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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 DECEMBER 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 January 8, 1999, the number of shares outstanding of the
registrant's common stock, $.03 par value was 5,479,736 shares.
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IN HOME HEALTH, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
December 31, 1998 and September 30, 1998 2-3
Consolidated Statements of Operations -
For the Three Months Ended December 31,
1998 and 1997 4
Consolidated Statements of Cash Flows -
For the Three Months Ended December 31,
1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9-12
PART II. OTHER INFORMATION 13
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IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
Dec. 31, 1998 Sept. 30,
(Unaudited) 1998
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,866 $ 21,462
Accounts receivable, net of allowances of $1,111 and
$1,175 in December and September 1998, respectively 11,918 13,598
Deferred income tax 1,198 1,269
Prepaid expenses and other current assets 994 970
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Total current assets 36,976 37,299
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Property:
Furniture and equipment 7,924 8,123
Computer equipment and software 6,779 6,771
Leasehold improvements 501 529
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Total 15,204 15,423
Accumulated depreciation (11,151) (10,954)
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Property - net 4,053 4,469
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Other Assets:
Accounts receivable, long-term 977 988
Goodwill, net 5,234 5,274
Other assets 304 330
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Total other assets 6,515 6,592
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Total Assets $ 47,544 $ 48,360
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Dec. 31, 1998 Sept. 30,
(Unaudited) 1998
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<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 189 $ 219
Accounts payable 2,882 2,612
Accounts payable - related party 107 111
Accrued liabilities:
Third party 12,325 12,669
Compensation 3,091 3,225
Insurance 3,026 3,246
Restructuring 330 456
Other 529 538
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Total current liabilities 22,479 23,076
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Long-Term Debt 18 44
Deferred Revenue 20 41
Deferred Rent Payable 187 198
Deferred Income Tax 1,210 1,288
Commitments and Contingencies -- --
Redeemable Convertible Preferred Stock - $1.00 par value,
$13,000 redemption value, authorized 130 shares; issued
and outstanding December 31 and September 30 - 130 shares 12,633 12,584
Shareholders' Equity:
Redeemable Convertible Preferred Stock - $1.00 par value,
$7,000 redemption value, authorized 70 shares; issued
and outstanding December 31 and September 30 - 70 shares 7,000 7,000
Preferred stock - authorized 800 shares -- --
Common stock - $.03 par value, authorized 13,334 shares;
issued and outstanding December 31- 5,480 shares
and September 30 - 5,479 shares 164 164
Additional paid-in capital 23,675 23,675
Retained deficit (19,842) (19,710)
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Total shareholders' equity 10,997 11,129
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Total Liabilities and Shareholders' Equity $ 47,544 $ 48,360
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Revenue [net of Medicare reserves of
($57) and $77 in 1998 and 1997, respectively] $ 18,571 $ 27,858
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Operating Expenses:
Direct costs of revenue (primarily payroll
related costs) 10,359 16,125
General, administrative and selling expenses 8,034 11,059
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Total operating expenses 18,393 27,184
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Income from operations 178 674
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Interest:
Interest income 345 216
Interest expense (6) (30)
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Net interest income 339 186
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Income before income taxes 517 860
Income tax expense -- --
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Net income $ 517 $ 860
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Net income (loss) available to common
shareholders $ (132) $ 186
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Basic and diluted earnings (loss) per share $ (.02) $ .03
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 517 $ 860
Adjustments:
Depreciation and amortization 393 709
Loss on disposal of assets 103 165
Accounts receivable 1,691 2,645
Prepaid expenses and other assets (31) (103)
Accounts payable 270 (1,606)
Accounts payable - related party (4) 15
Accrued liabilities (833) (1,556)
Deferred revenue (21) (105)
Deferred rent payable (11) (11)
Deferred income tax (7) --
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Net cash provided by operating activities 2,067 1,013
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Cash Flows From Investing Activities:
Acquisition of property (13) (18)
Repayments of advances to officers and employees 6 8
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Net cash used by investing activities (7) (10)
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Cash Flows From Financing Activities:
Payment of long-term debt (56) (308)
Preferred dividends paid (600) (600)
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Net cash used by financing activities (656) (908)
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Cash and Cash Equivalents:
Net increase 1,404 95
Beginning of period 21,462 13,853
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End of period $ 22,866 $ 13,948
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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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 December 31, 1998 and the
results of operations and cash flows for the three months ended December 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
The following table reflects the calculation of basic and diluted
earnings (loss) per share for the three months ended December 31, 1998 and 1997.
