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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 1998
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 No
--- ---
As of March 31, 1998, the number of shares outstanding of the registrant's
common stock, $.01 par value was 16,398,781 shares.
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IN HOME HEALTH, INC.
TABLE OF CONTENTS
<TABLE>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
March 31, 1998, Pro Forma March 31, 1998
and September 30, 1997 2-3
Consolidated Statements of Operations -
For the three and six months ended March 31,
1998 and 1997 4
Consolidated Statements of Cash Flows -
For the six months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11-14
PART II. OTHER INFORMATION 15
</TABLE>
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IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
Pro Forma
March 31, 1998 Mar. 31, 1998 Sept. 30,
(Unaudited) (Unaudited) 1997
----------- ----------- ----
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 17,164 $ 17,164 $ 13,853
Accounts receivable, net of allowances
of $1,936 and $2,029 in March 1998
and September 1997, respectively 14,760 14,760 14,125
Prepaid income tax 39 39 3,907
Deferred income tax 1,554 1,554 1,540
Prepaid expenses and other current assets 797 797 579
-------- -------- --------
Total current assets 34,314 34,314 34,004
-------- -------- --------
Property:
Furniture and equipment 9,156 9,156 9,621
Computer equipment and software 7,470 7,470 7,506
Leasehold improvements 630 630 727
-------- -------- --------
Total 17,256 17,256 17,854
Accumulated depreciation (11,279) (11,279) (10,501)
-------- -------- --------
Property - net 5,977 5,977 7,353
-------- -------- --------
Other Assets:
Accounts receivable, long-term 1,204 1,204 2,891
Goodwill, net 5,352 5,352 5,432
Other assets 439 439 544
-------- -------- --------
Total other assets 6,995 6,995 8,867
-------- -------- --------
Total Assets $ 47,286 $ 47,286 $ 50,224
-------- -------- --------
-------- -------- --------
</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>
Pro Forma
March 31,1998 Mar. 31, 1998 Sept. 30,
(Unaudited) (Unaudited) 1997
----------- ----------- ----
<S> <C> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 414 $ 414 $ 777
Accounts payable 3,386 3,386 4,255
Accounts payable - related party 74 74 59
Accrued liabilities:
Third party 7,456 7,456 6,789
Compensation 3,959 3,959 4,034
Insurance 5,521 5,521 6,704
Restructuring 890 890 1,807
Other 370 370 583
-------- -------- --------
Total current liabilities 22,070 22,070 25,008
-------- -------- --------
Long-Term Debt 125 125 278
Deferred Revenue 187 187 398
Deferred Rent Payable 227 227 248
Deferred Income Tax 1,573 1,573 1,643
Commitments and Contingencies -- -- --
Redeemable Convertible Preferred Stock -
$1.00 par value, $20,000 redemption value,
authorized 200 shares; issued and outstanding
March 31 and September 30 - 200 shares 19,210 -- 19,061
$1.00 par value, $13,000 redemption value,
authorized 130 shares; issued and outstanding
March 31 Proforma - 130 shares -- 12,487 --
Shareholders' Equity:
Redeemable Convertible Preferred Stock -
$1.00 par value, $7,000 redemption value,
authorized 70 shares; issued and outstanding
March 31 Proforma - 70 shares -- 7,000 --
Preferred stock - authorized 800 shares -- -- --
Common stock - $.01 par value:
authorized - 40,000 shares;
issued and outstanding -
March 31 -16,399 shares;
March 31 Pro Forma - 16,399 shares;
September 30 - 16,399 shares 164 164 164
Additional paid-in capital 23,661 23,661 23,661
Retained earnings (deficit) (19,931) (20,208) (20,237)
-------- -------- --------
Total shareholders' equity 3,894 10,617 3,588
-------- -------- --------
Total Liabilities and Shareholders' Equity $ 47,286 $ 47,286 $ 50,224
-------- -------- --------
-------- -------- --------
</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 SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
Three Months Ended Six Months Ended
March 31 March 31
------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue [net of Medicare reserves of
($4,306), $210, ($4,229), $451 for the
respective periods] $ 26,439 $ 31,375 $ 54,297 $ 62,960
