<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 1999
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, 1999, the number of shares outstanding of the
registrant's common stock, $.03 par value was 5,479,736 shares.
<PAGE>
IN HOME HEALTH, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
March 31, 1999 and September 30, 1998 2-3
Consolidated Statements of Income -
For the Three Months and Six Months Ended March 31,
1999 and 1998 4
Consolidated Statements of Cash Flows -
For the Six Months Ended March 31,
1999 and 1998 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
</TABLE>
1
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, 1999 Sept. 30,
(Unaudited) 1998
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 19,495 $ 21,462
Accounts receivable, net of allowances of $1,235 and
$1,175 at March 31, 1999 and September 30, 1998,
respectively 12,233 13,598
Deferred income tax 1,161 1,269
Prepaid expenses and other current assets 964 970
-------- --------
Total current assets 33,853 37,299
-------- --------
Property:
Furniture and equipment 7,785 8,123
Computer equipment and software 6,591 6,771
Leasehold improvements 494 529
-------- --------
Total 14,870 15,423
Accumulated depreciation (11,067) (10,954)
-------- --------
Property - net 3,803 4,469
-------- --------
Other Assets:
Accounts receivable, long-term 977 988
Goodwill, net 5,195 5,274
Other assets 255 330
-------- --------
Total other assets 6,427 6,592
-------- --------
Total Assets $ 44,083 $ 48,360
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1999 Sept. 30,
(Unaudited) 1998
----------- ---------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 156 $ 219
Accounts payable 3,246 2,612
Accounts payable - related party 107 111
Accrued liabilities:
Third party 6,689 12,669
Compensation 3,760 3,225
Insurance 3,426 3,246
Restructuring 272 456
Other 612 538
-------- --------
Total current liabilities 18,268 23,076
-------- --------
Long-Term Debt 58 44
Deferred Revenue 14 41
Deferred Rent Payable 170 198
Deferred Income Tax 1,161 1,288
Commitments and Contingencies -- --
Redeemable Convertible Preferred Stock - $1.00 par value, $13,000 redemption
value, authorized 130 shares; issued
and outstanding March 31 and September 30 - 130 shares 12,683 12,584
Shareholders' Equity:
Redeemable Convertible Preferred Stock - $1.00 par value, $7,000 redemption
value, authorized 70 shares; issued
and outstanding March 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 March 31 - 5,480 shares
and September 30 - 5,479 shares 164 164
Additional paid-in capital 23,675 23,675
Retained deficit (19,110) (19,710)
-------- --------
Total shareholders' equity 11,729 11,129
-------- --------
Total Liabilities and Shareholders' Equity $ 44,083 $ 48,360
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue (including favorable Medicare reserve
adjustments of $2,139, $4,306, $2,196, and
$4,229 for the respective periods) $ 21,079 $ 26,439 $ 39,650 $ 54,297
-------- -------- -------- --------
Operating Expenses:
Direct costs of revenue (primarily payroll
related costs) 10,742 15,203 21,101 31,328
General, administrative and selling expenses 9,211 10,708 17,245 21,767
-------- -------- -------- --------
Total operating expenses 19,953 25,911 38,346 53,095
-------- -------- -------- --------
Income from operations 1,126 528 1,304 1,202
-------- -------- -------- --------
Interest:
Interest income 273 274 618 490
Interest expense (17) (7) (23) (37)
-------- -------- -------- --------
Net interest income 256 267 595 453
-------- -------- -------- --------
Income before income taxes 1,382 795 1,899 1,655
Income tax expense -- -- -- --
-------- -------- -------- --------
Net income $ 1,382 $ 795 $ 1,899 $ 1,655
-------- -------- -------- --------
-------- -------- -------- --------
Net income available to common
shareholders $ 732 $ 120 $ 600 $ 306
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted earnings per share $ .13 $ .02 $ .11 $ .06
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,899 $ 1,655
Adjustments:
Depreciation and amortization 759 1,312
Loss on disposal of assets 197 298
Accounts receivable 1,376 1,052
Prepaid expenses and other assets (2) 3,641
Accounts payable 634 (869)
Accounts payable - related party (4) 15
Accrued liabilities (5,375) (1,721)
Deferred revenue (27) (211)
Deferred rent payable (28) (21)
Deferred income tax (19) (84)
-------- --------
Net cash provided (used) by operating activities (590) 5,067
-------- --------
Cash Flows From Investing Activities:
Acquisition of property (57) (48)
Repayments of advances to officers and employees 7 8
-------- --------
Net cash used by investing activities (50) (40)
-------- --------
Cash Flows From Financing Activities:
Payment of long-term debt (127) (516)
Preferred dividends paid (1,200) (1,200)
-------- --------
Net cash used by financing activities (1,327) (1,716)
-------- --------
Cash and Cash Equivalents:
Net increase (decrease) (1,967) 3,311
Beginning of period 21,462 13,853
-------- --------
End of period $ 19,495 $ 17,164
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company and its subsidiaries as of March
31, 1999 and the results of operations for the three and six months and cash
flows for the six months ended March 31, 1999 and 1998. 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 fiscal 1998 Form 10-K.