Earnings per share amounts presented for 1997 have been restated for the
one-for-three reverse stock split effective December 1, 1998. (See Note 6.)
<TABLE>
<CAPTION>
(in thousands, except per
share amounts)
1998 1997
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<S> <C> <C>
EARNINGS PER SHARE:
Net income $ 517 $ 860
Dividends on preferred stock (600) (600)
Preferred stock accretion (49) (74)
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Net income (loss) available to common shareholders $ (132) $ 186
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Weighted average shares outstanding 5,480 5,466
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Basic and diluted earnings (loss) per share $ (.02) $ .03
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</TABLE>
Options to purchase 272,142 and 427,286 shares of common stock were
outstanding at December 31, 1998 and 1997, respectively. 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.
Redeemable convertible preferred stock was issued to ManorCare
Health Services, Inc., a wholly owned subsidiary of HCR ManorCare, Inc.
("HCR"), in October 1995. As of December 31, 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 are initially convertible into
3,333,334 common shares at an initial conversion price of $6.00 per share.
In December 1998, an agreement was signed with HCR to modify the terms of the
preferred shares. Under the terms of the modification agreement, HCR
irrevocably waived the voting rights of the preferred stock, except with
respect to any proposal presented to the Company's stockholders to (i) wind
up, dissolve or liquidate the Company or revoke or forfeit its charter, (ii)
amend the Company's articles of incorporation, (iii) merge or consolidate or
enter into an exchange agreement with another
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corporation, or (iv) sell, lease, transfer or otherwise dispose of all or
substantially all of the Company's assets not in the usual and regular course
of business. In consideration, the Company waived its right to pay dividends
on the preferred stock in shares of its common stock. A private warrant
issued in October 1995 to HCR to purchase 2 million shares of common stock at
$11.25 per share expired in October 1998. The impact of the redeemable
convertible preferred stock and the warrant on diluted earnings (loss) per
share would be anti-dilutive and, therefore, they have been excluded from the
computation of basic and diluted earnings per share.
3. RESTRUCTURING CHARGE
During 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 $29,000
during the three months ended December 31, 1998 as compared to $240,000 for
the same period of the previous year. As of December 31, 1998, $330,000 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 substantially complete
by the end of the third quarter of fiscal 1999.
4. COMMITMENTS AND CONTINGENCIES
Approximately 46% and 59% of revenue for the three months ended
December 31, 1998 and 1997, respectively, was derived from services provided
to Medicare beneficiaries, for which payment is based on cost. Payments for
reimbursable services are made by the Medicare program based on reimbursable
costs incurred in rendering 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.
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. When the Company disagrees with findings of the Medicare
fiscal intermediaries, it seeks relief through administrative and legal
channels. Based on a detailed analysis of statutes and regulations,
administrative and judicial decisions, and consultation with independent
industry experts and legal counsel, the Company provides a reserve (by means
of a revenue deduction) for any costs incurred which are not probable of
recovery. At December 31, 1998, total disputed costs were $3,901,000; the
Company believes that recovery of $2,924,000 of such costs (including
extrapolation for all unsettled cost reporting periods) may not be probable
and, accordingly, has established reserves totaling $2,924,000 as of December
31, 1998.
At December 31, 1998, disputed costs totaling $977,000 were not
reserved, all of which relate to the compensation of physical therapists
employed by the Company. The Medicare intermediary took the position that
contractor physical therapist salary equivalency guidelines should be applied
to the Company's employee physical therapists, and thus disallowed certain
physical therapy costs for the fiscal 1992 cost reporting period. The
Company appealed to the Provider Reimbursement Review
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Board ("PRRB") and received a favorable ruling in February 1996. In April
1996, the Health Care Financing Administration ("HCFA") reversed the PRRB
ruling and disallowed all of the disputed costs. The Company appealed to the
U.S. Federal District Court ("District Court") in Minneapolis, which ruled in
favor of the Company, declaring HCFA's decision contrary to law and set it
aside. In August 1998, HCFA appealed the decision to the Eighth Circuit
Court of Appeals. The Company, based on its assessment and the opinion of
its legal counsel, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota,
continues to believe that it is probable that the Company will ultimately
prevail in this case.