--------- --------- --------- ---------
Operating Expenses:
Direct costs of revenue
(primarily payroll related costs) 15,203 17,717 31,328 34,898
General, administrative
and selling expenses 10,899 14,376 22,104 28,884
Restructuring Charge (191) -- (337) --
--------- --------- --------- ---------
Total operating expenses 25,911 32,093 53,095 63,782
--------- --------- --------- ---------
Income (loss) from operations 528 (718) 1,202 (822)
--------- --------- --------- ---------
Interest:
Interest income 274 180 490 403
Interest expense (7) (63) (37) (152)
--------- --------- --------- ---------
Net interest income 267 117 453 251
--------- --------- --------- ---------
Income (loss) before income taxes 795 (601) 1,655 (571)
Income tax benefit -- (80) -- (64)
--------- --------- --------- ---------
Net income (loss) $ 795 $ (521) $ 1,655 $ (507)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) available to
common shareholders $ 120 $ (1,194) $ 306 $ (1,854)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted earnings (loss)
per share $ .01 $ (.07) $ .02 $ (.11)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
1998 1997
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 1,655 $ (507)
Adjustments:
Depreciation and amortization 1,644 1,561
Accounts receivable 1,052 (1,390)
Prepaid expenses and other assets 3,641 222
Accounts payable (869) (851)
Accounts payable - related party 15 (112)
Accrued liabilities (1,721) (3,075)
Deferred revenue (211) (211)
Deferred rent payable (21) (42)
Deferred income tax (84) 99
-------- -------
Net cash provided (used) by operating activities 5,101 (4,306)
-------- -------
Cash Flows From Investing Activities:
Business acquisitions -- (47)
Acquisition of property (82) (137)
Repayments of advances to officers and employees 8 350
-------- -------
Net cash provided (used) by investing activities (74) 166
-------- -------
Cash Flows From Financing Activities:
Payment of long-term debt (516) (862)
Preferred dividends paid (1,200) (1,200)
Repurchase of common stock -- (505)
-------- -------
Net cash used by financing activities (1,716) (2,567)
-------- -------
Cash and Cash Equivalents:
Net increase (decrease) 3,311 (6,707)
Beginning of period 13,853 18,617
-------- -------
End of period $ 17,164 $11,910
-------- -------
-------- -------
</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 (consisting of only
normal, recurring accruals) necessary to present fairly the financial
position of the Company and its subsidiaries as of March 31, 1998 and the
results of operations for the three and six months and cash flows for the six
months ended March 31, 1998 and 1997. 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. BASIC AND DILUTED EARNINGS PER SHARE
Effective October 1, 1997 the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" (SFAS No. 128). Earnings
per share amounts presented for 1997 have been restated for the adoption of
SFAS No. 128. The following table reflects the calculation of basic and
diluted earnings per share for the three months and six months ended March
31, 1998 and 1997.
<TABLE>
(in thousands, except per share amounts)
THREE MONTHS SIX MONTHS
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS PER SHARE:
Net income (loss) $ 795 $ (521) $ 1,655 $ (507)
Dividends on preferred stock (600) (600) (1,200) (1,200)
Preferred stock accretion (75) (73) (149) (147)
------- ------- ------- -------
Income (loss) available to
common shareholders $ 120 $(1,194) $ 306 $(1,854)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 16,399 16,296 16,399 16,338
------- ------- ------- -------
------- ------- ------- -------
Income (loss) per share-basic and diluted $ .01 $ (.07) $ .02 $ (.11)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Options to purchase 1,216,000 shares of common stock were outstanding at
March 31, 1998. These options were not included in the computation of
diluted earnings per share because the options' exercise price was greater
than the average market price of the common shares. Options to purchase
1,548,041 shares of common stock were outstanding at March 31, 1997, and were
not included in the computation of diluted earnings per share due to the loss
in the period.
