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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT
---
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0-17490
IN HOME HEALTH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1458213
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
CARLSON CENTER, SUITE 500
601 CARLSON PARKWAY
MINNETONKA, MINNESOTA 55305-5214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-449-7500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $ .03 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ---
Based on the closing sale price of $3.25 on the NASDAQ National Market
System, as of November 18, 1999 the aggregate market value of the
registrant's common stock held by nonaffiliates was $10,522,229.
As of November 18, 1999 the number of shares outstanding of the registrant's
common stock, $.03 par value was 5,520,553 shares.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held February 23, 2000, (the "2000 Proxy
Statement"), a definitive copy of which will be filed within 120 days of the
close of the past fiscal year, is incorporated by reference into Part III of
this Form 10-K.
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TABLE OF CONTENTS
Page(s)
PART I Item 1. Business............................................ 3-9
Item 2. Properties.......................................... 9
Item 3. Legal Proceedings................................... 9-10
Item 4. Submission of Matters to a Vote of Security Holders. 10
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters....................... 11
Item 6. Selected Financial Data............................ 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 12-17
Item 8. Financial Statements and Supplementary Data........ 18-35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 18
PART III Item 10. Directors and Executive Officers................... 36
Item 11. Executive Compensation............................. 36
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................. 36
Item 13. Certain Relationships and Related Transactions..... 36
PART IV Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................ 36-37
SIGNATURES............................................................ 38
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PART I
ITEM 1. BUSINESS
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In Home Health, Inc. (the "Company") specializes in
providing comprehensive health care services to clients of all ages in their
homes. The Company's services include nursing, infusion therapy, hospice,
rehabilitation, personal care and homemaking. The Company currently provides
services from 39 offices in 20 geographic markets located in 15 states under
the trade names "In Home Health" or "Home Health Plus."
The Company was incorporated in Minnesota in 1983 and is
the successor to the business of a non-profit corporation which provided home
health services in Minneapolis-St. Paul beginning in 1977. In October 1995,
the Company consummated transactions with ManorCare Health Services, a wholly
owned subsidiary of Manor Care, Inc., whereby ManorCare Health Services
acquired 64% of the voting power of the Company's voting capital stock and
the Company received net cash proceeds of approximately $18 million. In
September 1998, Manor Care, Inc. ("Manor Care") was merged with a wholly
owned subsidiary of Health Care and Retirement Corporation.
SERVICES
The Company offers its clients a broad range of
professional and support services to meet medical and personal needs at home.
All home health services are provided under a plan of care and orders from
the client's physician. Services are available on a 24-hour a day basis every
day of the year. Office hours are from 8 a.m. to 5 p.m. Monday through
Friday, although personnel are available to respond to emergencies and
fulfill service requests at all times.
In fiscal 1999, approximately 38% of the Company's revenue
was derived from paraprofessional services provided by home health aides and
homemaker/companions, 28% was derived from medical/surgical nursing, 18% from
hospice services, 13% was attributable to rehabilitation services, and 3%
from infusion pharmacy products and medical supplies.
The Company receives payment for its services from various
sources. The following summarizes the Company's revenue by payer source:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Medicare, cost reimbursement (1) 48% 55% 56%
Insurance and county governments 18% 17% 19%
Private payers 17% 16% 16%
Medicare hospice benefit, per diem based 17% 12% 9%
---- ---- ----
100% 100% 100%
</TABLE>
(1) Fiscal 1997 revenue was reduced by a $17,101,000
increase to Medicare reserves. See Note 5 to the financial statements.
As a result of the recently enacted Medicare Interim
Payment System, the Company has increased its focus on higher margin
non-Medicare payer sources in an effort to reduce reliance on Medicare.
The Company's services are provided by a variety of personnel:
Critical Care Registered Nurses provide specialized nursing
such as pain management, respiratory care and infusion
therapy.
Registered Nurses/Case Managers provide a broad range of
nursing care including skilled observation and assessment,
teaching and technical procedures.
Licensed Practical/Vocational Nurses perform many technical
nursing procedures, such as injections and dressing changes.
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Pharmacists prepare and dispense drug and nutritional
therapies by physician order and monitor the client's
treatment.
Home Health Aides provide personal care such as bathing,
assistance with walking, and other activities of daily living
that do not require professional nursing expertise.
Homemakers/Companions assist with meal preparation and
housekeeping and provide companionship that can help maintain
independent living.
Physical Therapists assist clients to restore strength and
range of joint motion for improved function and retrain
clients in all areas of ambulation and mobility.
Occupational Therapists train clients to regain independence
in activities of daily living, such as feeding, dressing,
hygiene, and social activities.
Speech Pathologists retrain clients to deal with speech,
swallowing, language or hearing impediments to improve
communication abilities.
Social Workers assist clients and their families to deal with
financial, personal and social concerns resulting from health
problems.
Spiritual Care Counselors coordinate the spiritual needs of
clients and families and provide spiritual services in the
home or inpatient facility as needed.
Nutritionists assist with dietary modifications and
therapeutic diets for clients.
OPERATIONS
The Company manages its operations geographically through
39 office locations consisting of 33 branches and 6 satellites. Each of the
Company's branches provide Visit and Extended Hours services. In addition, 25
branches provide Hospice services. Visit services provide clients with
short-term care, usually up to two hours per visit. Extended Hours services
provide clients with care up to 24 hours per day. Hospice services provide
palliative care through an interdisciplinary team to terminally ill clients
and their families. Hospice services are available to patients at home, in
skilled nursing and assisted living facilities and in the hospital. Visit
services are charged by the visit, Extended Hours services are charged by the
hour and Hospice services are charged by the day.
Each office operates with a staff of professionals,
including one or more home care coordinators who are registered nurses. The
client is assigned to a registered nurse/case manager or therapist for case
management. The home care coordinator establishes a plan of care for each
client with the client's physician, supervises the services received by the
client, and assesses the client's response to and need for continued care.
Rehabilitation, nursing and other personnel provide services according to the
physician's plan of care.
QUALITY ASSURANCE
In addition to the basic requirements necessary for
licensure and certification, the Company has implemented several practices to
help assure high quality home care service. Clients are sent evaluation
surveys bi-monthly to detect and correct weaknesses. Survey results are
reviewed quarterly, along with a sampling of client charts, by a committee of
physicians, nurses and therapists. This committee determines if the medical
needs were identified and addressed in the plan of care. Each branch has an
advisory board composed of consumers and business and health professionals
that meets at least annually to review programs and developments and to make
recommendations to the management team. The Company has a Code of Ethics and
Client Bill of Rights that are provided to all employees and clients.
MARKETING
Home health providers are usually referred to potential
clients by other health care professionals. The Company seeks to build strong
relationships with these professionals. The Company has identified many
potential referral sources for home
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health services. These referral sources include physicians, hospitals,
nursing homes, managed care organizations, community organizations, and other
home care agencies. Word of mouth is also responsible for a significant
number of home care referrals. One of the Company's goals is to broaden the
referral base among managed care organizations, hospitals, nursing homes,
physicians and health insurance payers by establishing and maintaining strong
working relationships with them.
In each geographic area in which the Company operates,
account representatives are responsible for establishing and maintaining
relationships with referral sources. They contact physicians, hospitals,
nursing homes, managed care organizations and other health care providers to
explain the services provided by the Company. The account representatives are
backed by a professional health care liaison team consisting of home care
coordinators that are primarily registered nurses. The team takes referrals,
assesses clients and identifies their needs, emphasizes the benefits of the
Company's services, coordinates care and communicates with the referral
source. Each market is responsible for making contractual arrangements with
hospitals, HMOs, governments, clients and large physician groups.
COMPETITION
The home health care business is highly competitive. There
are three different types of providers involved in home health services:
INSTITUTIONS: Hospitals and public health agencies typically
provide only short term, intermittent care. Some larger
institutions have entered into the extended hours, hospice and
home infusion markets.
NATIONAL SPECIALIZED HOME CARE PROVIDERS: These companies
typically provide specialized care; for example, hospice or
infusion therapy, in multiple geographic markets.
OTHER INDEPENDENT HOME CARE COMPANIES: These are generally
locally owned and specialize in home care. Some of these
organizations provide only homemaker and chore-person
services, while others provide a broad range of home care
services.
The Company believes that the primary competitive factors
are the price of the services and quality considerations such as
responsiveness, the technical ability of the professional staff and the
ability to provide comprehensive services.
Many of the Company's competitors are large and established
organizations with significantly greater resources than the Company. Large
hospital systems may enjoy a particular competitive advantage due to their
ready access to a large client base.
REGULATION
As a provider of health care services, the Company is
subject to laws and regulations administered by the various states. As a
result of their certification in the Medicare program, the Company's branches
are subject to certain federal laws and regulations. The Company's provision
of pharmaceuticals and other supplies for home infusion therapy subjects the
Company to additional regulation, such as the need for licensing as a
pharmacy and the need to comply with various federal and state laws and
regulations governing pharmacies and the handling of pharmaceuticals. The
Company has all necessary licenses and permits for its current operations.
Providers of home health services may be subject to
increasing regulation in the future. Compliance with laws and regulations
could increase the cost and time necessary to allow the Company to operate
successfully and may affect the Company in other respects not presently
foreseeable.
In order to receive Medicare reimbursement, the Company
must satisfy conditions for participation established by the United States
Department of Health and Human Services relating to standards of medical
care. Loss of certification in the Medicare program would result in the loss
of a significant portion of the Company's revenues.
As a provider of services under the Medicare and Medicaid
programs, the Company is subject to the Medicare and Medicaid anti-kickback
statute, also known as "fraud and abuse laws." These laws prohibit any offer,
payment, solicitation or receipt of any form of remuneration to induce the
referral of business reimbursable under Medicare or state health programs or
in return for the purchase, lease or order of items or services covered by
Medicare or state health programs. Violations of the fraud
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and abuse laws can result in the imposition of substantial civil and criminal
penalties and, potentially, exclusion from Medicare and state health
programs. In addition, several states in which the Company operates have laws
that prohibit certain direct or indirect payments or fee-splitting
arrangements between health care providers if such arrangements are designed
to induce or to encourage the referral of patients to a particular provider.
Congress adopted legislation in 1989, known as the "Stark"
legislation, that generally prohibits or restricts a physician from referring
a Medicare beneficiary's clinical laboratory services to any entity in which
such physician (or a member of his immediate family) has an ownership or
individual interest or with which such physician has a financial
relationship, and prohibits such entity from billing for or receiving
reimbursement on account of such referral, unless a specified exemption is
available. Additional legislation became effective as of January 1, 1993
known as "Stark II," expanding the Stark legislation to referrals of services
eligible for Medicaid reimbursement and "designated health services,"
including home health services, durable medical equipment and outpatient
prescription drugs. Pursuant to Stark II, physicians who own an interest in
the Company or who are compensated by the Company will be prohibited from
seeking reimbursement for services rendered to such patients unless an
exception applies. Ownership interests are excepted if the interest held is a
publicly traded security in a company having shareholders' equity of at least
$75 million.
Several of the states in which the Company conducts
business have enacted statutes similar in scope and purpose to the federal
fraud and abuse laws and the Stark laws. There is no authority interpreting
the state fraud and abuse laws in a manner that applies to the Company's
operations. These laws are generally based upon the federal fraud and abuse
law, so that the interpretation of the federal law may govern the application
of the state laws.
The federal government has significantly increased the
financial and human resources allocated to enforcing the fraud and abuse
laws. In May 1995, the Clinton Administration instituted Operation Restore
Trust ("ORT"), a health care fraud and abuse initiative focusing on nursing
homes, home health care agencies and durable medical equipment companies
located in the five states with the largest Medicare populations. ORT has
been responsible for millions of dollars in civil and criminal restitution,
fines, recovery of overpayments and the exclusion of a number of individuals
and corporations from the Medicare program. ORT has been expanded to all
fifty states. Private insurers and various state enforcement agencies also
have increased their scrutiny of health care providers' practices and claims,
particularly in the home health and durable medical equipment areas. No
assurance can be given that the practices of the Company, if reviewed, would
be found to be in compliance with such laws or with any future laws, as such
laws ultimately may be interpreted.