At December 31, 1998, total accounts receivable (net of reserves)
due from Medicare were $6,828,000. Based on the progress toward resolution
of the disputed costs, management estimates that net receivables of $977,000
will not be realized within the next twelve months, and accordingly, has
classified net receivables of $977,000 as a non-current asset. Accrued
liabilities to third-party at December 31, 1998 represent payments from
Medicare in excess of amounts that the Company believes it will be entitled
to upon ultimate settlement of Medicare cost reports.
5. INCOME TAXES
At September 30, 1998, the Company had federal operating loss
carryforwards of $9,100,000 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
three months ended December 31, 1998, income tax expense of $200,000 was
offset by utilizing a portion of the net operating loss carryforwards versus
$400,000 for the same period of the previous year.
6. REVERSE STOCK SPLIT
On November 17, 1998, the Company declared a one-for-three reverse
stock split effective the close of business December 1, 1998. The Board of
Directors declared the reverse split to reduce the number of outstanding
shares of common stock and thereby encourage an increase in the price per
share of the common stock on the public market in an effort to maintain
eligibility for the continued trading on the NASDAQ National Market. While
the Company believes the reverse split should allow the common stock to
continue to trade on the NASDAQ National Market, this depends on the Company
meeting eligibility requirements in the future, and the Company can provide
no assurance that such requirements will be met.
The par value of the common stock was increased from $.01 to $.03
and the outstanding shares were decreased from 16,437,000 to 5,480,000 at
December 31, 1998. All references in the accompanying financial statements
to the number of common shares and the per share amounts have been restated
to reflect the reverse stock split.
7. 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 the
Company in fiscal 1999. In its fiscal 1999 Form 10-K, the Company will
disclose information relating to three segments: Extended Hours Division,
Visit Division, and Hospice Division.
8
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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
The Balanced Budget Act of 1997 (the "Budget Act") and the Omnibus
Consolidated and Emergency Supplemental Appropriations Act for Fiscal Year
1999 (the "Appropriations Act") require HCFA to implement a prospective
payment system ("PPS") for home health agencies by October 1, 2000. Until
PPS is implemented, the Budget Act established an Interim Payment System
("IPS"), effective October 1, 1997, that reimburses home health agencies the
lesser of: (1) actual, reasonable costs, (2) per-visit cost limits, or (3)
newly implemented per-beneficiary cost limits. The IPS program rates were
announced April 1, 1998, but given effect retroactively to October 1, 1997.
In response to the implementation of IPS, the Company initiated a series of
cost reduction programs and care delivery process improvements.
Revenue for the three months ended December 31, 1998 decreased 33%
over the same period in the prior year. The decrease in revenue occurred
primarily in cost reimbursed revenue due to cost reduction initiatives in
response to lower Medicare payments under the new per-beneficiary limits
announced in 1998. Visit Division revenue decreased 46% due to a decrease in
patient visits and corporate cost reductions implemented in an effort to
minimize the impact of IPS. Extended Hours Division revenue declined 18% due
to a reduction in the volume of new low margin cases accepted and a lack of
staffing for certain service offerings in several markets. Infusion Pharmacy
revenue decreased 65% primarily as a result of a reduction of infusion
product offerings in a number of markets and the closure of pharmacies as a
part of the Company's restructuring plan. Hospice Division revenue increased
13% due to increased patient census.
Direct costs, as a percent of revenue, were 56% versus 58% for the
three months ended December 31, 1998 and 1997, respectively. This reduction
was principally the result of the Company's cost reduction program.
General, administrative and selling expenses for the three months
ended December 31, 1998 were $8,034,000, a decrease of $3,025,000 from the
same period last year due to the cost reduction initiatives implemented last
year. As a percent of revenue, however, expenses increased to 43% from 40%
last year due to the decrease in revenues.
Net interest income for the three months ended December 31, 1998
was $339,000 versus $186,000 for the same period of the previous year. The
increase in net interest income was principally attributable to higher
average cash balances resulting from improved cash flow from operations and
reductions in interest expense due to reduction of long-term debt.
