<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NO. 0-17490
IN HOME HEALTH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1458213
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
601 CARLSON PARKWAY
SUITE 500
MINNETONKA, MINNESOTA 55305-5214
(Address of principal executive offices)
(Zip Code)
952-449-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of July 31, 2000, the number of shares outstanding of the
registrant's common stock, $.03 par value, was 5,540,224 shares.
<PAGE>
IN HOME HEALTH, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 2000 and September 30, 1999 2-3
Consolidated Statements of Income -
For the Three Months and Nine Months Ended June 30,
2000 and 1999 4
Consolidated Statements of Cash Flows -
For the Nine Months Ended June 30,
2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11-14
PART II. OTHER INFORMATION 15-16
1
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IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 2000 SEPT. 30,
(UNAUDITED) 1999
----------- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 18,745 $ 21,406
Accounts receivable, net of allowances of $1,092 and
$1,079 at June 2000 and September 1999, respectively 12,099 11,937
Deferred income taxes 2,824 1,006
Prepaid expenses and other current assets 768 668
-------- --------
Total current assets 34,436 35,017
-------- --------
Property:
Furniture and equipment 7,205 7,202
Computer equipment and software 5,848 6,099
Leasehold improvements 422 399
-------- --------
Total 13,475 13,700
Accumulated depreciation (10,608) (10,433)
-------- --------
Property - net 2,867 3,267
-------- --------
Other Assets:
Accounts receivable, long-term 7,869 4,658
Goodwill, net 5,016 5,115
Other assets 83 92
-------- --------
Total other assets 12,968 9,865
-------- --------
Total Assets $ 50,271 $ 48,149
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
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IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, 2000 SEPT. 30,
(UNAUDITED) 1999
------------- ---------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 20 $ 67
Accounts payable 4,848 4,045
Accrued liabilities:
Third party 8,277 10,209
Compensation 4,407 3,869
Insurance 2,558 2,593
Other 449 552
-------- --------
Total current liabilities 20,559 21,335
-------- --------
Long-Term Debt 28 43
Deferred Rent Payable 99 144
Deferred Income Taxes 902 1,006
Commitments and Contingencies (Note 4) -- --
Redeemable Convertible Preferred Stock - $1.00 par value,
$13,000 redemption value, authorized 130 shares; issued
and outstanding June 30 and September 30 - 130 shares 12,932 12,782
Shareholders' Equity:
Redeemable convertible preferred stock - $1.00 par value,
$7,000 redemption value, authorized 70 shares; issued
and outstanding June 30 and September 30 - 70 shares 7,000 7,000
Preferred stock - authorized 800 shares -- --
Common stock - $.03 par value, authorized 13,334 shares; issued and
outstanding June 30 - 5,534 shares;
September 30 - 5,521 shares 166 166
Additional paid-in capital 23,774 23,739
Retained deficit (15,189) (18,066)
-------- --------
Total shareholders' equity 15,751 12,839
-------- --------
Total Liabilities and Shareholders' Equity $ 50,271 $ 48,149
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
---------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue [including (unfavorable) favorable
Medicare reserve adjustments of ($255),
($55), $(92), and $2,141 for the
respective periods] $ 24,224 $ 20,165 $ 71,299 $ 59,815
-------- -------- -------- --------
Operating Expenses:
Direct costs of revenue (primarily payroll
related costs) 13,771 11,237 40,844 32,338
General, administrative and selling expenses 9,581 8,030 28,330 25,275
-------- -------- -------- --------
Total operating expenses 23,352 19,267 69,174 57,613
-------- -------- -------- --------
Income from operations 872 898 2,125 2,202
-------- -------- -------- --------
Interest:
Interest income 281 256 855 874
Interest expense (1) (5) (6) (28)
-------- -------- -------- --------
Net interest income 280 251 849 846
-------- -------- -------- --------
Income before income taxes 1,152 1,149 2,974 3,048
Income tax benefit (1,853) -- (1,853) --
-------- -------- -------- --------
Net income $ 3,005 $ 1,149 $ 4,827 $ 3,048
======== ======== ======== ========
Net income available to common
shareholders $ 2,355 $ 500 $ 2,877 $ 1,100
======== ======== ======== ========
Basic earnings per share $ .43 $ .09 $ .52 $ .20
======== ======== ======== ========
Diluted earnings per share $ .42 $ .09 $ .51 $ .20
======== ======== ======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,827 $ 3,048
Adjustments:
Depreciation and amortization 916 1,107
Loss on disposal of assets 46 322
Accounts receivable (3,373) 1,712
Prepaid expenses and other assets (111) 130
Accounts payable 803 373
Accrued liabilities (1,532) (6,802)
Deferred revenue -- (34)
Deferred rent payable (45) (47)
Deferred income taxes (1,922) (19)
-------- --------
Net cash used by operating activities (391) (210)
-------- --------
Cash Flows From Investing Activities:
Acquisition of property and agencies (454) (185)
Other 11 9
-------- --------
Net cash used by investing activities (443) (176)
-------- --------
Cash Flows From Financing Activities:
Payment of long-term debt (62) (182)
Issuance of common stock 35 -
Preferred dividends paid (1,800) (1,800)
-------- --------
Net cash used by financing activities (1,827) (1,982)
-------- --------
Cash and Cash Equivalents:
Net decrease (2,661) (2,368)
Beginning of period 21,406 21,462
-------- --------
End of period $ 18,745 $ 19,094
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
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IN HOME HEALTH, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company and its subsidiaries as of June 30,
2000 and the results of operations for the three and nine months and cash flows
for the nine months ended June 30, 2000 and 1999. The results of operations for
any interim period are not necessarily indicative of the results for the year.