Additionally, the Health Care Financing Administration
("HCFA") of the U.S. Department of Health and Human Services, the federal
agency responsible for the rules governing Medicare and Medicaid, has
implemented "Wedge Surveys" in at least 13 states. In these surveys, HCFA
completes ORT-type surveys on a much smaller scale. Generally, HCFA reviews a
small, limited number of claims over a two-month period and extrapolates the
percentage which was paid in error to all claims paid for the period under
review. Assuming the reviewer uncovered nothing significant, the home health
agency then has the option to repay the amount determined by HCFA or undergo
a broader review of its claims. If the survey uncovers significant problems,
the matter may be referred for further review.
While the Company believes that it is in material
compliance with the fraud and abuse laws, there can be no assurance that the
practices of the Company, if reviewed, would be found to be in full
compliance with such requirements, as such requirements ultimately may be
interpreted. It is the Company's policy to monitor its compliance with such
requirements and to take appropriate actions to ensure such compliance.
Political, economic and regulatory influences are
subjecting the health care industry in the United States to fundamental
change. Although Congress has not adopted comprehensive health care reform
legislation, the Company anticipates that Congress and state legislatures
will continue to review and assess alternative health care delivery and
payment systems and in the future will propose and adopt legislation
effecting fundamental changes in the health care delivery system. Legislative
debate regarding changes to the health care delivery system and payment
systems is expected to continue in the future. The Balanced Budget Act of
1997 (the "Budget Act") contains numerous changes in reimbursement to health
care providers and has significantly affected the health care industry.
Additionally, the level of net revenues and profitability of the Company,
like those of other health care providers, will be affected by the continuing
efforts of other payers to contain or reduce the costs of health care by
lowering reimbursement rates, increasing case management review of services,
negotiating reduced contract pricing and setting capitation arrangements.
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Prior to October 1, 1997, Medicare reimbursed participating
Medicare-certified home health agencies for the reasonable costs incurred to
provide covered visits to eligible beneficiaries, subject to certain cost
limits which vary according to geographic regions of the country. In August
1997, President Clinton signed into law the Budget Act with plans to reduce
the growth in Medicare expenditures to health care providers. The Budget Act
contains provisions which impact a number of types of health care providers.
In October 1998, President Clinton signed into law the Omnibus Consolidated
and Emergency Supplemental Appropriations Act for Fiscal Year 1999 (the
"Appropriations Act") which includes a number of policy changes affecting
health care providers. Provisions of these Acts which apply to home health
providers are discussed below.
The Budget Act required HCFA to implement a prospective
payment system ("PPS") for home health agencies by October 1, 1999, and until
that time created an interim payment system ("IPS") that provides for
lowering reimbursement limits for home health visits. Under the Budget Act,
home health agencies are reimbursed the lesser of (i) actual, reasonable
costs, (ii) per-visit cost limits based on 105% of median costs of
freestanding home health agencies, or (iii) agency-specific per-beneficiary
cost limits, based on 98% of 1994 costs, adjusted for inflation. In addition,
the Budget Act provided that if the Secretary of the Department of Health and
Human Services ("HHS") failed to implement a PPS by October l, 1999, the cost
limits and per-beneficiary limits would be reduced an additional 15% on that
date. The IPS program rates were announced April 1, 1998, but given effect
retroactively to October 1, 1997. As a result of the new per-beneficiary cost
limits, together with the per-visit limits, the Company recorded a $4.5
million reduction to fiscal 1998 revenue. This adjustment reflected the
Company's estimate of the impact of IPS on revenue and is subject to audit
and review by Medicare.
Effective October 1, 1998, the Appropriations Act revised
the Medicare IPS for home health agencies. The Appropriations Act
acknowledged HHS's inability to meet the October 1, 1999 PPS deadline by
delaying the statutory implementation date of PPS until October 1, 2000. The
Appropriations Act also delays until October 1, 2000 the provision that
mandated a 15% cut to limits if PPS implementation is delayed. The 1999
Appropriations Act further delayed the 15% limit reduction to October 2001.
The impact of such a change, if implemented, on the Company's results of
operations cannot be predicted with any certainty at this time and would
depend, to a large extent, on the reimbursement rates for home nursing
established on an interim basis and under the prospective payment system.
There can be no assurances that such reimbursement rates, if enacted, would
cover the costs incurred by the Company to provide home nursing services. The
Appropriations Act also responds to widespread concerns about inadequate
payments to home health agencies under IPS by modifying per-beneficiary
limits. Specifically, for providers with a 12-month cost reporting period
ending in fiscal 1994, each home health agency below the national median
per-beneficiary limit will have its limit increased by one-third of the
difference between its limit and the national median. Payments to agencies
without a 12-month cost reporting period ending in fiscal 1994, but for which
the first cost reporting period begins before fiscal 1999, will be increased
by two percent. In addition, the Appropriations Act increases the per-visit
limit from 105% to 106% of the national median cost.
INSURANCE
General and professional liability insurance is maintained
by the Company which includes coverage up to $25,000,000 per location. There
can be no assurance that the Company will not be subject to claims in excess
of its insurance coverage or that such insurance will continue to be
available.
SERVICE MARKS AND TRADEMARKS
The Company operates under the names "In Home Health" and
"Home Health Plus," which are registered service marks. The Company believes
that because its business is derived principally from referrals by other
health care providers, it is not materially dependent on any trademarks or
service marks.
EMPLOYEES
On September 30, 1999, the Company employed approximately
700 persons on a full-time basis and 1,600 persons on a part-time basis.
Substantially all of the part-time employees were direct caregivers. None of
the Company's employees are represented by unions.
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" ("SFAS 131") which was
effective for the Company in
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fiscal 1999. SFAS 131 redefines how operating segments are determined and
requires disclosures of certain financial and descriptive information about a
company's operating segments. The Company's management analyzes operating
performance on a geographic basis and considers each branch an operating
segment. All branches offer substantially the same services to similar types
of clients entirely within the United States. Additionally, all branches
operate in the same regulatory environment and utilize similar processes to
provide care to their clients. For financial reporting purposes, all the
Company's operating segments are aggregated into one reportable segment.
Therefore, the Company has concluded that the current reportable segment is
consistent with the "management approach" methodology outlined in SFAS 131.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which is
effective for the Company on October 1, 2000. SFAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company is currently reviewing
the standard and its effect on the financial statements.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and members of the Board of
Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
------ ----- ------------------
<S> <C> <C>
Wolfgang von Maack (1) (5) (6) 59 Director and Chairman, President and Chief Executive
Officer
Clyde Michael Ford (4) (5) 61 Director
Robert J. Hoffman, Jr. (2) 44 Corporate Secretary, Treasurer and Chief Financial Officer
James J. Lynn, Ed. D. (4) (6) 57 Director
Judith Irene Storfjell, Ph. D. (5) 56 Director
Eugene Terry (3) 61 Director
</TABLE>
(1) Mr. von Maack was elected to the Board of Directors
June 6, 1997 and elected Chairman of the Board
November 17, 1998.
(2) Mr. Hoffman was appointed Secretary June 22, 1998, elected
Chief Financial Officer February 24, 1999, and elected
Treasurer June 8, 1999.
(3) Mr. Terry was appointed as a member of the Board of
Directors September 30, 1999, filling the vacancy
resulting from the resignation of Mr. Wilensky.
(4) Member of the Audit Committee.
(5) Member of the Compensation Committee.
(6) Member of the Nominating Committee.
Mr. von Maack has served as President and Chief Executive
Officer of the Company since May 1997 and Chairman of the Board since
November 1998. He had been Senior Vice President, Healthcare Services of
ManorCare Health Services, Inc. from June 1990 to December 1998 and was Vice
President, Operations of ManorCare Health Services, Inc. from March 1988 to
June 1990.
Mr. Ford has been a member of the Board of Directors of the
Company since November 1998. He has been the owner and Chairman of the Board
of Montpelier Corporation since October 1997. He was elected to the Board of
Directors of Krug International, a manufacturer of children's safety
products, in October 1999. He had served as Vice President, Development of
Columbia/HCA Healthcare Corporation from September 1994 to September 1997. He
was Vice President of Marketing for Meditrust from October 1993 to September
1994. He was employed by Charter Medical Corporation from June 1976 to 1990
in a
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variety of positions, including Secretary and Treasurer and Executive Vice
President of Finance, Chief Financial Officer and member of the Board of
Directors.
Mr. Hoffman has served as Corporate Secretary and Acting
Chief Financial Officer since June 1998, Chief Financial Officer since
February 1999, and Treasurer of the Company since June 1999. He was employed
by Manor Care Inc., from 1982 through 1998 in a variety of positions
including Director of Internal Audit, Controller of Rehab Services Division,
Director of Financial Analysis, and Director of SEC Compliance/Lodging
Accounting. He previously served as Assistant Controller for Makro Self
Service Corporation from 1981 to 1982.
Mr. Lynn has been a Director of the Company since 1987 and
served as Director of Management Development of the Company from October 1995
to October 1998. He had served as Vice President of the Company on a nominal
basis from 1986 to 1990. Since 1981 Mr. Lynn has been a principal of Lynn &
Associates, a management consulting company of which Mr. Lynn is the founder
and President.
Dr. Storfjell has been a Director of the Company since
November 1998. She has served as President of Lloyd Consultants, LLC since
1986 and Assistant Professor, Department of Public Health Nursing, College of
Nursing Graduate Faculty, University of Illinois at Chicago since 1988. She
was a Lecturer, School of Nursing at the University of Michigan from 1987 to
1988. She was President and founder of Health Care at Home Management
Corporation from 1979 to 1986. She previously served as a Public Health
Nursing Supervisor for Berrien County, Benton Harbor, Michigan from 1974 to
1978, as a Teacher for Beirut Overseas School, Beirut, Lebanon, and a variety
of other nursing positions from 1966 to 1970.
Mr. Terry was appointed as a Director of the Company in
September 1999. He has been an executive of TC Solutions, a consulting
venture capital company, since 1997. He has been a Director of Proxymed, a
health care information services firm, since 1994 and a Director of Ivonyx,
an infusion company, since 1989.
ITEM 2. PROPERTIES
----------
The Company's executive offices are located in Minnetonka,
Minnesota, a suburb of Minneapolis, in approximately 21,000 square feet of
leased space.
The Company's 39 office locations each lease approximately
1,000 to 8,000 square feet of office space in their respective locations. The
Company's leased properties are suitable and adequate for its current needs
and additional space is expected to be available as needed at competitive
rates.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company has several pending cases which challenge the
disallowance of reimbursement by the fiscal intermediaries of the U.S.
Department of Health and Human Services ("HHS") for various categories of
costs incurred by the Company in providing services to Medicare
beneficiaries. These cases are pending before HHS's Provider Reimbursement
Review Board ("PRRB"), an administrative tribunal, before the United States
District Court for the District of Minnesota ("District Court") or before the
United States Court of Appeals for the Eighth Circuit ("Court of Appeals").
Each case involves specific Company branch offices for specific fiscal years,
but has precedential value for the same type of costs for other branch office
fiscal years. Following a PRRB ruling, either the Company or the fiscal
intermediary may request that HHS review the PRRB decision. If HHS declines
review, the PRRB's decision is viewed as the final agency decision. If HHS
reviews the PRRB decision, the HHS decision based on that review is the final
agency decision. The Company may then seek judicial review in United States
District Court. The pending cases are summarized below:
1. In May 1996, the Company filed a case in the District
Court challenging the application of certain HHS Salary Equivalency
Guidelines to its employee physical therapists. The Company maintains, among
other things, that the Guidelines are only applicable to physical therapists
that are independent contractors. The reimbursement impact (i.e., ignoring
other challenged disallowances, the amount by which the Company's Medicare
reimbursement is reduced) of the disallowances in dispute, representing costs
incurred in the fiscal year ended September 30, 1992, is approximately
$207,000. Similar disallowances have also been made in fiscal years ended
September 30, 1991, 1993 and 1994, amounting to $214,000, $280,000 and
$276,000, respectively. The final determination of this case will likely have
a precedential impact on other such disallowances. In February 1996, the PRRB
ruled in favor of the Company, but in April 1996, HHS reversed that decision.