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Net income for the three months ended December 31, 1998 was
$517,000, compared to $860,000 for the same period of the previous year. Net
loss available to common shareholders was $132,000 for the three months ended
December 31, 1998, compared to income of $186,000 for the same period of the
previous year. The reduction in net income is due primarily to the decreased
volume in the Visit Division in response to IPS, resulting in less cost
reimbursement of general and administrative costs within that division, and
increased general and administrative allocations to the other divisions.
While gross margins for Extended Hours and Hospice have been maintained and
general and administrative costs have been reduced, these divisions have not
generated enough new revenue to compensate for the shift of general and
administrative costs from the Visit Division. The difference between net
income and net income available to common shareholders is primarily the
result of the preferred stock dividend to ManorCare Health Services, Inc., a
wholly owned subsidiary of HCR ManorCare, Inc. ("HCR") for its $20 million
preferred stock investment in In Home Health. Basic and diluted loss per
share was $.02 compared to earnings of $.03 per share last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $1,404,000 to
$22,866,000 at December 31, 1998 from $21,462,000 at September 30, 1998. Net
cash provided from operating activities for the three months ended December
31, 1998 was $2,067,000, which was primarily the result of the decrease in
total accounts receivable. During the three months ended December 31, 1998,
the Company paid $600,000 to HCR for preferred stock dividends.
Approximately 46% and 59% of revenue for the three months ended
December 31, 1998 and 1997, respectively, was derived from services provided
to Medicare beneficiaries, for which payment is based on cost. Payments for
reimbursable services are made by the Medicare program based on reimbursable
costs incurred in rendering 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.
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. When the Company disagrees with findings of the Medicare
fiscal intermediaries, it seeks relief through administrative and legal
channels. Based on a detailed analysis of statutes and regulations,
administrative and judicial decisions, and consultation with independent
industry experts and legal counsel, the Company provides a reserve (by means
of a revenue deduction) for any costs incurred which are not probable of
recovery. At December 31, 1998, total disputed costs were $3,901,000; the
Company believes that recovery of $2,924,000 of such costs (including
extrapolation for all unsettled cost reporting periods) may not be probable
and, accordingly, has established reserves totaling $2,924,000 as of December
31, 1998.
At December 31, 1998, disputed costs totaling $977,000 were not
reserved, all of which relate to the compensation of physical therapists
employed by the Company. The Medicare intermediary took the position that
contractor physical therapist salary equivalency guidelines should be applied to
the Company's employee physical therapists, and thus disallowed certain physical
therapy costs for the fiscal 1992 cost reporting period. The Company appealed
to the Provider Reimbursement Review
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Board ("PRRB") and received a favorable ruling in February 1996. In April
1996, the Health Care Financing Administration ("HCFA") reversed the PRRB
ruling and disallowed all of the disputed costs. The Company appealed to the
U.S. Federal District Court ("District Court") in Minneapolis, which ruled in
favor of the Company, declaring HCFA's decision contrary to law and set it
aside. In August 1998, HCFA appealed the decision to the Eighth Circuit
Court of Appeals. The Company, based on its assessment and the opinion of
its legal counsel, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota,
continues to believe that it is probable that the Company will ultimately
prevail in this case.
At December 31, 1998, total accounts receivable (net of reserves)
due from Medicare were $6,828,000. Based on the progress toward resolution
of the disputed costs, management estimates that net receivables of $977,000
will not be realized within the next twelve months, and accordingly, has
classified net receivables of $977,000 as a non-current asset. Accrued
liabilities to third-party at December 31, 1998 represent payments from
Medicare in excess of amounts that the Company believes it will be entitled
to upon ultimate settlement of Medicare cost reports.
The Company has letter of credit facilities from a commercial bank
totaling $1,915,000. These credit facilities are collateralized by secured
investments and will expire in December 1999.
Management believes cash provided by operations and existing cash
balances are sufficient to meet the Company's financial requirements for the
foreseeable future.
YEAR 2000
The Company has assessed and continues to assess the potential impact of
the Year 2000 issue affecting most corporations, primarily concerning the
ability of information systems to properly recognize and process information
relating to the year 2000 and beyond.