Redeemable convertible preferred stock was issued to ManorCare Health
Services, Inc. in October 1995. As of April 13, 1998, 130,000 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, while 70,000 shares can be
redeemed only at the option of the Company on and after the fifth
anniversary. 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. A private warrant was
issued in October 1995 to ManorCare Health Services, Inc. to purchase 6
million shares of common stock at $3.75 per share and expires in October
1998. The impact of the redeemable
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convertible preferred stock and the warrant on diluted earnings per share
would be anti-dilutive and therefore, they have been excluded. Please refer
to note 7 for additional information.
3. RESTRUCTURING CHARGE
During the last half of fiscal 1997, the Company 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.
Total expenditures related to facilities consolidation were $580,000
during the six months ended March 31, 1998. As of March 31, 1998, $890,000
of costs, comprised of lease costs and related equipment write-offs
associated with vacated sites, remain to be paid out and are included in
other current liabilities. The restructuring plan is expected to be
completed by the end of fiscal 1998.
4. COMMITMENTS AND CONTINGENCIES
Approximately 59% and 62% of revenue for the six months ended March 31,
1998 and 1997, respectively, was derived from services provided to Medicare
beneficiaries. Payments for reimbursable 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.
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
7
<PAGE>
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 cost 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.
In cases where the company disagrees with the positions taken by the
Medicare fiscal intermediaries' auditors and HCFA, it vigorously pursues such
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 had NPRs challenging $6.9 million as of March 31, 1998. There
is an additional $2.2 million of costs at March 31, 1998 related to open cost
reporting years that are similar to the costs that have been challenged on
NPRs. The Company has settled with HCFA to recover $4.5 million (see below)
of the $6.9 million withheld through March 31, 1998. Together these amounts
($6.9 million plus $2.2 million minus $4.5 million) comprise a total of $4.6
million that the Company considers to be disputed costs. The cost categories
in dispute are the cost of physical therapists employed by the Company and
certain other branch and corporate expenses. The settlements were primarily
related to certain personnel costs relating to the Company's community
liaison position and pharmacy expenses. As a result of such settlements, the
amount in dispute with respect to NPRs received and anticipated has been
reduced by $15.1 million to $4.6 million and the Medicare reserve has been
reduced by $13.4 million to $3.4 million.
One of the disputes with HCFA which was settled during the quarter ended
March 31, 1998 concerned the treatment of certain personnel costs relating to
the Company's community liaison positions. As a result, the disputed costs
and reserves have been reduced by $8.3 million and $7.1 million,
respectively. The Company has
8
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settled a dispute over pharmacy indirect expenses, which results in a
reduction in the disputed costs and reserves by $6.4 million and $6.1
million, respectively. In addition, the Company has settled other cost
allocation issues which have resulted in a reduction in the disputed costs
and reserves by $0.4 million and $0.2 million, respectively.
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 decision 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 March 31, 1998, the Company, based on its analysis process, believes
that recovery of $3,351,000 of total disputed costs (including the
extrapolated impact) may not be probable and, accordingly, has established
reserves which totaled that amount as of March 31, 1998. Total accounts
receivable (net of reserves) due from Medicare at March 31, 1998 were
$9,249,000, including the receivables (net of reserves) for disputed costs of
$1,204,000. As of March 31, 1998, the Company had received $7,456,000 in
payments from Medicare for which Medicare may seek repayment and accordingly,
such a 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 $1,204,000 as of March 31,
1998 have been classified as a non-current asset.
5. INCOME TAXES
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 and other temporary differences may expire unused and,
accordingly, has established a valuation allowance against them. During the
six months ended March 31, 1998, income tax expense of $700,000 was offset by
utilizing a portion of the net operating loss carryforwards.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
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.