In March 1997, the District Court set HHS's decision aside as providing an
insufficient explanation. In October 1997, HHS issued a new decision
purporting to clarify
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its previous decision. The Company appealed this decision to the District
Court, where in June 1998, the Court again set aside HHS's decision. In
August 1998, HHS appealed the District Court decision to the Court of
Appeals. On September 1, 1999, the United States Court of Appeals for the
Eighth Circuit issued a favorable decision for the Company. The Secretary's
time in which to appeal expired November 30, 1999. On December 3, 1999, the
Assistant U.S. Attorney in Minneapolis informed the Company that the
Secretary has not appealed the decision to the Court of Appeals.
2. In July 1998, the Company filed a case in the District
Court claiming that the Salary Equivalency Guidelines that HHS applies to
outside contractor physical therapists were unlawfully low. The reimbursement
impact of the disallowances in dispute, representing costs incurred in the
fiscal years ended September 30, 1992 and 1993, is approximately $118,000.
Similar disallowances have also been made in subsequent fiscal years, in
which the reimbursement impact is approximately $298,000. In May 1998, the
PRRB's ruling affirmed the fiscal intermediaries' adjustments and the Company
has requested District Court review of this decision. The Company expects a
decision from the District Court sometime in 2000.
The Company is also a party to various other claims and
legal proceedings which management believes are in the normal course of
business and will not involve any material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
-----------------------------------------------------
STOCKHOLDERS' MATTERS
---------------------
The Company's Common Stock is registered under Section
12(g) of the Securities Exchange Act of 1934 and is traded on the NASDAQ
National Market System under the symbol "IHHI". As of November 18, 1999,
there were approximately 1,086 record holders of the common stock.
The closing sale prices for the common stock as reported by
NASDAQ for each quarter of the two most recent fiscal years were:
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------------------------------------
1999 1998
----------------------- ----------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 2.156 $ 1.125 $ 5.625 $ 2.532
Second Quarter 2.750 1.094 4.500 2.625
Third Quarter 2.000 1.125 4.125 2.814
Fourth Quarter 2.313 1.500 3.375 1.500
</TABLE>
These prices do not include retail markups, markdowns or commissions and may
not represent actual transactions.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Year Ended September 30 (Dollars in Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------
1999 1998 1997 (1) 1996 1995
<S> <C> <C> <C> <C> <C>
Revenue $ 80,046 $ 97,008 $ 110,139 $ 125,086 $ 129,816
Income (loss) from operations 3,110 2,449 (22,467) (1,814) 3,774
Income (loss) before income taxes 4,242 3,450 (21,937) (1,165) 3,007
Net income (loss) 4,242 3,450 (20,157) (982) 1,621
Net income (loss) available to
common shareholders 1,644 803 (22,852) (3,501) 1,621
Basic and diluted earnings (loss)
per share .30 .15 (4.19) (.64) .30
</TABLE>
(1) Fiscal 1997 revenue was reduced by $17,101,000 due to Medicare reserve
adjustments - see Note 5 to the financial statements. During fiscal 1997, a
$2,476,000 restructuring charge was recorded - see Note 3 to the financial
statements.
<TABLE>
<CAPTION>
BALANCE SHEET DATA
- ------------------
September 30 (Dollars in Thousands)
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Current assets $ 35,017 $ 37,299 $ 34,004 $ 44,053 $ 21,394
Current liabilities 21,335 23,076 25,008 33,170 21,289
Total assets 48,149 48,360 50,224 82,683 57,559
Long-term debt 43 44 278 1,080 2,443
Redeemable convertible preferred stock 12,782 12,584 19,061 18,766 -
Shareholders' equity 12,839 11,129 3,588 26,758 30,509
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
The following table indicates the percentage relationship of
income and expense items to revenue as set forth in the Company's consolidated
statements of operations and the percentage changes from year to year.
<TABLE>
<CAPTION>
Percent of Revenue Percent Change
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
1999 1998 1997 to 1999 to 1998
---- ---- ---- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100% 100% 100 % (17)% (12)%
Direct Costs 54 56 64 (20)% (24)%
---- ---- ----
Gross Profit 46 44 36 (15)% 9 %
General, Administrative and
Selling Expenses 42 41 56 (17)% (31)%
---- ---- ----
Income (Loss) From Operations 4% 3% (20)% 27 % -
==== ==== ====
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Together, 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 the Health Care
Financing Administration ("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, care delivery process improvements, and revenue growth
actions. See "Forward Looking Information" below for a discussion of the
possible impact of these regulatory matters on expected results.
Revenue decreased 17% and 12% for fiscal 1999 and 1998,
respectively, principally due to reductions of Medicare patient visits and
corporate costs that were implemented to minimize the impact of new
per-beneficiary limits and tightened per-visit limits imposed by the Medicare
IPS. The decline in 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. Fiscal 1998 revenue
included a $4.6 million increase in revenue due to resolution of several
reimbursement issues with HCFA and $4.5 million decrease as a result of the
impact of the per-beneficiary limits. Medicare reserves of $17.1 million were
recorded in fiscal 1997, principally relating to various decisions received
from the Medicare fiscal intermediary, the Provider Reimbursement Review
Board and the U.S. District Court. See Note 5 to the financial statements for
further discussion of the Medicare cost reimbursement disputes.
The breakdown by service of the Company's total revenue is as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended September 30
1999 1998 1997
---- ---- ----
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Visits 52% 57% 59%
Extended Hours 28% 27% 27%
Hospice 18% 13% 9%
Infusion 2% 3% 5%
- -----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Extended Hours revenue decreased 13% and 11% in fiscal 1999 and
1998, respectively. The decreases resulted principally from a reduction in
the volume of new low margin cases accepted and a lack of staffing for
certain service offerings in several markets. Visit revenue declined 26% and
14% in fiscal 1999 and 1998, respectively, primarily due to decreases of 27%
and 30%, respectively, in patient visits and corporate cost reductions
implemented in an effort to minimize the impact of IPS. Infusion revenue
decreased 43% and 55% in fiscal 1999 and 1998, respectively, primarily due to
a reduction of infusion product offerings in a number of markets and the
closure of ten pharmacies as part of the Company's restructuring plan during
fiscal 1997. Hospice revenue increased 14% and 19% in fiscal 1999 and 1998,
respectively, as a result of increased overall patient census.
Direct costs, as a percent of revenue, were 54%, 56% and
64% in fiscal 1999, 1998 and 1997, respectively. The high percent in fiscal
1997 resulted principally from increases to Medicare reserves that were
recorded as reductions in revenue. Direct costs, as a percent of revenue
before Medicare reserves, were 53%, 58% and 55% in fiscal 1999, 1998 and
1997, respectively. The rate increase in fiscal 1998 was due primarily to the
decrease in revenue as a result of the per-beneficiary limits enacted that
year. The rate decrease in fiscal 1999 is due primarily to care delivery
process improvements initiated as a result of IPS.
General, administrative and selling expenses as a percent
of revenue were 42% in fiscal 1999 compared to 41% in fiscal 1998 and 56% in
fiscal 1997. The reduction in revenue attributable to increases in the
Medicare reserves strongly impacted the general, administrative and selling
expenses as a percent of revenue in fiscal 1997. General, administrative and
selling expenses as a percent of revenue before Medicare reserves, were 41%,
44% and 47% in fiscal 1999, 1998 and 1997, respectively. The decrease in the
percent for fiscal 1999 and 1998 is principally attributable to cost controls
implemented by management in response to IPS.
During fiscal 1997, the Company recorded a $2,476,000
restructuring charge as a result of the implementation of a plan to
restructure its field operations and reduce its cost structure in an effort
to improve earnings. The charge included $1,820,000 of costs associated with
lease costs and related equipment write-offs due to the closing of eight
pharmacies, the consolidation of seven sites in multi-site markets and the
relocation of eight other sites to more economical locations. The charge also
included $361,000 of severance costs related to administrative staff
reductions which were included in general, administrative and selling
expenses and completed in fiscal 1997. Total expenditures related to
facilities consolidation were $113,000, $853,000 and $668,000 in fiscal 1999,
1998 and 1997, respectively. The Company reduced the restructuring liability
through general, administrative and selling expenses by $267,000 and $499,000
in fiscal 1999 and 1998, respectively, which were primarily lease costs and
equipment write-offs primarily due to the timing of certain events differing
from the original plan. As of September 30, 1999, the restructuring is
complete.
Net interest income for fiscal 1999, 1998 and 1997 was
$1,132,000, $1,001,000 and $530,000, respectively. Interest income is
principally derived from earnings on cash and cash equivalents. The increases
in net interest income in fiscal 1999 and 1998 was due to increases in cash
equivalents generated by operating activities.
Income tax expense of $1,521,000 and $1,668,000 for fiscal
1999 and 1998, respectively, have been offset by net operating loss
carryforwards generated in fiscal 1997. Income tax benefit was 8% of the loss
before tax in fiscal 1997. The fiscal 1997 tax rate was impacted by a
valuation allowance against the Company's net operating loss carryforward and
certain other deferred tax assets.
Income (loss) applicable to common shareholders was
$1,644,000, $803,000 and ($22,852,000) for fiscal 1999, 1998 and 1997,
respectively. The significant loss in fiscal 1997 was principally
attributable to an increase of $17,101,000 in Medicare reserves resulting
from unfavorable decisions received in fiscal 1997 from the Medicare fiscal
intermediary, the Provider Reimbursement Review Board and the U.S. District
Court relating to prior period cost reports. The restructuring charge of
$2,476,000 also contributed to the loss in fiscal 1997.
LIQUIDITY & CAPITAL RESOURCES
During fiscal 1999 the Company's cash and cash equivalents
decreased $56,000 to $21,406,000 at September 30, 1999. In October 1999 the
Company repaid Medicare $4,688,000 as discussed below.
13
<PAGE>
Approximately 48%, 55% and 56% of revenue for the fiscal
years ended September 30, 1999, 1998, and 1997, respectively, was derived
from services provided to Medicare beneficiaries for which payment is based
on cost. Payments for these 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 related 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 such costs are not reimbursable and thus not recoverable by the
Company under 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 September 30, 1999, total disputed costs were $7,809,000. The
Company believes that recovery of $3,151,000 of such costs (including
extrapolation for all unsettled cost reporting periods) may not be probable
and, accordingly, has established reserves totaling $3,151,000 at
September 30, 1999.
At September 30, 1999, disputed costs totaling $4,658,000
were not reserved. Of these costs, $977,000 relates to the compensation of
physical therapists employed by the Company. The Medicare intermediary has
taken 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 in March
1997 set aside HCFA's decision, finding it arbitrary and capricious because
HCFA provided an insufficient explanation for their decision. In October
1997, HCFA issued a decision purporting to clarify their previous decision,
and disallowed all disputed costs. The Company appealed to the District
Court, and in June 1998 the District Court again 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. On September 1, 1999, the United States Court of Appeals for the
Eighth Circuit issued a favorable decision for the Company. The Secretary's
time in which to appeal expired November 30, 1999. On December 3, 1999, the
Assistant U.S. Attorney in Minneapolis informed the Company that the
Secretary has not appealed the decision of the Court of Appeals.
$1,333,000 of unreserved disputed costs involves the
Company's home office costs as they relate to the pharmacy operations in the
Company's branch offices. The Company's fiscal intermediary has adopted an
allocation method of the Company's home office costs that the Company
believes is in violation of a written agreement between the Company and its
fiscal intermediary. The Company believes that it will prevail in this case.
