ ------ ------
Loss applicable to common stock $(14,443) $ (560) $(16,297) $ (1,510)
------ ------ ------ ------
------ ------ ------ ------
Loss per common and common
equivalent share $ (.89) $ (.03) $ (1.00) $ (.09)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
3. RESTRUCTURING CHARGE
The Company has recorded a $2,027,000 restructuring charge as a result of
the implementation of a plan to restructure its field operations and reduce the
Company's cost structure. The charge includes $1,800,000 of costs associated
with lease costs and related equipment write-offs associated with the closing
6
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of six pharmacies, the consolidation of three sites in multi-site markets, the
relocation of ten other sites to more economical locations and $217,000 of
severance costs related to administrative staff reductions.
As of June 30, 1997, $1,869,000 of costs, comprised of $1,712,000 of lease
costs and related equipment write-offs associated with vacated sites and
$157,000 of severance costs, remain to be paid out and 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.
4. COMMITMENTS AND CONTINGENCIES
Approximately 55% of revenue for the nine months ended June 30, 1997 was
derived from services provided to Medicare beneficiaries through cost
reimbursement programs. Primarily all of the payments for these services are
made by the Medicare program based on reimbursable costs incurred in rendering
the services. Payments are made via an interim payment rate as services are
rendered. Cost reports are filed with Medicare on an annual basis, and are
subject to audit and retroactive adjustment by Medicare. The Company reports
revenue only for those costs that it believes are probable (as defined in
Statement of Financial Accounting Standards No. 5) of recovery under the
applicable Medicare statutes and regulations and reports its accounts receivable
balances at net realizable value. The Company utilizes an extensive system of
internal controls to ensure such proper reporting of revenues. The Company
employs personnel with significant Medicare reimbursement experience to prepare
its cost reports and to monitor its operations on an ongoing basis to identify
and seek to minimize those costs which are not reimbursed. As a part of its
system of internal controls, the Company uses a detailed analysis process in
calculating its Medicare revenue at the time services are rendered. This
process considers the nature and amounts of the disputed costs (as described in
more detail below) along with several authoritative, legal and historical
sources of information including:
- Applicable statutes and regulations, such as those contained in the
Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1)
(A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient
Care", Health Care Financing Administration (HCFA) Publication 11
"Home Health Agency Manual", applicable sections of HCFA Publication
15-1 "Provider Reimbursement Manual" and intermediary letters and
program memoranda issued by HCFA.
- Administrative decisions and rulings on related issues by the Provider
Reimbursement Review Board and Administrative Law Judges.
- Judicial decisions from Federal District Courts on relevant cases.
- Consultation with independent industry experts such as Medicare Cost
Reimbursement Consultants.
- Opinions of outside legal counsel who specialize in dealing with
Medicare reimbursement issues.
- Historical knowledge gained internally from past Medicare audits.
- Meetings and other communication with Medicare Intermediaries, Blue
Cross Association and HCFA.
This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs. Results of this detailed analysis process are extrapolated to other
unaudited cost reporting years for all of the Company's operations, to estimate
the gross amount of reimbursement that would be affected. The Company, through
this ongoing control and monitoring process, establishes 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
7
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reduction of accounts receivable for disputed costs for which the Company may
not ultimately receive payment. The Company has also reported as a liability
disputed costs for which it has received payment, which may have to be returned
to Medicare. Accordingly, the Company believes that its accounts receivable are
stated at net realizable value, and that it has recorded all probable
liabilities for repayment of disputed costs.
Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process, taken
certain positions with respect to certain types of costs, claiming that they are
not reimbursable and thus not recoverable by the Company from the Medicare
program. These positions are based on interpretations promulgated after the
period covered by the cost reports and applied retroactively, on interpretations
of cost reimbursement principles that are contrary to the Company's
interpretations, or on what the Company believes to be misapplications of
specific reimbursement principles, that could not have been foreseen at the time
services were rendered and revenue recorded. These positions taken by Medicare
auditors are usually determined from Medicare's Notice of Program Reimbursement
("NPR") which typically are not received until two to three years after the
services are rendered. In those situations where the Company decides to not
challenge an NPR finding, any revenue relating to these costs, as well as the
extrapolated impact, if any, on other open costs reporting years, if not written
off or provided for earlier, is written off as a revenue reduction at that time.