7. NOTE TO PRO FORMA BALANCE SHEET
On April 13, 1998, In Home Health, Inc. and Manor Care, Inc. entered into
an agreement to modify the redemption terms of $7,000,000 of In Home
Health's redeemable convertible preferred stock. Pursuant to the
modification, these shares are redeemable only at the option of In Home
Health. There are no other changes in the terms of the $7,000,000 of
redeemable convertible preferred stock, and no changes in the remaining
$13,000,000 of redeemable convertible preferred stock. The pro forma balance
sheet as of March 31, 1998 gives
9
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effect to the change in redemption feature by including $7,000,000 of
redeemable convertible preferred stock within shareholders' equity, and
recording the amortization of the discount relating to these shares as a
reduction of retained earnings.
The effect of the Agreement is to permit the Company to present the
modified shares in the Stockholders' Equity portion of its balance sheet,
while the remainder of the preferred stock continues to be presented as a
"mezzanine item" between the liabilities and shareholders' equity sections of
the balance sheet.
The reason for the Agreement was to allow the Company to meet the
requirements for continued listing of its common stock on the NASDAQ National
Market. The Company has also provided an undertaking to the NASDAQ Stock
Market, Inc. ("NASDAQ") that it will not voluntarily redeem any of its
preferred stock if the redemption would cause the Company's net tangible
assets, as defined by NASDAQ, to be less than $5,000,000, unless NASDAQ
otherwise consents. Based on the Agreement and the undertaking described
above, the Company's common stock will continue to be listed for trading on
the NASDAQ National Market. Please refer to the Form 8-K filed on April 14,
1998 for additional information.
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 six months ended March 31, 1998 decreased 16% and
14%, respectively, over the same periods in the prior year. Visit Division
revenues decreased by 18% due to the impact on revenue from the cost reduction
program management enacted in fiscal 1997 and lower Medicare payments under the
new per-beneficiary cost limits which were announced on April 1, 1998 but made
effective retroactive to October 1, 1997. Extended Hours, Infusion and Hospice
Division revenues decreased 6% from the prior year.
The second quarter results included two significant adjustments in recorded
revenues. First, In Home Health successfully resolved several reimbursement
disputes with HCFA resulting in a $4.4 million increase in revenues. Second,
with HCFA's April 1st announcement of the new per-beneficiary cost limits, In
Home Health took a $4.5 million reduction in year-to-date revenues. Management
is implementing a series of cost reduction programs and improvements in the
care delivery process to reduce the impact of the new Medicare cost limits in
future periods.
Direct costs, as a percent of revenue, were 58% for the three and six months
ended March 31, 1998 versus 56% and 55% for the same periods of the previous
year. The increase was due to the change in Visit Division revenue volume and
overall revenue mix.
General, administrative and selling expenses for the three and six months
ended March 31, 1998 were 41% versus 46% for the same periods of the previous
year. This decrease was due to the decrease in costs associated with the
Company's restructuring plan.
Net interest income for the three and six months ended March 31, 1998 was
$267,000 and $453,000 versus $117,000 and $251,000 for the same periods of the
previous year. Interest income is a result of the cash proceeds from the
investment by ManorCare Health Services, Inc. in October 1995. Due to the
Company's improved cash flow from operations, the larger cash balance has
provided an increase in interest income over last year.
Net income for the three and six months ended March 31, 1998 was $795,000
and $1,655,000 compared to net loss of $521,000 and $507,000 for the same
periods of the previous year. The net income improvement is primarily due to a
significant reduction in general, administrative and selling expenses resulting
from fiscal 1997 restructuring initiatives. Net income available to common
shareholders was $120,000 and $306,000 for the three and six months ended March
31, 1998, compared to a loss of $1,194,000 and $1,854,000 for the same periods
of the previous year. The difference between net income and net income
available to common shareholders is primarily the result of the preferred stock
dividend payable to ManorCare Health Services, Inc. for its $20 million
preferred stock investment in In Home Health. Basic and diluted earnings per
share were $.01 and $.02 compared to a loss of $.07 and $.11 per share last
year.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $3,311,000 to $17,164,000
at March 31, 1998. The Company received about $3.9 million of income tax
refunds by carrying back the fiscal 1997 net operating loss three years.