$1,016,000 of unreserved disputed costs involves the
Company's skilled nursing costs. The Company's fiscal intermediary has
allocated such costs to all services of the Company in spite of the fact that
the activities of the Company's skilled nursing staff are 100% attributable
to the Company's Visits services. The Company believes that it will prevail
in this case.
$969,000 of unreserved disputed costs involves the
Company's payments for services from Manor Care, Inc. ("Manor Care").
Beginning in fiscal 1996, the Company made payments to Manor Care in return
for services performed on behalf of the Company. To ensure that the expenses
incurred by Manor Care were not submitted to Medicare on both the Company's
and on Manor Care's cost reports, the Company's fiscal intermediary requested
documentation that the amounts were removed from Manor Care's cost report.
The Company is working with Manor Care to provide such documentation. The
Company believes that it will prevail in this case.
$363,000 of unreserved disputed costs involves the costs of
certain administrative/clerical personnel. The Company's fiscal intermediary
has allocated such costs across all services of the Company in spite of the
fact that they are incurred primarily in the Visits services due to the
relatively high need for documentation and filing in the Visits services. The
Company believes that it will prevail in this case.
At September 30, 1999, total accounts receivable (net of
reserves) due from Medicare were $9,438,000. Based on the progress toward
resolution of the disputed costs, management estimates that net receivables
of $4,658,000 will not be realized
14
<PAGE>
within the next twelve months, and accordingly, has classified net
receivables of $4,658,000 as a non-current asset. Accrued liabilities to
third-party of $10,209,000 at September 30, 1999 represent payments from
Medicare in excess of amounts that the Company will be entitled to upon
ultimate settlement of Medicare cost reports. In October 1999, the Company
repaid $4,688,000 to Medicare which was included in the accrued liabilities
to third party.
Operating activities provided $2,771,000 in cash during
fiscal 1999, $10,785,000 in cash during fiscal 1998 and used $769,000 in cash
during fiscal 1997. Included in the cash provided by operating activities in
fiscal 1998 was $6,529,000 of progress payments received from third parties
in excess of costs incurred. This entire amount was repaid in November 1998,
which affected fiscal 1999 operating cash flows. Additionally, fiscal 1998
cash provided by operating activities included $3,918,000 of income tax
refunds in connection with a net operating loss carryback of the fiscal 1997
net operating loss. Total accounts receivable (current and long-term)
increased 14% in fiscal 1999 and decreased 14% and 59% during fiscal 1998 and
1997, respectively. The increase in total accounts receivable during fiscal
1999 was due to the increase in long-term accounts receivable resulting from
the increase of disputed costs as discussed above. The decrease in accounts
receivable during fiscal 1998 was due to the decreases in related revenue.
The decrease during fiscal 1997 was due primarily to the additions to the
Medicare reserve of $17,101,000.
Investing activities used $262,000 in fiscal 1999 and
provided $2,000 and $241,000 in fiscal 1998 and 1997, respectively. Capital
expenditures in fiscal 1999 were primarily computer upgrades.
The Company paid Manor Care cash dividends of $2,400,000 in
fiscal 1999, 1998 and 1997. Additionally, during fiscal 1999, 1998 and 1997,
the Company made principal payments on long-term debt of $231,000, $792,000
and $1,480,000, respectively.
The Company has unused letter of credit facilities for
$1,915,000. The letters of credit are collateralized by secured investments
and will expire in December 1999.
The redeemable convertible preferred stock issued to Manor
Care includes 130,000 shares that may be redeemed at the option of Manor Care
or the Company at $13,000,000 face value on or after October 24, 2000 and
70,000 shares with a face value of $7,000,000 that may only be redeemed at
the option of the Company. Management has performed preliminary evaluations
on a number of financing alternatives in the event Manor Care elects to
redeem the $13,000,000 of preferred stock. Management believes that cash
provided from operations along with existing cash balances will be sufficient
to finance the Company's operations through October 24, 2000, and long-term
financing alternatives will be available to meet the Company's future needs,
however there are no assurances such long-term financing will ultimately be
obtained.
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
believes it is substantially Year 2000 compliant.
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. Other systems, such as the internally
developed business operations systems, phone systems, and wide area network
were modified or replaced during fiscal 1998 and 1999. Fiscal 1999 costs of
modification/ replacement included $121,000 of expense and $255,000 of
capital assets and did not 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,
which administers Medicare payments, reported it has renovated, tested, and
certified all of its critical internal systems as of December 31, 1998. The
critical external systems operated by private insurance companies that
contract with HCFA have also been certified as compliant by March 31, 1999.
The Company is not aware of any significant exposure due to its own systems
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 compliant in a
timely manner, or that such failure would not have a material adverse impact
on the Company.
15
<PAGE>
FORWARD LOOKING INFORMATION
Statements included in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, in the letter to
Shareholders, elsewhere in the Annual Report, in the Company's Form 10-K, in
future filings by the Company with the Securities and Exchange Commission, in
the Company's press releases and in oral statements made with the approval of
an authorized executive officer which 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 from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made.
The factors discussed below, among others, could affect the Company's actual
results and could cause the Company's actual financial performance to differ
materially from that expressed in any forward-looking statement.
The majority of the Company's revenue is derived from
services provided to Medicare beneficiaries. Currently, Medicare reimburses
participating Medicare-certified home health agencies for the reasonable
costs incurred to provide covered visits to eligible beneficiaries, subject
to certain cost limits which vary according to geographic regions of the
country. This does not allow the Company to generate a profit from these
services. In fact, due to certain limitations on the nature and amount of the
costs that are reimbursable, the Company incurs a loss on the Medicare
business.
Together, 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. The Budget Act and Appropriations Act provide that if the Department of
Health and Human Services ("HHS") fails to implement a PPS by October 1,
2000, the per-visit and per-beneficiary cost limits will be reduced an
additional 15% on that date. The 1999 Appropriations Act further delayed the
15% limit reduction to October 2001. The impact of such a change, if
implemented, on the Company's results of operations cannot be predicted with
any certainty at this time and would depend, to a large extent, on the
reimbursement rates for home nursing established on an interim basis and
under the prospective payment system. There can be no assurances that such
reimbursement rates, if enacted, would cover the costs incurred by the
Company to provide home nursing services.
Until prospective payment takes effect on October 1, 2000,
the Budget Act sets up an interim payment system ("IPS") that provides for
lowering of reimbursement limits for home health visits. For fiscal 1999 and
1998, home health agencies' cost limits will be determined as the lesser of
(i) actual, reasonable costs, (ii) per-visit cost limits based on 105% of
median costs of freestanding home health agencies or (iii) agency-specific
per-beneficiary cost limits, based on 98% of 1994 costs, adjusted for
inflation. The new cost limits were announced April 1, 1998, effective
retroactively to October 1, 1997. The new limits, together with the per-visit
limits, caused a $4.5 million reduction to the Company's 1998 revenue. The
Company initiated a series of cost reduction programs, care delivery process
improvements, and revenue growth actions and had only a $201,000 reduction in
fiscal 1999 revenue due to these limits. In response to industry and patient
protest as to the severity of cuts in payments resulting from the 1998
interim payments, Congress enacted change in the 1999 payments.
Effective October 1, 1998, the Appropriations Act includes
revisions to the Medicare IPS for home health agencies. The Appropriations
Act responds to widespread concerns about inadequate payments to home health
agencies under IPS by modifying per-beneficiary limits. Specifically, for
providers with a 12-month cost reporting period ending in fiscal 1994, each
home health agency below the national median per-beneficiary limit will have
its limit increased by one-third of the difference between its limit and the
national median. Payments to agencies without a 12-month cost reporting
period ending in fiscal 1994, but for which the first cost reporting period
begins in fiscal 1999, will be increased by two percent. In addition, the
Appropriations Act increases the per-visit limit from 105% to 106% of the
national median cost. While the Company expects to be able to operate under
the new limits, based on the recent changes, there can be no assurances these
are the final rates.
During fiscal 1997, several cost reimbursement issues that
were in dispute for several years were resolved through decisions by the PRRB
and the U.S. District Court. As a result of these decisions and other
communications from HCFA, it became clear that some costs incurred by the
Company would not be reimbursed by Medicare. Although the Company has
restructured its operations and eliminated a portion of these nonreimbursable
costs, the Company will continue to incur some costs that are not reimbursed
by Medicare, as it believes they constitute a necessary function to the
conduct of its business.
In May 1995, the Clinton Administration instituted
Operation Restore Trust ("ORT"), a health care fraud and abuse initiative
focusing on nursing homes, home health care agencies and durable medical
equipment companies located in the five states with the largest Medicare
populations. ORT has been responsible for millions of dollars in civil and
criminal restitution,
16
<PAGE>
fines, recovery of overpayments and the exclusion of a number of individuals
and corporations from the Medicare program. ORT has been expanded to all
fifty states. Private insurers and various state enforcement agencies also
have increased their scrutiny of health care providers' practices and claims,
particularly in the home health and durable medical equipment areas.
Additionally, HCFA has implemented "Wedge Surveys" in at
least 13 states. In these surveys, HCFA completes ORT-type surveys on a much
smaller scale. Generally, HCFA extrapolates the percentage which was paid in
error to all claims paid for the period under review. Assuming the reviewer
uncovered nothing significant, the home health agency then has the option to
repay the amount determined by HCFA or undergo a broader review of its
claims. If the survey uncovers significant problems, the matter may be
referred for further review.
While the Company believes that it is in material
compliance with the fraud and abuse laws, there can be no assurance that the
practices of the Company, if reviewed, would be found to be in full
compliance with such requirements, as such requirements ultimately may be
interpreted. It is the Company's policy to monitor its compliance with such
requirements and to take appropriate actions to attempt to ensure such
compliance. Although the Company does not believe it has violated any fraud
and abuse laws, there can be no assurance that future related legislation,
either health care or budgetary, related regulatory changes or
interpretations of such regulations, will not have a material adverse effect
on the future operations of the Company.