The results of all NPRs are included in the analysis process in calculating net
Medicare revenue as described above.
During the quarter ended June 30, 1997 and subsequent to June 30, 1997, the
Company has settled various disputed NPRs and received decisions from the
Provider Reimbursement Review Board and the U.S. District Court. As a result,
the Company currently has NPRs challenging $18.0 million of costs as of June 30,
1997. There was an additional $7.7 million of costs at June 30, 1997 related to
open cost reporting years that are similar to the costs that have been
challenged on NPRs. Together these amounts ($25.7 million at June 30, 1997)
comprise the total amount the Company considers to be disputed costs. The major
cost category in dispute, accounting for approximately 61% of total disputed
costs, is the treatment of certain personnel costs relating to the Company's
community liaison positions, which Medicare auditors allege are unreimbursable
sales costs. Other costs in dispute relate to the cost of physical therapists
employed by the Company and certain other branch and corporate expenses. The
normal Medicare administrative appeal process may take several years to resolve
these types of disputes.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and the Health Care Financing Administration, and is
vigorously pursuing these matters through administrative and legal channels.
The Company has established, and is continuing to add to, a reserve for the
portion of these costs not considered probable of recovery. Since the reserves
have been established, the Company has continued to review whether the level is
appropriate. Subsequent to the third quarter of fiscal 1997, the Company
received two decisions which has caused the Company to conclude that the reserve
should be changed. As a result, a Medicare reserve of $14.0 million was
recorded during the third 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 Department of Health and Human Services' Provider
Reimbursement Review Board (PRRB). The U.S. District Court ruled that the
Company was not entitled to Medicare
8
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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. 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 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 $15,685,000 regarding the community liaison issues, the
Company has established reserves of $14,476,000. The Company believes that
in applying the decisions of the U.S. District Court and the PRRB, the
remaining $1,209,000 of costs are recoverable.
The Company received, in March 1996, a favorable ruling on the physical
therapist issue by the PRRB. In May 1996, this ruling was reversed by the
Health Care Financing Administration. The Company appealed the decision to the
U.S. Federal District Court in Minneapolis. During the second quarter of fiscal
1997, the Company was notified that the U.S. District Court granted the
Company's motion to set aside the decision by the Health Care Financing
Administration which denied the Company reimbursement of some of its costs for
providing physical therapy services provided in 1992. The Court found that the
Health Care Financing Administration had provided an insufficient explanation of
its decision, and therefore, the decision was arbitrary and capricious. The
Court remanded the matter to the Secretary of the Department of Health and Human
Services for further proceeding consistent with its order. As a result, the
Company has not established a reserve for these disputed costs.
As of June 30, 1997, the Company, based on its analysis process, believes
that recovery of $21,856,000 of total disputed costs (including the extrapolated
impact) may not be probable and, accordingly, has established reserves which
totaled that amount as of June 30, 1997. Total accounts receivable (net of
reserves) due from Medicare at June 30, 1997 were $13,276,000, including the
receivables (net of reserves) for disputed costs of $3,868,000. As of June 30,
1997 the Company had received $5,576,000 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 $3,868,000 as of June 30, 1997 have been
classified as a non-current asset.
5. INCOME TAXES
As a result of the restructuring charge noted in Footnote 3 and the
Medicare reserve adjustment noted in Footnote 4, the Company recorded a tax
benefit for the carry back of tax losses to preceding years. This tax benefit
was offset by the write-off of certain deferred tax assets.