The Company began addressing the Year 2000 issue in fiscal 1997,
primarily in the business systems area, such as general ledger, payroll, and
accounts payable, which were modified and are now compliant. Remaining
systems, such as the internally developed operations systems, phone system,
and wide area network were targeted for modification or replacement by
January 31, 1999. The Company estimates it will be over 90% compliant by
January 31, 1999. In December 1998 and January 1999 the Company performed
additional financial analysis on the costs of upgrading the hardware
components of current hardware versus replacing the current hardware for full
Year 2000 compliance. Based on reduced ongoing operational costs, the
Company decided to replace rather than upgrade existing hardware. The new
hardware is scheduled for delivery in March 1999. Full compliance is now
expected early in the third quarter of fiscal 1999. The estimated cost of
Year 2000 compliance is $275,000, and is not expected to have a material
impact on the Company's financial performance.
Principal risk areas for the Company would be the potential inability to
bill its principal third-party payer, Medicare, for services rendered to
patients, or the inability of the third-party payer's systems to recognize the
billing data, delaying payment for services rendered. The Health Care Finance
Administration ("HCFA") published a targeted date of December 31, 1998 for Year
2000 compliance, and has delayed other projects to accomplish their tasks. As
of January 20, 1999, HCFA published their quarterly report for October on their
web site and estimated that 85% of the code for Medicare fee-for-service had
been renovated as of September 30, 1998. The Company is not aware of any
significant exposure due to its own or the systems of third-parties; however,
there can be no guarantee that the systems of third-parties on which the Company
relies will be converted in a timely manner, or that such
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failure would not have a material adverse impact on the Company. The Company
will continue to monitor publications of HCFA and its principal Fiscal
Intermediary, United Government Services, and develop contingency plans as
conditions merit.
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 dependent 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 payers, 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, 1998 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 - On December 22, 1998, the Registrant entered
into a Second Preferred Stock Modification Agreement (the "Agreement")
with ManorCare Health Services, Inc. ("ManorCare"), a wholly owned
subsidiary of HCR ManorCare, Inc., to modify the terms of the 200,000
shares of the Company's convertible preferred stock held by ManorCare.
Under the terms of the Agreement, ManorCare irrevocably waived the
right of the preferred stock to vote on an as-if-converted basis along
with the common stock, except with respect to any proposal presented
to the Company's stockholders to (i) wind up, dissolve or liquidate
the Company or revoke or forfeit its charter, (ii) amend the Company's
articles of incorporation, (iii) merge or consolidate or enter into an
exchange agreement with another corporation, or (iv) sell, lease,
transfer or otherwise dispose of all or substantially all of the
Company's assets not in the usual and regular course of business. The
waiver only applies in cases where the preferred stock has the right
to vote on an as-if-converted basis with holders of common stock.
In consideration for ManorCare entering into the Agreement, the
Company waived the right to pay the 12% dividends on the preferred
stock in the form of shares of common stock. The Company has in the
past paid this dividend in the form of cash, and as a result of the
waiver, will continue to do so.
In addition to the 200,000 preferred shares, ManorCare continues to
own 41% of the Company's outstanding common stock. The Agreement does
not effect the voting rights of these shares of common stock. As a
result of the Agreement, ManorCare no longer has majority voting power
with respect to the election of the Company's Board of Directors.
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 -
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - A report on Form 8-K was filed
December 22, 1998 containing disclosure pursuant to Item 5 of
Form 8-K. See ITEM 2 above.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q report to be signed on its behalf
by the undersigned thereunto duly authorized.
In Home Health, Inc.
---------------------------
Registrant
Date: February 1, 1999 /s/Wolfgang von Maack
---------------------------
Wolfgang von Maack
Chief Executive Officer
Date: February 1, 1999 /s/Robert J. Hoffman, Jr.
---------------------------
Robert J. Hoffman, Jr.
Acting Chief Financial Officer
14
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS, THE STATEMENTS OF OPERATIONS AND THE STATEMENTS OF CASH FLOWS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,866
<SECURITIES> 0
<RECEIVABLES> 14,006
<ALLOWANCES> 1,111
<INVENTORY> 0
<CURRENT-ASSETS> 36,976
<PP&E> 15,204
<DEPRECIATION> 11,151
<TOTAL-ASSETS> 47,544
<CURRENT-LIABILITIES> 22,479
<BONDS> 0
0
19,633
<COMMON> 164
<OTHER-SE> 3,833
<TOTAL-LIABILITY-AND-EQUITY> 47,544
<SALES> 0
<TOTAL-REVENUES> 18,571
<CGS> 0
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<OTHER-EXPENSES> 8,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (339)
<INCOME-PRETAX> 517
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
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