The Company is also affected by settlements which may be
reached with HHS regarding cost reports and 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. At September 30, 1999,
the Company had federal operating loss carryforwards of $5,245,000 which will
expire in 2012 and 2013. Management believes it is more likely than not that
certain of these net operating loss carryforwards may expire unused and,
accordingly, has established a valuation allowance against them.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Page(s)
Consolidated Balance Sheets.............................. 19-20
Consolidated Statements of Operations.................... 21
Consolidated Statements of Shareholders' Equity.......... 22
Consolidated Statements of Cash Flows.................... 23
Notes to Consolidated Financial Statements............... 24-34
Independent Auditors' Report............................. 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
18
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- -----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,406 $ 21,462
Accounts receivable, net of allowances
of $1,079 and $1,175 in 1999 and 1998,
respectively 11,937 13,598
Deferred income tax 1,006 1,269
Prepaid expenses and other current assets 668 970
-------- --------
Total current assets 35,017 37,299
-------- --------
Property:
Furniture and equipment 7,202 8,123
Computer equipment and software 6,099 6,771
Leasehold improvements 399 529
-------- --------
Total 13,700 15,423
Accumulated depreciation (10,433) (10,954)
-------- --------
Property - net 3,267 4,469
-------- --------
Other Assets:
Accounts receivable, long-term 4,658 988
Goodwill, net 5,115 5,274
Other assets 92 330
-------- --------
Total other assets 9,865 6,592
-------- --------
Total Assets $ 48,149 $ 48,360
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
IN HOME HEATH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 67 $ 219
Accounts payable 4,045 2,723
Accrued liabilities:
Third party 10,209 12,669
Compensation 3,869 3,225
Insurance 2,593 3,246
Restructuring 76 456
Other 476 538
-------- --------
Total current liabilities 21,335 23,076
-------- --------
Long-Term Debt 43 44
Deferred Revenue - 41
Deferred Rent Payable 144 198
Deferred Income Tax 1,006 1,288
Commitments and Contingencies - -
Redeemable Convertible Preferred Stock - $1.00 par value,
$13,000 redemption value, authorized 130 shares;
issued and outstanding 1999 and 1998 - 130 shares 12,782 12,584
Shareholders' Equity:
Redeemable convertible preferred stock - $1.00
par value, $7,000 redemption value, authorized
70 shares; issued and outstanding 1999 and 1998
- 70 shares 7,000 7,000
Preferred stock - authorized 800 shares - -
Common stock - $.03 par value, authorized 13,334 shares;
issued and outstanding - 1999 - 5,521 shares,
1998 - 5,479 shares 166 164
Additional paid-in capital 23,739 23,675
Retained deficit (18,066) (19,710)
-------- --------
Total shareholders' equity 12,839 11,129
-------- --------
Total Liabilities and Shareholders' Equity $ 48,149 $ 48,360
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue [including favorable (unfavorable) Medicare
reserve adjustments of $1,716, $3,662 and ($17,101)
in 1999, 1998 and 1997, respectively] $ 80,046 $ 97,008 $ 110,139
--------- --------- ---------
Operating Expenses:
Direct costs of revenue (primarily payroll related costs) 43,312 53,885 70,570
General, administrative and selling expenses 33,624 40,674 62,036
--------- --------- ---------
Total operating expenses 76,936 94,559 132,606
--------- --------- ---------
Income (loss) from operations 3,110 2,449 (22,467)
--------- --------- ---------
Interest:
Interest expense (29) (65) (265)
Interest income 1,161 1,066 795
--------- --------- ---------
Net interest income 1,132 1,001 530
--------- --------- ---------
Income (loss) before income taxes 4,242 3,450 (21,937)
Income tax benefit - - (1,780)
--------- --------- ---------
Net income (loss) $ 4,242 $ 3,450 $ (20,157)
========= ========= =========
Net income (loss) available to common shareholders $ 1,644 $ 803 $ (22,852)
========= ========= =========
Basic and diluted earnings (loss) per share $ .30 $ .15 $ (4.19)
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Redeemable
Convertible
Common Stock Preferred Stock Additional Retained
------------ --------------- paid-in earnings
Shares Amount Shares Amount capital (deficit)
------ ------ ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1996 5,514 $ 165 - $ - $23,978 $ 2,615
Common stock issued for
employee stock plans 34 1 - - 185 -
Repurchase from former officers (82) (2) - - (502) -
Net loss - - - - - (20,157)
Preferred dividends - - - - - (2,400)
Preferred stock accretion - - - - - (295)
-------- ----- ----- ------- ---------- --------
Balance - September 30, 1997 5,466 164 - - 23,661 (20,237)
Common stock issued for
employee stock plans 36 1 - - 52 -
Repurchase (23) (1) - - (38) -
Net income - - - - - 3,450
Preferred dividends - - - - - (2,400)
Preferred stock accretion - - - - - (247)
Preferred stock conversion - - 70 7,000 - (276)
-------- ----- ---- ----- --------- --------
Balance - September 30, 1998 5,479 164 70 7,000 23,675 (19,710)
Common stock issued for
employee stock plans 42 2 - - 64 -
Net income - - - - - 4,242
Preferred dividends - - - - - (2,400)
Preferred stock accretion - - - - - (198)
-------- ----- ----- ------- --------- --------
Balance - September 30, 1999 5,521 $ 166 70 $ 7,000 $23,739 $(18,066)
======== ===== ===== ======= ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 4,242 $ 3,450 $(20,157)
Adjustments:
Depreciation and amortization 1,564 2,400 3,012
Loss on disposal of fixed assets 382 862 344
Accounts receivable (2,009) 2,430 24,420
Prepaid expenses and other assets 295 3,508 (2,133)
Accounts payable 1,322 (1,591) (354)
Accrued liabilities (2,911) 217 (7,130)
Deferred revenue (41) (357) (422)
Deferred rent payable (54) (50) (19)
Deferred income tax (19) (84) 1,670
-------- -------- --------
Net cash provided (used) by operating activities 2,771 10,785 (769)
-------- -------- --------
Cash Flows From Investing Activities:
Acquisition of property (269) (6) (109)
Repayments of advances to officers and employees 7 8 350
-------- -------- --------
Net cash (used) provided by investing activities (262) 2 241
-------- -------- --------
Cash Flows From Financing Activities:
Payment of long-term debt (231) (792) (1,480)
Preferred dividends paid (2,400) (2,400) (2,400)
Issuance (repurchase) of common stock 66 14 (356)
-------- -------- --------
Net cash used by financing activities (2,565) (3,178) (4,236)
-------- -------- --------
Cash and Cash Equivalents:
Net (decrease) increase (56) 7,609 (4,764)
Beginning of year 21,462 13,853 18,617
-------- -------- --------
End of year $ 21,406 $ 21,462 $ 13,853
======== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - In Home Health, Inc. specializes in high-quality health
services to clients in their homes, including high-tech nursing,
hospice, rehabilitation, infusion therapy and personal care through its
33 branches. Management analyzes operating performance on a geographic
basis and considers each branch an operating segment. All branches offer
substantially the same services to similar types of clients entirely
within the United States. Additionally, all branches operate in the same
regulatory environment and utilize similar processes to provide care to
their clients. For financial reporting purposes, all the Company's
operating segments are aggregated into one reportable segment.
BASIS OF CONSOLIDATION - The consolidated financial statements include
the accounts of In Home Health, Inc. and its subsidiaries (the
"Company"). All material intercompany accounts and transactions have
been eliminated in consolidation.
CASH EQUIVALENTS - Securities which are readily convertible into cash
with original maturities of three months or less are considered cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The book value of accounts
receivable, cash and cash equivalents, accounts payable and accrued
liabilities approximates fair value due to the short-term nature of
these balances.
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
PROPERTY AND PROPERTY UNDER CAPITALIZED LEASES - Property and property
under capitalized leases are stated at cost and depreciated or amortized
over estimated useful lives or lease term, if shorter, (from three to
twelve years) using the straight-line method. Property acquired by
capital lease for the year ended September 30, 1999 was $79,000. No
property was acquired under capitalized leases for the years ended
September 30, 1998 or 1997.
GOODWILL - Costs in excess of net assets of acquired businesses have
been capitalized and are being amortized using the straight-line method
over 40 years. Accumulated amortization was $1,211,000 and $1,053,000 at
September 30, 1999 and 1998, respectively. The Company reviews for
impairment of long-lived assets and goodwill to be held and used in the
Company's operations whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
For purposes of assessing impairment, assets are grouped at the branch
level which is the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups of
assets. Goodwill is generally separately identified by acquisition and
branch location. Management deems the long-lived and/or intangible
assets of a branch to be impaired if estimated expected undiscounted
future cash flows is less than the carrying amount of the assets.
Estimates of expected future cash flows are based on management's best
estimates of anticipated operating results over the remaining useful
life of the assets. For those branches identified as containing impaired
assets, the Company measures the impairment as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. In
estimating the fair value of the asset, management utilizes a valuation
technique based on the present value of expected future cash flows.
DEFERRED REVENUE - Deferred revenue relates to the timing difference in
recording certain software development costs for financial statement
purposes and Medicare cost reporting purposes. Incremental costs
relating to the development of software for certain major management
information system projects undertaken during 1992 through 1994 have
been capitalized and are included in computer equipment and software on
the balance sheet. For Medicare cost reimbursement purposes, the Company
includes in reimbursable costs the amount of expenditures in the year
they were
24
<PAGE>
incurred. The Company has reported an amount of deferred
revenue, representing the Medicare impact of the difference between the
reimbursable costs reported on the Medicare cost reports and the
unamortized balance of capitalized software development costs. The
deferred revenues are being recorded to revenue when the amortization of
the related software development expenses is recorded (over a five year
period). Unamortized software development costs were $56,000 as of
September 30, 1998. The costs are fully amortized as of September 30,
1999.
DEFERRED RENT PAYABLE - Deferred rent payable has been recorded for
long-term office space operating leases which contain initial rent
inducements. Rental expense is being amortized on a straight-line basis
over the terms of the operating leases.
INCOME TAXES - Deferred tax assets and liabilities are recognized based
on differences between the financial statement and tax bases of assets
and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to
be realized.
REVENUE RECOGNITION - Revenue is recognized at the time the service is
provided to the client. The Company records revenue for services to
Medicare beneficiaries at the time the services are rendered and based
on the Medicare cost reimbursement principles. Under those principles,
Medicare reimburses the Company for the reasonable costs (as defined by
Medicare regulations) incurred in providing care to Medicare
beneficiaries. The Company reports as reimbursable costs in the Medicare
cost reports only those costs it believes to be reimbursable under the
applicable Medicare cost reimbursement principles. In determining the
amount of revenue to be recorded, those costs are reduced for costs that
are in excess of reimbursable cost limits, and for costs for which
reimbursement may be questionable based on the Company's understanding
of reimbursement principles in effect at that time. Accordingly, this
process results in recording revenue only for the costs that the Company
believes are reasonably assured of recovery. Refer to Note 5 for
additional information.
RELATED PARTY TRANSACTIONS - On October 24, 1995, the Company closed an
agreement with ManorCare Health Services, Inc., a wholly owned
subsidiary of Manor Care, Inc. ("Manor Care"), a national health care
and international lodging firm. Pursuant to this agreement, the Company
conducted a cash self-tender offer and purchased 2,250,000 shares of its
common stock (41% of outstanding) at $10.20 per share and Manor Care
purchased 2,250,000 shares from the Company at $10.20 per share. In
addition, Manor Care invested $20 million to purchase redeemable
convertible preferred shares and a warrant to purchase 2,000,000 shares
of common stock at an exercise price of $11.25 per share. See Notes 6
and 8.
The Purchase Agreement with Manor Care also contemplated that the
Company and Manor Care would enter into agreements or arrangements which
they deemed prudent and mutually beneficial for the provision of
services between them on terms that are fair to each party. The Company
and Manor Care entered into an agreement whereby Manor Care would
provide to the Company certain administrative services, reimbursement
services, legal services and other similar types of services. Under this
agreement, administrative fees of $102,000, $340,000 and $129,000 for
fiscal years ended September 30, 1999, 1998 and 1997, respectively, were
recorded. Management believes that the foregoing charges are reasonable
allocations of the costs incurred by Manor Care on the Company's behalf.
RECLASSIFICATIONS - Certain reclassifications have been made to the
fiscal 1998 and 1997 financial statements to conform to the
presentations adopted in fiscal 1999. These reclassifications had no
effect on net income (loss) or earnings (loss) per share or
shareholders' equity as previously reported.
2. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
The following table reflects the calculation of basic and diluted
earnings per share for the fiscal years ended September 30 (in
thousands, except per share amounts):
25
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
EARNINGS PER SHARE:
Net income (loss) $ 4,242 $ 3,450 $ (20,157)
Dividends on preferred stock (2,400) (2,400) (2,400)
Preferred stock accretion (198) (247) (295)
------- -------- ---------
Net income (loss) available to
common shareholders $ 1,644 $ 803 $ (22,852)
======= ======== =========
Weighted average shares outstanding 5,483 5,467 5,450
======= ======== =========
Basic and diluted earnings (loss) per share $ .30 $ .15 $ (4.19)
======== ======== =========
</TABLE>
Options to purchase 620,790 and 319,996 shares of common stock were
outstanding at September 30, 1999 and 1998, respectively. These options
were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average
market price of the common shares. Options to purchase 360,778 shares of
common stock were outstanding at September 30, 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 Manor Care in
October 1995. As of September 30, 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 have voting rights on an
as-if converted basis, and are initially convertible into 3,333,334
common shares at an initial conversion price of $6.00 per share. A
private warrant issued in October 1995 to Manor Care to purchase
2,000,000 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 per share would be anti-dilutive and,
therefore, have been excluded.