9
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6. STOCK BASED COMPENSATION
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". SFAS
123 requires expanded disclosures of stock-based compensation arrangements with
employees and nonemployees and encourages a new method of accounting for
employee stock compensation awards based on their estimated fair value at the
date of grant and the recognition of associated compensation expense over the
service period in the income statement. Companies are permitted to continue
following Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees", but must disclose pro forma net income and pro forma
earnings per share, as if the fair value method of SFAS 123 had been applied, in
a footnote to the financial statements. The fair value measurement and
recognition provisions of SFAS 123 must be applied to all stock-based
arrangements with nonemployees. As permitted by SFAS 123, the Company has
elected to continue following the guidance of APB 25 for measurement and
recognition of stock-based transactions with employees. SFAS 123 disclosures
are not required on an interim reporting basis unless a complete set of
financial statements is presented.
7. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share" which will be
effective in fiscal 1998. The Company does not expect the impact of the new
standard to have a material effect on the financial statements.
10
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's level
of operation and financial condition. This discussion should be read with the
consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
Revenue for the three and nine month periods ended June 30, 1997
decreased 38% and 13%, respectively, as compared to the same periods of the
previous year. The decline is due to a $14 million revenue reserve recorded
in the third quarter of fiscal year 1997. In August 1997, the U.S. District
Court for Minnesota held that the Company was not entitled to Medicare
reimbursement for approximately $1.6 million of community liaison costs
incurred prior to June 1992, but was entitled to partial reimbursement of the
costs for the period from June through September 1992. The total costs for
June through September 1992 were $300,000. In a second case the Department
of Health and Human Services' Provider Reimbursement Review Board ruled that
the Company was entitled to partial reimbursement for approximately $3
million of home care coordinator/community liaison costs incurred in fiscal
years 1991 through 1993. These decisions are likely to affect whether the
Company is entitled to Medicare reimbursement for similar costs in subsequent
years. Based on its preliminary evaluation, the Company has recorded
$13,970,000 of revenue reserves in the third quarter of fiscal 1997.
Direct costs of revenue, as a percentage of revenue, were 95% and 65% for
the three and nine months ended June 30, 1997 versus 52% and 54% in the
comparable periods of the prior year. The increase is due to the $14 million
Medicare reserve previously discussed, which reduced revenues, and margin
pressures in the Extended Hours, Infusion and Hospice divisions.
General, administrative and selling expenses for the three and nine months
ended June 30, 1997 were 77% and 53%, respectively, versus 47% and 46% in the
previous year. The increase is due to the $14 million Medicare reserve
previously discussed.
During the third quarter of fiscal 1997 the Company recorded a $2,027,000
restructuring charge as a result of the implementation of a plan to restructure
its field operations and reduce the Company's cost structure. The charge
included $1,800,000 of costs associated with lease costs and related equipment
write-offs associated with the closing of six pharmacies, the consolidation of
three sites in multi-site markets, the relocation of ten other sites to more
economical locations and $217,000 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 the three and nine month periods ended June 30,
1997 was $132,000 and $383,000 as compared with $154,000 and $471,000 during the
same periods of the previous year. The decrease is due to less interest bearing
cash and cash equivalents as a result of $4.6 million in payments for previously
accrued settlements and severance agreements and repayment of prior year
Medicare overpayments.
11
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Net loss for the third quarter of fiscal 1997 was $13,769,000 versus net
income of $112,000 for the same period of fiscal 1996. Net loss for the nine
month period ended June 30, 1997 was $14,276,000 compared with net income of
$336,000 for the same period of the prior year. The net losses are primarily
the result of the $14 million Medicare revenue reserve and the $2 million
restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $7,096,000 to $11,521,000
at June 30, 1997. During fiscal year 1997 the Company has paid out $2.3 million
for previously accrued settlements and severance agreements with former
employees and $2.3 million in repayments of Medicare overpayments during fiscal
1996. The Company has also paid $1.8 million in preferred dividends and
$900,000 in management fees to ManorCare Health Services, Inc.