2. BASIC AND DILUTED EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted
earnings per share for the three and six months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
THREE MONTHS SIX MONTHS
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE:
Net income $ 1,382 $ 795 $ 1,899 $ 1,655
Dividends on preferred stock (600) (600) (1,200) (1,200)
Preferred stock accretion (50) (75) (99) (149)
------- ------- ------- -------
Net income available to
common shareholders $ 732 $ 120 $ 600 $ 306
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 5,480 5,466 5,480 5,466
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted earnings per share $ .13 $ .02 $ .11 $ .06
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Options to purchase 220,734 and 398,770 shares of common stock were
outstanding at March 31, 1999 and 1998, 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 Manor Care, Inc. ("HCR"), in
October 1995. As of March 31, 1999, 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
corporation, or (iv) sell, lease, transfer or otherwise dispose of all or
substantially all of the Company's
6
<PAGE>
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. The impact of the redeemable convertible preferred stock on
diluted earnings per share would be anti-dilutive and, therefore, has 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 included
$1,820,000 of costs associated with lease costs and related equipment write-offs
associated with the closing of eight pharmacies, the consolidation of seven
sites in multi-site markets, 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 $42,000
during the six months ended March 31, 1999 as compared to $580,000 for the same
period of the previous year. As of March 31, 1999, $272,000 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 50% and 59% of revenue for the six months ended March 31,
1999 and 1998, 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 March 31, 1999, total disputed
costs were $3,405,000; the Company believes that recovery of $2,428,000 of such
costs (including extrapolation for all unsettled cost reporting periods) may not
be probable and, accordingly, has established reserves totaling $2,428,000 as of
March 31, 1999.
At March 31, 1999, 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 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
setting it aside.
7
<PAGE>
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 March 31, 1999, total accounts receivable (net of reserves) due from
Medicare were $5,342,000. 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 March 31, 1999 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 six months ended March 31, 1999,
income tax expense of $750,000 was offset by utilizing a portion of the net
operating loss carryforwards versus $700,000 for the same period of the previous
year.
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 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
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's level of operation and financial condition. This discussion should be
read with the consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
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 and six months ended March 31, 1999 decreased 20%
and 27%, respectively, over the same periods in the prior year. The decreases 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 28% and 37% for the
three and six months ended March 31, 1999 compared to the same periods last year
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 13% and 16% for the three and six months ended March 31, 1999 compared
to the same periods last year 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. Hospice Division revenue increased 16% and 14% for the three and six
months ended March 31, 1999 as compared to last year due to increased patient
census.
The decline in second quarter 1999 revenue was offset in part by $2.2
million recorded as revenue in the second quarter because the Company received
final settlements on several reimbursement issues with HCFA. Last year's second
quarter results included two significant adjustments in recorded revenue. First,
the Company successfully resolved several reimbursement disputes with HCFA
resulting in a $4.4 million increase in revenue. Second, with HCFA's April 1,
1998 announcement of the per-beneficiary limits, effective retroactively to
October 1, 1997, the Company recorded a $4.5 million reduction in fiscal 1998
year-to-date revenue.
Direct costs, as a percent of revenue, were 51% and 53% for the three
and six months ended March 31, 1999 versus 58% and 58% for the same periods of
the previous year. These reductions were principally the result of the Company's
cost reduction program.
General, administrative and selling expenses for the three and six
months ended March 31, 1999 were $9,211,000 and $17,245,000 compared to
$10,708,000 and $21,767,000 for the same periods last
9
<PAGE>
year. The decreases were due to the cost reduction initiatives implemented last
year. As a percent of revenue, however, such expenses increased to 44% and 43%
from 41% and 40% last year due to the greater percentage decrease in revenue.
Net interest income for the three and six months ended March 31, 1999
was $256,000 and $595,000 versus $267,000 and $453,000 for the same periods of
the previous year.
Net income for the three and six months ended March 31, 1999 was
$1,382,000 and $1,899,000, compared to $795,000 and $1,655,000 for the same
periods of the previous year. The increase in net income is due to the
$2,183,000 in revenue recorded in the second quarter for Medicare-related
settlements. Excluding the impact of this adjustment, the Company had net losses
of $801,000 and $284,000 for the three and six months ended March 31, 1999.