3. RESTRUCTURING CHARGE
During fiscal 1997, the Company recorded a $2,476,000 restructuring
charge as a result of the implementation of a plan to restructure its
field operations and reduce its cost structure in an effort to improve
earnings. The charge included $1,820,000 of costs associated with lease
costs and related equipment write-offs due to the closing of eight
pharmacies, the consolidation of seven sites in multi-site markets and
the relocation of eight other sites to more economical locations. The
charge also included $361,000 of severance costs related to
administrative staff reductions which were included in general,
administrative and selling expenses and completed in fiscal 1997. Total
expenditures related to facilities consolidation were $113,000, $853,000
and $668,000 in fiscal 1999, 1998 and 1997, respectively. The Company
reduced the restructuring liability through general, administrative and
selling expenses by $267,000 and $499,000 in fiscal 1999 and 1998,
respectively, which were primarily lease costs and equipment write-offs
primarily due to the timing of certain events differing from the
original plan. As of September 30, 1999, the restructuring is complete.
4. LONG-TERM DEBT
Long-term debt consists of obligations under capitalized leases with
interest rates up to 11.3%, due through January 2003.
Future minimum payments as of September 30, 1999 are as follows (in
thousands):
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
------------------------
<S> <C>
2000 $ 88
2001 23
2002 21
2003 3
-----
Total minimum payments 135
Less amounts representing interest (25)
----
Present value of future minimum payments 110
Less current maturities (67)
----
Long-term debt $ 43
====
</TABLE>
Assets recorded under capital leases are included in property at cost of
$812,000 and $1,048,000, and accumulated depreciation of $223,000 and
$368,000 at September 30, 1999 and 1998, respectively. Interest paid for
the years ended September 30, 1999, 1998 and 1997 was $29,000, $65,000
and $265,000, respectively.
5. MEDICARE COST REIMBURSEMENT
Approximately 48%, 55% and 56% of revenue for the fiscal years ended
September 30, 1999, 1998, and 1997, respectively, was derived from
services provided to Medicare beneficiaries for which payment is based
on cost. Payments for these 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 related 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 such costs are not reimbursable and thus not recoverable
by the Company under 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 September 30,
1999, total disputed costs were $7,809,000. The Company believes that
recovery of $3,151,000 of such costs (including extrapolation for all
unsettled cost reporting periods) may not be probable and, accordingly,
has established reserves totaling $3,151,000 at September 30, 1999.
At September 30, 1999, disputed costs totaling $4,658,000 were not
reserved. Of these costs, $977,000 relates to the compensation of
physical therapists employed by the Company. The Medicare intermediary
has taken 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 in March 1997 set aside
HCFA's decision, finding it arbitrary and capricious because HCFA
provided an insufficient explanation for their decision. In October
1997, HCFA issued a decision purporting to clarify their previous
decision, and disallowed all disputed costs. The Company appealed to the
District Court, and in June 1998 the District Court again 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. On September 1, 1999, the United States Court of
Appeals for the Eighth Circuit issued a favorable decision for the
Company. The Secretary's time in which to appeal expired November 30,
1999. On December 3, 1999, the Assistant U.S. Attorney in Minneapolis
informed the Company that the Secretary has not appealed the decision to
the Court of Appeals.
27
<PAGE>
$1,333,000 of unreserved disputed costs involves the Company's home
office costs as they relate to the pharmacy operations in the Company's
branch offices. The Company's fiscal intermediary has adopted an
allocation method of the Company's home office costs that the Company
believes is in violation of a written agreement between the Company and
its fiscal intermediary. The Company believes that it will prevail in
this case.
$1,016,000 of unreserved disputed costs involves the Company's skilled
nursing costs. The Company's fiscal intermediary has allocated such
costs to all services of the Company in spite of the fact that the
activities of the Company's skilled nursing staff are 100% attributable
to the Company's Visits services. The Company believes that it will
prevail in this case.
$969,000 of unreserved disputed costs involves the Company's payments
for services from Manor Care, Inc. ("Manor Care"). Beginning in fiscal
1996, the Company made payments to Manor Care in return for services
performed on behalf of the Company. To ensure that the expenses incurred
by Manor Care were not submitted to Medicare on both the Company's and
on Manor Care's cost reports, the Company's fiscal intermediary
requested documentation that the amounts were removed from Manor Care's
cost report. The Company is working with Manor Care to provide such
documentation. The Company believes that it will prevail in this case.
$363,000 of unreserved disputed costs involves the costs of certain
administrative/clerical personnel. The Company's fiscal intermediary has
allocated such costs across all services of the Company in spite of the
fact that they are incurred primarily in the Visits services due to the
relatively high need for documentation and filing in the Visits
services. The Company believes that it will prevail in this case.
At September 30, 1999, total accounts receivable (net of reserves) due
from Medicare were $9,438,000. Based on the progress toward resolution
of the disputed costs, management estimates that net receivables of
$4,658,000 will not be realized within the next twelve months, and
accordingly, has classified net receivables of $4,658,000 as a
non-current asset. Accrued liabilities to third-party of $10,209,000 at
September 30, 1999 represent payments from Medicare in excess of amounts
that the Company will be entitled to upon ultimate settlement of
Medicare cost reports. In October 1999, the Company repaid $4,688,000 to
Medicare.
During fiscal 1997, the Company adjusted its Medicare reserves by a
charge to revenues of $17,101,000, principally as a result of PRRB and
Court decisions which clarified the definition of allowable activities
and documentation requirements related to the Company's community
liaison costs.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was issued to Manor Care on
October 24, 1995. The preferred shares were originally redeemable in
cash at the option of the holder or the Company on and after the fifth
anniversary of their issuance. The redeemable preferred shares have
voting rights on an as-if converted basis, and are initially convertible
into 3.3 million common shares at an initial conversion price of $6.00
per share. The redeemable preferred shares bear dividends payable
quarterly at 12% per annum. The redeemable preferred stock is being
accreted over five years from its fair value of $18,500,000 on the date
of issuance to its redemption value of $20,000,000.
On April 13, 1998, the Company entered into an agreement with Manor Care
whereby Manor Care waived its right to give notice on or after October
24, 2000 requiring the Company to redeem 70,000 of the 200,000 shares.
The effect of the agreement allowed the Company to present the 70,000
modified shares in the shareholders' equity section of its balance
sheet, while the remainder of the Preferred Shares continues to be
presented outside the shareholders' equity section of the balance sheet.
The reason for the waiver was to allow the Company to meet the
requirements for continued listing of its common stock on the NASDAQ
National Market ("NASDAQ") by retaining a minimum net tangible asset
balance, as defined by NASDAQ, of at least $5,000,000. With respect to
the remaining 130,000 shares, the Company also entered into a resolution
whereby it will not redeem any shares of its capital stock from Manor
Care if such redemption would cause the Company's net tangible assets,
as defined by NASDAQ to be less than $5,000,000. Manor Care consented to
the adoption of the resolution.
28
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
The Company is obligated under several noncancelable operating leases
for office space and equipment. Total rental expense for all operating
leases was $3,906,000, $4,401,000 and $4,852,000, for the years ended
September 30, 1999, 1998 and 1997, respectively.
Future minimum rental payments as of September 30, 1999 for operating
leases with noncancelable terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
------------------------
<S> <C>
2000 $2,471
2001 2,186
2002 1,416
2003 565
2004 337
------
Total minimum payments $6,975
======
</TABLE>
The Company has unused letter of credit facilities totaling $1,915,000.
The letters of credit are collateralized by secured investments and will
expire in December 1999.
The Company is a party to various claims and legal proceedings which
management believes are in the normal course of business and will not
involve any material loss.
8. CAPITAL TRANSACTIONS
STOCK PURCHASE PLAN
-------------------
The Company has a plan whereby eligible employees may purchase the
Company's common stock at 85% of the lower the market price at the time
of grant or the time of purchase. There are 500,000 shares reserved for
this plan of which 42,000 shares were issued on September 30, 1999 at
$1.59 per share, 36,000 shares were issued on September 30, 1998 at
$1.50 per share and 31,000 shares were issued on September 30, 1997 at
$4.62 per share. At September 30, 1999 there were 187,000 shares
available for future offerings.
STOCK REPURCHASE
----------------
In fiscal 1998, the Company repurchased 23,000 shares of common stock at
fair market value. In fiscal 1997, the Company repurchased 82,000 shares
of common stock at fair market value from two former officers as part of
a settlement agreement. All of their outstanding stock options were
canceled.
STOCK OPTION PLAN
-----------------
The Company has adopted stock option plans to provide for the granting
of options to purchase up to a maximum of 1,267,000 shares of common
stock. The options are granted at exercise prices equal to the fair
market value of the common stock at the date of grant. The following is
a summary of stock option activity for the years ended September 30 (in
thousands, except per share amounts):
29
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 320 $6.62 361 $7.17 689 $8.55
Granted 432 1.77 130 5.25 251 5.46
Exercised - - - - (3) 1.59
Canceled (131) 7.16 (171) 6.74 (576) 8.10
---- ---- ----
Outstanding at end
of year 621 3.14 320 6.62 361 7.17
==== ==== ====
Options exercisable
at year-end 95 7.14 157 7.67 159 8.64
--------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, there were no shares available for grant.
However, the Board, subject to shareholder approval, has granted 100,277
additional shares.
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------
Range of Outstanding Weighted-Average Weighted-Average Exercisable
Exercise Prices as of Remaining Exercise Price as of Weighted-Average
9/30/99 Contractual Life 9/30/99 Exercise Price
in Years
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - $1.99 410,000 9.6 $ 1.75 - -
$2.00 - $3.99 21,668 9.7 $ 2.15 668 $ 3.09
$4.00 - $5.99 140,557 7.4 $ 5.32 49,132 $ 5.37
$6.00 - $7.99 29,050 5.5 $ 7.10 25,446 $ 7.15
$8.00 - $9.99 6,337 2.8 $ 8.79 6,337 $ 8.79
$10.00 - $11.99 1,834 3.6 $11.19 1,834 $11.19
$12.00 - $13.99 7,176 2.7 $12.71 7,176 $12.71
$14.00 - $15.99 4,168 3.3 $14.71 4,168 $14.71
----- -----
620,790 8.7 $ 3.14 94,761 $ 7.14
-----------------------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("SFAS 123"), but continues to apply Accounting Principles
Board Opinion No. 25 and related interpretations in the accounting for
its stock option plans. If the Company had adopted the expense
recognition provisions of SFAS 123 for purposes of determining
compensation expense related to stock options
30
<PAGE>
granted during the years ended September 30, 1999, 1998 and 1997, net
income (loss) available to common shareholders and basic and diluted
earnings (loss) per share would have been changed to the pro forma
amounts shown below:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) available to common shareholders
As reported $ 1,644,000 $ 803,000 $ (22,852,000)
Pro forma 1,272,000 261,000 (23,380,000)
Basic and diluted earnings (loss) per share
As reported $ .30 $ .15 $ (4.19)
Pro forma .23 .05 (4.29)
</TABLE>
The fair value of each option granted during fiscal 1999, 1998 and 1997
was estimated on the grant date using the Black-Scholes option pricing
model with the following assumptions: no dividend yield; a risk free
interest rate of 5.78%, 4.23% and 6.46% during fiscal 1999, 1998 and
1997, respectively; expected volatility of the market price of the
Company's common stock of 121%, 105% and 68% during fiscal 1999, 1998
and 1997, respectively; turnover of 0%, 2% and 37% during fiscal 1999,
1998 and 1997, respectively, and expected option life ranging between
four and five years. Based upon these assumptions, the weighted average
fair value at grant date of options granted during fiscal 1999, 1998 and
1997 was $1.50, $4.11 and $3.39, respectively.
The fair value of the employees' stock purchase plan was estimated using
the Black-Scholes model with the following assumptions for fiscal 1999,
1998 and 1997: no dividend yield; a risk free interest rate of 5.78%,
4.23% and 6.46% during fiscal 1999, 1998 and 1997, respectively;
expected volatility of the market price of the Company's common stock of
121%, 105% and 68% during fiscal 1999, 1998 and 1997, respectively; and
expected option life of one year. Based upon the assumptions, the
weighted average fair value of the stock purchase rights granted in
fiscal 1999, 1998 and 1997 was $1.10, $3.06 and $3.24, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for
future years. SFAS 123 does not apply to awards granted prior to fiscal
1996 and additional awards are anticipated in future years.