Approximately 55% of revenue for the nine months ended June 30, 1997 was
derived from services provided to Medicare beneficiaries through cost
reimbursement programs. Primarily all of the payments for these services are
made by the Medicare program based on reimbursable costs incurred in rendering
the services. Payments are made via an interim payment rate as services are
rendered. Cost reports are filed with Medicare on an annual basis, and are
subject to audit and retroactive adjustment by Medicare. The Company reports
revenue only for those costs that it believes are probable (as defined in
Statement of Financial Accounting Standards No. 5) of recovery under the
applicable Medicare statutes and regulations and reports its accounts receivable
balances at net realizable value. The Company utilizes an extensive system of
internal controls to ensure such proper reporting of revenues. The Company
employs personnel with significant Medicare reimbursement experience to prepare
its cost reports and to monitor its operations on an ongoing basis to identify
and seek to minimize those costs which are not reimbursed. As a part of its
system of internal controls, the Company uses a detailed analysis process in
calculating its Medicare revenue at the time services are rendered. This
process considers the nature and amounts of the disputed costs (as described in
more detail below) along with several authoritative, legal and historical
sources of information including:
- Applicable statutes and regulations, such as those contained in the
Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1)
(A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient
Care", Health Care Financing Administration (HCFA) Publication 11
"Home Health Agency Manual", applicable sections of HCFA Publication
15-1 "Provider Reimbursement Manual" and intermediary letters and
program memoranda issued by HCFA.
- Administrative decisions and rulings on related issues by the Provider
Reimbursement Review Board and Administrative Law Judges.
- Judicial decisions from Federal District Courts on relevant cases.
- Consultation with independent industry experts such as Medicare Cost
Reimbursement Consultants.
- Opinions of outside legal counsel who specialize in dealing with
Medicare reimbursement issues.
- Historical knowledge gained internally from past Medicare audits.
- Meetings and other communication with Medicare Intermediaries, Blue
Cross Association and HCFA.
This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs. Results of this detailed analysis
12
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process are extrapolated to other unaudited cost reporting years for all of the
Company's operations, to estimate the gross amount of reimbursement that would
be affected. The Company, through this ongoing control and monitoring process,
establishes a reserve (by means of a revenue reduction) for any costs incurred
which the Company believes are not probable of recovery. This reserve is
reported as a reduction of accounts receivable for disputed costs for which the
Company may not ultimately receive payment. The Company has also reported as a
liability disputed costs for which it has received payment, which may have to be
returned to Medicare. Accordingly, the Company believes that its accounts
receivable are stated at net realizable value, and that it has recorded all
probable liabilities for repayment of disputed costs.
Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process,
taken certain positions with respect to certain types of costs, claiming that
they are not reimbursable and thus not recoverable by the Company from the
Medicare program. These positions are based on interpretations promulgated
after the period covered by the cost reports and applied retroactively, on
interpretations of cost reimbursement principles that are contrary to the
Company's interpretations, or on what the Company believes to be
misapplications of specific reimbursement principles, that could not have
been foreseen at the time services were rendered and revenue recorded. These
positions taken by Medicare auditors are usually determined from Medicare's
Notice of Program Reimbursement ("NPR") which typically are not received
until two to three years after the services are rendered. In those
situations where the Company decides to not challenge an NPR finding, any
revenue relating to these costs, as well as the extrapolated impact, if any,
on other open costs reporting years, if not written off or provided for
earlier, is written off as a revenue reduction at that time. The results of
all NPRs are included in the analysis process in calculating net Medicare
revenue as described above.
During the quarter ended June 30, 1997 and subsequent to June 30, 1997, the
Company has settled various disputed NPRs and received decisions from the
Provider Reimbursement Review Board and the U.S. District Court. As a result,
the Company currently has NPRs challenging $18.0 million of costs as of June 30,
1997. There was an additional $7.7 million of costs at June 30, 1997 related to
open cost reporting years that are similar to the costs that have been
challenged on NPRs. Together these amounts ($25.7 million at June 30, 1997)
comprise the total amount the Company considers to be disputed costs. The major
cost category in dispute, accounting for approximately 61% of total disputed
costs, is the treatment of certain personnel costs relating to the Company's
community liaison positions, which Medicare auditors allege are unreimbursable
sales costs. Other costs in dispute relate to the cost of physical therapists
employed by the Company and certain other branch and corporate expenses. The
normal Medicare administrative appeal process may take several years to resolve
these types of disputes.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and the Health Care Financing Administration, and is
vigorously pursuing these matters through administrative and legal channels.