Excluding the impact of the positive resolution of disputes with HCFA last year,
the Company had net losses of $3,606,000 and $2,746,000 for the three and six
months ended March 31, 1998. The reductions in net losses in the current year
compared to last year, excluding the foregoing adjustments, principally related
to the Company's actions to reduce costs of services to Medicare patients in an
effort to operate within the per-beneficiary limits announced by HCFA on April
1, 1998, applied retroactively to October 1, 1997.
Net income available to common shareholders was $732,000 and $600,000
for the three and six months ended March 31, 1999, compared to $120,000 and
$306,000 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 to ManorCare Health Services, Inc., a wholly
owned subsidiary of HCR Manor Care, Inc. ("HCR") for its $20 million preferred
stock investment in In Home Health. Basic and diluted earnings per share were
$.13 and $.11 compared to $.02 and $.06 last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $1,967,000 to
$19,495,000 at March 31, 1999 from $21,462,000 at September 30, 1998. Net cash
used by operating activities for the six months ended March 31, 1999 was
$590,000. During the same period, the Company paid $1,200,000 to HCR for
preferred stock dividends.
Approximately 50% and 59% of revenue for the six months ended March 31,
1999 and 1998, 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
10
<PAGE>
incurred which are not probable of recovery. At March 31, 1999, total disputed
costs were $3,405,000; the Company believes that recovery of $2,428,000 of such
costs (including extrapolation for all unsettled cost reporting periods) may not
be probable and, accordingly, has established reserves totaling $2,428,000 as of
March 31, 1999.
At March 31, 1999, 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 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
setting 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 March 31, 1999, total accounts receivable (net of reserves) due from
Medicare were $5,342,000. 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 March 31, 1999 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 unused 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. The programming
changes for the internally developed operations systems have been completed. The
wide area network and phone systems have also been updated. During the third
quarter of fiscal 1999, the Company will be replacing its current hardware
system and expects full Year 2000 compliance by the end of June 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. HCFA's December 31, 1998
11
<PAGE>
Quarterly Progress Report, revised March 4, 1999, states that all 25 of their
internal mission critical systems and 54 of 82 external mission critical systems
are compliant. The Company's principal Fiscal Intermediary, United Government
Services, anticipates all information technology under their control will be
compliant by November 1, 1999. 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 failure would not have a material
adverse impact on the Company. The Company will continue to monitor information
provided by HCFA and 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 HCFA 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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - None.
ITEM 2 - CHANGE IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
The Company held its Annual Meeting of Shareholders on February 24,
1999. The shareholders present in person or in proxy voted to elect
the present 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.
<TABLE>
<CAPTION>
Nominees Votes for Withheld
-------- --------- --------
<S> <C> <C>
Wolfgang von Maack 5,049,885 85,926
James J. Lynn, Ed.D. 5,047,383 88,428
C. Michael Ford 5,049,039 86,772
Judith Lloyd Storfjell, Ph.D. 5,050,054 85,757
Marvin Wilensky 5,046,263 89,548
</TABLE>
The shareholders ratified the selection of Deloitte & Touche LLP as
the Company's independent auditors for 1999 by a vote of 5,046,792
shares in favor, 73,600 shares against, 15,419 abstaining and zero
shares broker non-voted. The shareholders also ratified the
Non-Employee Director Stock Compensation Plan by a vote of 4,947,038
shares in favor, 163,772 shares against, 25,001 abstaining and zero
shares broker non-voted.
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 - None.
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: May 13, 1999 /s/ Wolfgang Von Maack
----------------------------------
Wolfgang von Maack
Chief Executive Officer
Date: May 13, 1999 /s/ Robert J. Hoffman, Jr.
----------------------------------
Robert J. Hoffman, Jr.
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheets, the Statements of Income, and the Statements of Cash Flows and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 19,495
<SECURITIES> 0
<RECEIVABLES> 14,445
<ALLOWANCES> 1,235
<INVENTORY> 0
<CURRENT-ASSETS> 33,853
<PP&E> 14,870
<DEPRECIATION> 11,067
<TOTAL-ASSETS> 44,083
<CURRENT-LIABILITIES> 18,268
<BONDS> 0
0
19,683
<COMMON> 164
<OTHER-SE> 4,565
<TOTAL-LIABILITY-AND-EQUITY> 44,083
<SALES> 0
<TOTAL-REVENUES> 39,650
<CGS> 0
<TOTAL-COSTS> 21,101
<OTHER-EXPENSES> 17,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (595)
<INCOME-PRETAX> 1,899
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,899
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