9. INCOME TAXES
The income tax provision for the years ended September 30 consisted
of (in thousands):
31
<PAGE>
<TABLE>
<CAPTION>
1999 FEDERAL STATE TOTAL
---- ------- ----- -----
<S> <C> <C> <C>
Current $ 11 $ 8 $ 19
Deferred (2) (17) (19)
------- ----- -------
$ 9 $ (9) $ -
======= ===== =======
1998 FEDERAL STATE TOTAL
---- ------- ----- -------
Current $ 108 $ (24) $ 84
Deferred (69) (15) (84)
------- ----- -------
$ 39 $ (39) $ -
======= ===== =======
1997 FEDERAL STATE TOTAL
---- ------- ----- -------
Current $(3,308) $(142) $(3,450)
Deferred 1,275 395 1,670
------- ----- -------
$(2,033) $ 253 $(1,780)
======= ===== =======
</TABLE>
The income tax expense differs from the amount computed by applying
the Federal statutory rate to income before income taxes for each of
the fiscal years ended September 30 as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax (benefit) at Federal statutory rate $ 1,442 $ 1,173 $(7,459)
State income taxes, net of Federal benefit 204 169 (995)
Goodwill amortization 41 41 38
Meals and entertainment 15 30 62
Other (181) 255 (216)
Valuation allowance (1,521) (1,668) 6,790
------- -------- -------
Income tax benefit $ - $ - $(1,780)
======= ======== =======
</TABLE>
The tax benefit related to the exercise of employee stock options is
recorded as additional paid-in-capital.
During fiscal 1998, income tax refunds of $3,918,000 were
received from fiscal 1997 net operating loss carryback.
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets and liabilities at September 30 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- ----------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
ASSET LIABILITY ASSET LIABILITY
----- --------- ------- ---------
<S> <C> <C> <C> <C>
Bad debt allowance $ 417 $ - $ 454 $ -
Depreciation and amortization - 719 - 950
Insurance accruals 1,190 - 1,522 -
Capitalized items expensed for taxes - 334 - 434
Deferred revenue - - 16 -
Vacation 252 - 286 -
Restructuring reserve 29 - 176 -
Benefit of NOL carryforward 2,631 - 3,898 -
Other 88 (47) 39 (96)
------ ------ -------- --------
4,607 1,006 6,391 1,288
Less valuation allowance (3,601) - (5,122) -
------ ------ -------- --------
$1,006 $1,006 $ 1,269 $ 1,288
====== ====== ======== ========
</TABLE>
Realization of deferred tax assets associated with the net operating
loss carryforwards is dependent upon generating sufficient taxable
income prior to their expiration. Management believes that it is more
likely than not that certain of these net operating loss
carryforwards may expire unused and that other certain tax assets may
not be realized and, accordingly, has established a valuation
allowance against them.
32
<PAGE>
As of September 30, 1999, the Company had federal operating loss
carryforwards of $5,245,000 which expire in 2012 and 2013.
10. SEGMENT INFORMATION
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" ("SFAS 131") which was effective
for the Company in fiscal 1999. SFAS 131 redefines how operating
segments are determined and requires disclosures of certain financial
and descriptive information about a company's operating segments. The
Company's management analyzes operating performance on a geographic
basis and considers each branch an operating segment. All branches offer
substantially the same services to similar types of clients entirely
within the United States. Additionally, all branches operate in the same
regulatory environment and utilize similar processes to provide care to
their clients. For financial reporting purposes, all the Company's
operating segments are aggregated into one reportable segment.
Therefore, the Company has concluded that the current reportable segment
is consistent with the "management approach" methodology outlined in
SFAS 131.
Revenue by service for fiscal years ended September 30 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Visits $41,634 $55,897 $ 64,725
Extended Hours 22,768 26,048 29,205
Hospice 14,179 12,475 10,443
Other 1,465 2,588 5,766
------- ------- --------
$80,046 $97,008 $110,139
======= ======= ========
</TABLE>
Revenue from Medicare was $52,026,000, $64,723,000 and $70,910,000 for
fiscal 1999, 1998 and 1997, respectively.
11. SUBSEQUENT EVENT
On October 16, 1999, the Company acquired the assets of six home health
agencies located in Wisconsin and Colorado. The purchase price was not
significant.
33
<PAGE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $18,571 $21,079 $20,165 $20,231
Income from operations 178 1,126 898 908
Net income (loss) available to common shareholders (132) 732 500 544
Basic and diluted earnings (loss) per share (.02) .13 .09 .10
FISCAL 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenue $27,858 $26,439 $22,904 $19,807
Income from operations 674 528 635 612
Net income applicable to common shareholders 186 120 287 210
Basic and diluted earnings per share .04 .02 .05 .04
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
In Home Health, Inc.
We have audited the accompanying consolidated balance sheets of In Home
Health, Inc. (the Company) as of September 30, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of In Home Health, Inc. as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 19, 1999
(December 7, 1999 as to Note 5)
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Information required under this Item with respect to
directors will be contained in the section entitled "Election of Directors"
in the Company's 2000 Proxy Statement, and is incorporated herein by
reference.
Information concerning executive officers is set forth in
the section entitled "Executive Officers of the Registrant" in Part I of this
Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required under this item will be contained in
the section entitled "Executive Compensation and Other Information" in the
Company's 2000 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
Information required under this item will be contained in
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's 2000 Proxy Statement and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required under this item will be contained in
the section entitled "Election of Directors - Certain Transactions" in the
Company's 2000 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
------------------------------------------------------------
8-K
---
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements filed with this Form
10-K are listed in Item 8 above.
2. FINANCIAL STATEMENT SCHEDULES
The schedules required to be filed as part of this Annual
Report on Form 10-K are listed below with their location in
this report.
PAGE
Independent Auditors' Report .............................35
Schedule for the Years Ended September 30, 1999,
1998 and 1997:
II - Valuation and Qualifying Accounts and Reserves ..40
All schedules, other than indicated above, are omitted because
of the absence of the conditions under which they are required
or because the information required is shown in the
consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed July 27, 1999
containing disclosure pursuant to Item 1 of Form 8-K
and is incorporated by reference.
36
<PAGE>
<TABLE>
<CAPTION>
(c) EXHIBITS:
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Amendment of Articles of Incorporation. (iv)
3.2 Restated Bylaws. (ii)
4.1 Form of specimen Common Stock certificate. (iv)
4.2 Form of specimen certificate for Series A
Preferred Stock. (i)
4.3 Certificate of Designation of the Series, Number of Shares in
Series, Dividend Rate, Redemption Price, Liquidation Price,
Conversion Right and Other Rights and Preferences of the
Series A Preferred Stock ($1.00 par value) of In Home Health,
Inc. (i)
4.4 Preferred Stock Modification Agreement. (iii)
10.1 Executive Incentive Plan in place for fiscal 1999.
10.2 Lease agreement dated October 24, 1991 with Minnesota CC
Properties, as amended. (i)
10.3 The Company's 1987 Stock Option Plan, as amended. (i)
10.4 The Company's 1995 Stock Option Plan, as amended. (i)
10.5 The Company's 1991 Employee Stock Purchase Plan, as amended.
(iv)
10.6 Letter of Credit Agreement dated September 29, 1998 with U.S.
Bank National Association, as amended. (iv)
10.7 Letter of Credit Agreement dated December 16, 1996 with U.S.
Bank National Association. (ii)
10.8 Employment Agreement between the Company and Robert J.
Hoffman, Jr. dated December 31, 1998.
23 Independent Auditors' Consent
27 Financial Data Schedule
(i) Incorporated herein by reference to the Registrants' Annual
Report on Form 10-K for the year ended September 30, 1995.
(ii) Incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for
the year ended September 30, 1997.
(iii) Incorporated herein by reference to the Registrants' current
Report on Form 8-K dated April 14, 1998.
(iv) Incorporate herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended
September 30, 1998.
</TABLE>
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Minnetonka,
Minnesota.
IN HOME HEALTH, INC.
By: /s/ Wolfgang Von Maack
---------------------------------------------
Wolfgang von Maack, Chief Executive Officer
and President
Date: December 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Wolfgang Von Maack Chief Executive Officer, December 10, 1999
- --------------------------- President, Chairman and
Wolfgang von Maack Director
(principal executive officer)
/s/ Robert J. Hoffman, Jr. Chief Financial Officer December 10, 1999
- --------------------------- (principal financial officer)
Robert J. Hoffman, Jr.
/s/ James J. Lynn, Ed.D. Director December 10, 1999
- ---------------------------
James J. Lynn, Ed.D.
/s/ Clyde Michael Ford Director December 10, 1999
- ------------------------
Clyde Michael Ford
/s/ Judith Irene Storfjell, Ph.D. Director December 10, 1999
- ---------------------------------
Judith Irene Storfjell, Ph.D.
/s/ Eugene Terry Director December 10, 1999
- -------------------------------
Eugene Terry
</TABLE>
38
<PAGE>
IN HOME HEALTH, INC.
SCHEDULE AND EXHIBIT INDEX
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
II Valuation and Qualifying Accounts and Reserves 40
EXHIBIT
-------
10.1 Executive Incentive Plan in place for fiscal 1999. 41
10.8 Employment Agreement between the Company and
Robert J. Hoffman, Jr. dated December 31, 1998. 44
23 Independent Auditors' Consent. 52
27 Financial Data Schedule. 53
</TABLE>
39
<PAGE>
SCHEDULE II
IN HOME HEALTH, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
(1) (2)
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses -Describe -Describe Period
(B) (A)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
- ----
Allowance for Doubtful Accounts - Current $ 1,175 $ 565 $ - $ 661 $ 1,079
Medicare Reserve 3,336 - (1,716) (1,631) 3,251
1998
- ----
Allowance for Doubtful Accounts - Current $ 2,029 $ (2) $ - $ 852 $ 1,175
Medicare Reserve 16,800 - (3,662) 9,802 3,336
1997
- ----
Allowance for Doubtful Accounts - Current $ 802 $ 2,727 $ - $ 1,500 $ 2,029
Medicare Reserve 7,239 - 17,101 7,540 16,800
</TABLE>
(A) Write-off of bad debts and Medicare disputes which the Company has decided
not to pursue, net of recoveries.
(B) Adjustment to Medicare reserve.
40
<PAGE>
EXHIBIT 10.1
IN HOME HEALTH, INC.
EXECUTIVE INCENTIVE PLAN
FISCAL YEAR 1999
In Home Health has annual incentive plans for executives. Executive is defined
as Corporate Vice Presidents, Directors of Operations and key corporate
employees. The purpose of these plans is:
* To ensure a competitive total compensation package for executive
positions.
* To attract, retain and motivate qualified employees in executive
positions.
* To stimulate higher performance levels by clarifying and strengthening
the links between an individual's contributions and their
compensation.
* To assure that corporate goals and objectives are an integral part
executive performance.
* Increase shareholder value -- stock price growth.
* Profit growth.
ELIGIBILITY
The plans are intended to include those executive personnel who have measurable
effects on financial results. Positions will be identified by the Executive
Management Team and the Compensation Committee of the Board of Directors.
TOTAL COMPENSATION OPPORTUNITY
The total compensation package, composed of base salary and benefits, plus the
executive incentive plan, is designed to provide participants with an
opportunity to earn above average compensation for meeting and exceeding the
plan objectives.
ANNUAL INCENTIVE MOTIVATION
An incentive will be motivational if:
1. the opportunity is large enough to be of significance to the individual,
and
2. the individual perceives that he/she can reasonably impact and/or control
the expected results which are set forth in the compensation plan.