The Company has established, and is continuing to add to, a reserve for the
portion of these costs not considered probable of recovery. Since the reserves
have been established, the Company has continued to review whether the level is
appropriate. Subsequent to the third quarter of fiscal 1997, the Company
received two decisions which has caused the Company to conclude that the reserve
should be changed. As a result, a Medicare reserve of $14.0 million was
recorded during the third quarter of fiscal 1997.
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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 Department of Health and Human Services' Provider
Reimbursement Review Board (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. 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
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 $15,685,000 regarding the community liaison issues, the
Company has established reserves of $14,476,000. The Company believes that
in applying the decisions of the U.S. District Court and the PRRB, the
remaining $1,209,000 of costs are recoverable.
The Company received, in March 1996, a favorable ruling on the physical
therapist issue by the PRRB. In May 1996, this ruling was reversed by the
Health Care Financing Administration. The Company appealed the decision to
the U.S. Federal District Court in Minneapolis. During the second quarter of
fiscal 1997, the Company was notified that the U.S. District Court granted
the Company's motion to set aside the decision by the Health Care Financing
Administration which denied the Company reimbursement of some of its costs
for providing physical therapy services provided in 1992. The Court found
that the Health Care Financing Administration had provided an insufficient
explanation of its decision, and therefore, the decision was arbitrary and
capricious. The Court remanded the matter to the Secretary of the Department
of Health and Human Services for further proceeding consistent with its
order. As a result, the Company has not established a reserve for these
disputed costs.
As of June 30, 1997, the Company, based on its analysis process,
believes that recovery of $21,856,000 of total disputed costs (including the
extrapolated impact) may not be probable and, accordingly, has established
reserves which totaled that amount as of June 30, 1997. Total accounts
receivable (net of reserves) due from Medicare at June 30, 1997 were
$13,276,000, including the receivables (net of reserves) for disputed costs
of $3,868,000. As of June 30, 1997 the Company had received $5,576,000 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 $3,868,000 as of June 30, 1997 have been classified as a
non-current asset.
The Company has letter of credit facilities from a commercial bank
totaling $3,348,000. These credit facilities are collateralized by secured
investments and will expire on December 15, 1997.
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The ultimate settlement of the $5,576,000 liability for payments from
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.
Overall, In Home Health believes that cash provided by operations along
with its existing cash balances of $11,521,000 will be sufficient to finance its
current operations through at least fiscal 2000.
FORWARD LOOKING INFORMATION
Statements included in this Form 10-Q that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. The Company's ability to succeed in the future is dependant
upon government regulation, third party reimbursement, competition and factors
affecting the health care industry in general. The Company's future results of
operations and financial condition will be affected by factors such as (i)
proposed changes to the Medicare reimbursement system from a retrospective
cost-based system to a prospective payment system, (ii) settlements which may be
reached with the Department of Health and Human Services regarding cost reports,
and (iii) its ability to establish and maintain close working relationships with
referral sources, including payors, hospitals, physicians and other health care
professionals.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - Information about certain legal proceedings, set
forth under Note 4 to the Unaudited Consolidated Financial Statements
included herein, is incorporated by reference in this Item.
ITEM 2 - CHANGE IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5 - OTHER INFORMATION - None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q report to be signed on its behalf by
the undersigned thereunto duly authorized.
In Home Health, Inc.
----------------------
Registrant
Date: April 3, 1998 /s/Wolfgang von Maack
------------------------
Wolfgang von Maack
Chief Executive Officer
Date: April 3, 1998 /s/Thomas R. Gross
---------------------
Thomas R. Gross
Chief Financial Officer
17