Approximately 59% and 62% of revenue for the six months ended March 31, 1998
and 1997, respectively, was derived from services provided to Medicare
beneficiaries. Payments for reimbursable 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.
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.
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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 cost 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.
In cases where the Company disagrees with the positions taken by the
Medicare fiscal intermediaries' auditors and HCFA, it vigorously pursues such
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 had NPRS challenging $6.9 million as of March 31,1998. There is
an additional $2.2 million of costs at March 31, 1998 related to open cost
reporting years that are similar to the costs that have been challenged on
NPRS. The Company has settled with hcfa to recover $4.5 million (see below) of
the $6.9 million withheld through March 31, 1998. Together these amounts ($6.9
million plus $2.2 million minus $4.5 million) comprise a total of $4.6 million
that the Company considers to be disputed costs. The cost categories in
dispute are the cost of physical therapists employed by the Company and certain
other branch and corporate expenses. The settlements were primarily related to
certain personnel costs relating to the Company's community liaison position
and pharmacy expenses. As a result of such settlements, the amount in dispute
with respect to NPRS received and anticipated has been reduced by $15.1 million
to $4.6 million and the Medicare reserve has been reduced by $13.4 million to
$3.4 million.
One of the disputes with HCFA which was settled during the quarter ended
March 31, 1998 concerned the treatment of certain personnel costs relating to
the Company's community liaison positions. As a result, the disputed costs and
reserves have been reduced by $8.3 million and $7.1 million, respectively. The
Company has settled a dispute over pharmacy indirect expenses, which results in
a reduction in the disputed costs and reserves by $6.4 million and $6.1
million, respectively. In addition, the Company has settled other cost
allocation issues which have resulted in a reduction in the disputed costs and
reserves by $0.4 million and $0.2 million, respectively.
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
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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 decision 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 March 31, 1998, the Company, based on its analysis process, believes
that recovery of $3,351,000 of total disputed costs (including the extrapolated
impact) may not be probable and, accordingly, has established reserves which
totaled that amount as of March 31, 1998. Total accounts receivable (net of
reserves) due from Medicare at March 31, 1998 were $9,249,000, including the
receivables (net of reserves) for disputed costs of $1,204,000. As of March
31, 1998, the Company had received $7,456,000 in payments from Medicare for
which Medicare may seek repayment and accordingly, such a 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 $1,204,000 as of March 31, 1998 have been classified as a
non-current asset.
The Company has letter of credit facilities from a commercial bank totaling
$3,127,000. These credit facilities are collateralized by secured investments
and will expire on December 15, 1998.
Overall, In Home Health believes the cash provided by operations along with
its existing cash balance of $17,164,000 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. 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. Please
refer to our Form 10-K for the fiscal year ended September 30, 1997 for a more
thorough discussion of forward looking information.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - None.
ITEM 2 - CHANGE IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
The Company held its Annual Meeting of Shareholders on March 4, 1998.
The shareholders present in person or in proxy voted to re-elect the
existing board of directors. Each nominee received the number of
votes indicated below. There were no broker non-votes with respect
to the election of directors.
Nominees Votes For Withheld
-------- ---------- --------
Wolfgang von Maack 25,323,410 171,843
James J. Lynn 25,304,429 190,824
Donald C. Tomasso 25,304,563 190,690
Joseph Buckley 25,304,928 190,325
James M. Rempe 25,317,216 178,037
The shareholders ratified the selection of Deloitte & Touche LLP as
the Company's independent auditors for 1998 by a vote of 25,360,915
shares in favor, 86,059 shares against, 48,279 abstaining and zero
shares broker non-voted.
ITEM 5 - OTHER INFORMATION - None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none
(b) A report on Form 8-K was filed April 14, 1998 containing
disclosure pursuant to Item 5 of Form 8-K.
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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: May 11, 1998 /s/ Wolfgang von Maack
-------------------------------
Wolfgang von Maack
Chief Executive Officer
Date: May 11, 1998 /s/ Thomas R. Gross
------------------------------
Thomas R. Gross
Chief Financial Officer
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