41
<PAGE>
INCENTIVE ELEMENTS
For fiscal year 1999, the emphasis will be placed on achieving budgeted profit
before tax.
No bonus will be paid to any executive where a loss occurs in his/her area of
responsibility. The bonus plus the salary cannot exceed the operating profit of
the branch. Exceptions to this policy may be made at the discretion of the Chief
Executive Officer.
GENERATION OF INCENTIVE POOL
Each year, incentive dollars will be integrated into the operating budget based
on performance projections for executives and the corporation.
INCENTIVE PAYMENTS
Incentive payments will be paid annually. Payments will be made when the audited
results of the preceding fiscal year are available and the executive incentive
amount has been approved. The incentive amount is a percentage of base salary in
effect on the last day of the fiscal year.
NEW HIRES
Participants hired during the year must be employed for at least 6 of the 12
months of the fiscal year in order to be eligible for the incentive. A prorated
payment may be made based on the number of full months (6 to 11 months) worked
during the fiscal year. Exceptions to this policy must receive the prior written
approval of the Chief Executive Officer.
TRANSFERS, PROMOTIONS AND LEAVES
If an employee is transferred or promoted into an incentive eligible position
during the fiscal year, he/she will be eligible for incentive when they complete
at least six (6) months of employment in the new position. A prorated payment
may be made based on the number of full months (six to eleven) worked in the
eligible position.
If the executive is promoted from one eligible position to another eligible
position and is in the higher position at least six months, the amount paid may
be prorated according to the number of months worked in each position. If the
employee is in the new position for less than six months, the incentive will not
be prorated but will be based on the lower position's incentive rate.
An executive transferring into a lower incentive from a higher incentive
position will receive the lower incentive rate for the entire year. An executive
who transfers out of an eligible incentive position any time during the year is
ineligible for any incentive relating to that year.
42
<PAGE>
An executive on an unpaid leave of absence will not be paid incentive for the
months or portions of months absent. The amount will be prorated for the full
months worked in an eligible position.
TERMINATION
In the event a participant is terminated, no incentive will be paid. When a
participant voluntarily terminates their position before the incentive award
is due to be paid, payment of the incentive will not be made. Exceptions to
this policy may be made at the discretion of the Chief Executive Officer.
DURATION OF PLAN
The company may change, modify, or amend this plan at any time. This plan is
for fiscal year 1999 only and no plan for fiscal year 2000 or any other
fiscal year is implied.
FY 1999 INCENTIVE PLAN PAYMENTS
A. Corporate
Plan pays a percentage of base salary to certain corporate executives
according to their positions if annual budget is achieved. The positions are
as follows: Chief Executive Officer 65%, Chief Financial Officer 35%, VP
Operations 35%, other Managers 25%. Budget is defined as profit before taxes
and payment of preferred dividends.
B. Branches
Plan pays 25% of base salary to Directors of Operations whose branches have
achieved an operating profit of 4% or more.
43
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Agreement ("Agreement") dated this 31st day of December, 1998
between In Home Health, Inc. ("Employer" or "In Home"), a Minnesota
corporation, with principal offices at 601 Carlson Parkway, Minnetonka,
Minnesota 55305, and Robert J. Hoffman, Jr. ("Employee"), sets forth the
terms and conditions governing the employment relationship between Employee
and In Home.
1. EMPLOYMENT. During the term of this Agreement, as hereinafter
defined, Employer hereby employs Employee as Chief Financial Officer.
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth and agrees to faithfully and to the best of his ability
perform such duties as may be from time to time assigned by Employer, its
Board of Directors or its designees, such duties to be rendered at the
principal office of Employer or at such other place or places as Employer
shall require. Employee also agrees to perform his duties in accordance with
policies established by Employer's Board of Directors, which may be changed
from time to time.
2. TERM. Subject to the provisions for termination hereinafter
provided, the term of this Agreement shall begin on January 1, 1999 and shall
terminate December 31, 2001.
3. COMPENSATION. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) SALARY. A base salary of $118,000 per annum payable in
accordance with Employer's standard payroll practices from time to time
in effect. Such salary shall be reviewed after one year and may be
increased at the discretion of Employer.
44
<PAGE>
(b) INCENTIVE BONUS. Employee shall have the opportunity to
earn up to a maximum of 35% of the base salary set forth in
subparagraph 3(a) above in Employer's bonus plans as adopted from time
to time by Employer's Board of Directors.
(c) STOCK OPTIONS. Employee shall be entitled to participate
in the In Home Health, Inc. Stock Option Plan, or similar plan, in
accordance with the policy of the In Home Home Health, Inc. Board of
Directors as in effect from time to time. Employee shall be granted a
minimum of 5,000 stock options between January 1, 1999 and March 31,
1999.
(d) OTHER BENEFITS. Employee shall, when eligible, be entitled
to participate in all other fringe benefits accorded headquarters
employees by Employer as are in effect from time to time.
Effective as of January 1, 1999, the Employee shall be
eligible for medical coverage or reimbursed for the cost of medical
coverage under COBRA with Employee's previous employer. Effective
January 1, 1999, the Employee would be eligible to participate in the
Company's 401K and stock purchase plan unless prohibited by law or
regulation.
45
<PAGE>
4. EXTENT OF SERVICES. Employee shall devote his full time, attention,
and energies to the business of Employer, and shall not during the term of this
Agreement be engaged in any other significant business activity pursued for
gain, profit, or other pecuniary advantage; but this shall not be construed as
preventing Employee from investing his assets in the securities of public
companies if such holdings do not exceed one percent (1%) of the outstanding
shares of any such company. Employee warrants and represents that he has no
contracts or obligations to others which would materially inhibit the
performance of his services under this Agreement.
5. DISCLOSURE AND USE OF INFORMATION. Employee recognizes and
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, contracts, development and marketing plans, acquisitions, operating
data, policies, and personnel, as they may exist from time to time, are
valuable, special and unique assets of Employer's business. Throughout the term
of this Agreement and for a period of six (6) months after its scheduled
termination or expiration as set forth in paragraph 2 above, Employee shall not
directly or indirectly, or cause others to: (1) make use of or disclose to
others any information relating to the business of Employer that has not
otherwise been made public, including but not limited to Employer's and
affiliates' present or prospective clients, franchises, contracts, development
and marketing plans, acquisitions, operating data, and policies; or (2) without
Employer's prior written consent, offer employment to or employ on behalf of
Employee or any other person, any person who at any time is or has been within
the preceding one (1) year an employee of Employer or any parent, subsidiary or
affiliate
46
<PAGE>
of Employer, or induce such person, directly or indirectly, to leave his or
her employment. In the event of an actual or threatened breach by Employee of
the provisions of this paragraph, Employer shall be entitled to injunctive
relief restraining Employee from committing such breach or threatened breach.
Nothing herein stated shall be construed as preventing Employer from pursuing
any other remedies available to the company for such breach or threatened
breach, including the recovery of damages from Employee.
6. NOTICES. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or sent by certified or registered mail to his
residence in the case of Employee, or to its principal office in the case of the
Employer.
7. ELECTIVE POSITIONS. Nothing contained in this Agreement is
intended to nor shall be construed to abrogate, limit or affect the powers,
rights and privileges of the Board of Directors or stockholders to remove
Employee as Chief Financial Officer, with or without just cause, during the
term of this Agreement or to elect someone other than Employee to that
position, as provided by law and the By-Laws of Employer; provided, however,
that if Employee is so removed without cause, it is expressly understood and
agreed, in the event any one or combination of the foregoing occurs,
Employee's rights under this Agreement shall in no way be prejudiced and
Employee shall, nevertheless, be entitled to receive compensation referred to
in paragraph 3 above, except any right to receive new stock option grants, so
long as he is ready, willing and able to perform the duties and
responsibilities set forth above. Notwithstanding the foregoing, the election
or appointment of Employee to a different executive position shall not be
considered removal hereunder.
47
<PAGE>
Employee upon removal shall be entitled to pursue other employment. As a
condition to Employee receiving his compensation from Employer, Employee
agrees to furnish Employer annually with full information regarding such
other employment and to permit inspection of his records at any such
employment and copies of his Federal income tax returns. Employer shall
receive credit for unemployment insurance benefits, social security insurance
or like amounts actually received by Employee.
8. WAIVER OF BREACH. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
9. ASSIGNMENT. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Employer. The obligations of Employee hereunder may
not be assigned or delegated.
10. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the
following events and conditions.
(a) For just cause, including but not limited to, refusal to
carry out duties and instructions relative to the position, dishonesty,
violation of this Agreement, and any willful acts or omissions
inimical to or contrary to policies of Employer not arbitrarily
applied in the case of Employee. In the event of termination by
Employer for just cause, vested but unexercised options granted during
the term of this Agreement shall be forfeited as a result thereof, as
of the date of notice. Employee shall be entitled to fourteen (14)
days advance written notice of any such termination, except where the
basis for the termination constitutes conduct on the part of Employee
involving dishonesty or bad faith, and in such latter cases, the
termination shall be effective upon the sending of notice.
48
<PAGE>
(b) In the event that Employee is unable to perform the
services called for hereunder by reason of incapacity or disablement
for more than six (6) months (whether or not consecutive) in any period
of twenty-four (24) consecutive months, Employer shall have the right
to terminate this Agreement by written notice to Employee. In the event
of such termination, all non-vested obligations of Employer to Employee
pursuant to this Agreement shall terminate.
(c) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date thereof.
(d) Without cause. The Company may terminate the employee for
any reason, at any time, upon written notice of such intention to
terminate. In the event of termination without cause, the Employee
shall be entitled to the payments described in subparagraph 10(a). In
addition, the Employee will be entitled to severance of twelve months
base salary and the ratable portion of bonus computed on the Employee's
maximum annual bonus potential and reasonable moving expenses to
transport Employee's personal effects from Minnesota to Maryland. The
cost of such moving expenses shall be limited to $8,000. Also, in the
event the Employee entered into a binding purchase contract or
purchased a residence in Minnesota prior to written notification of
termination or the expiration of this agreement, the Company will
reimburse the Employee an amount equal to 7% of the appraised value of
such residence.
49
<PAGE>
(e) Corporate relocation. In the event the Employee is
offered the option to continue employment with In Home contingent
upon relocation from Minnesota, the Employee may opt to terminate
employment and receive severance of six months base salary plus the
ratable portion of bonus computed on the Employee's maximum bonus
potential and reasonable moving expenses to transport Employee's
personal effects from Minnesota to Maryland not to exceed $8,000.
11. CHANGE OF CONTROL. In the event of a change of control of In
Home, all options granted to the Employee would vest immediately and be
payable in cash at the time of any change of control of In Home. Should the
change of control result in termination of the Employee, all other provisions
of subparagraph 10(d) would be applicable.
12. RELOCATION EXPENSES. Employee shall be reimbursed for relocation
expenses including moving expenses from Maryland to Minnesota, seller's
closing costs on existing residence located in Maryland, and buyer's closing
costs on new residence in Minnesota. Such costs will be limited to $17,700
(15% of Employee's base salary).
13. SEVERABILITY. If for any reason, any provision of this Agreement
is held invalid, such invalidity shall not effect any other provision of this
Agreement not held so invalid, and each such other provision shall to the
full extent consistent with law continue in full force and effect.
14. HEADINGS. The headings of paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
50
<PAGE>
15. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Minnesota and any litigation shall be conducted in the State of
Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
Employer:
IN HOME HEALTH, INC.
By:______________________________
Wolfgang von Maack
Chairman of the Board
Witness: Employee:
- --------------------------- --------------------------------
Robert J. Hoffman Jr.
51
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement Nos.
33-07511, 33-38504, 33-75876, and 333-35963 of In Home Health, Inc. on Form S-8
of our report dated November 19, 1999 (December 7, 1999 as to Note 5), appearing
in this Annual Report on Form 10-K of In Home Health, Inc. for the year ended
September 30, 1999.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 7, 1999
52
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0
19,782
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