These interim consolidated financial statements should be read in conjunction
with the Company's annual financial statements and related notes in the
Company's Form 10-K.
Certain reclassifications have been made to the fiscal 1999 financial
statements to conform to the presentations adopted in fiscal 2000. These
reclassifications had no effect on net income, earnings per share or
shareholders' equity as previously reported.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
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, but does not expect it to have a significant effect on
its financial position or the results of its operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements". SAB No. 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
SAB No. 101 is to be implemented by the Company no later than the fourth quarter
of fiscal 2001. The Company is currently reviewing SAB No. 101 and its effects
on the financial statements, but does not expect it to have a significant effect
on its financial position or results of its operations.
6
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3. BASIC AND DILUTED EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted
earnings per share for the three and nine months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
THREE MONTHS NINE MONTHS
------------ -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS PER SHARE:
Net income $ 3,005 $ 1,149 $ 4,827 $ 3,048
Dividends on preferred stock (600) (600) (1,800) (1,800)
Preferred stock accretion (50) (49) (150) (148)
------- ------- ------- -------
Net income available to
common shareholders $ 2,355 $ 500 $ 2,877 $ 1,100
======= ======= ======= =======
Weighted average shares outstanding 5,525 5,480 5,522 5,480
Dilutive effect of outstanding stock options 61 -- 96 --
------- ------- ------- -------
Dilutive potential shares outstanding 5,586 5,480 5,618 5,480
======= ======= ======= =======
Basic earnings per share $ .43 $ .09 $ .52 $ .20
======= ======= ======= =======
Diluted earnings per share $ .42 $ .09 $ .51 $ .20
======= ======= ======= =======
</TABLE>
Options to purchase 381,385 shares of common stock were outstanding at
June 30, 2000. Of these, 180,308 and 173,744 were dilutive for the three months
and nine months, respectively, and included in the computation above while the
remaining options were not included in the computation of diluted earnings per
share as their exercise prices were greater than the average market price of the
common shares. Options to purchase 602,895 shares of common stock were
outstanding at June 30, 1999 and 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 for the three and nine month periods
ended June 30, 1999.
Redeemable convertible preferred stock was issued to ManorCare Health
Services, Inc., a wholly owned subsidiary of Manor Care, Inc. ("Manor Care"), in
October 1995. As of June 30, 2000, 130,000 preferred shares may be redeemed in
cash at the option of the holder or the Company on or after October 24, 2000,
while 70,000 shares can be redeemed only at the option of the Company on or
after that date. The redeemable preferred shares have certain 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. The impact of the
redeemable convertible preferred stock on diluted earnings per share would be
anti-dilutive and, therefore, has been excluded.
4. COMMITMENTS AND CONTINGENCIES
MEDICARE COST REIMBURSEMENT - Approximately 49% of revenue for both nine
month periods ended June 30, 2000 and 1999 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
7
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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 June 30, 2000, total disputed costs were $11,093,000. The Company believes
that recovery of $3,224,000 of such costs (including extrapolation for all
unsettled cost reporting periods) may not be probable and, accordingly, has
established reserves totaling $3,224,000 at June 30, 2000.
At June 30, 2000, disputed costs totaling $7,869,000 were not reserved.
Of these costs, $2,770,000 relates to a miscalculation on the part of the
Company's fiscal intermediary regarding the accounting for a previously signed
agreement concerning the allocation of the Company's home office costs. In
connection with this miscalculation, the Company requested and received an
interim payment of $3,000,000 during the quarter ended March 31, 2000.
$1,445,000 of unreserved disputed costs involves the Company's home
office costs (including extrapolation for all unsettled cost reporting periods)
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 issue.
$2,685,000 of unreserved disputed costs involves the Company's skilled
nursing costs related to fiscal intermediary audited results. 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
attributable to the Company's Visits services. The Company believes that it will
prevail in this issue.
$969,000 of unreserved disputed costs involves the Company's payments for
services from Manor Care (including extrapolation for all unsettled cost
reporting periods). 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 issue.
At June 30, 2000, total accounts receivable (net of reserves) due from
the Medicare cost reimbursement system were $10,851,000. Based on the progress
toward resolution of the disputed costs, management estimates that net
receivables of $7,869,000 will not be realized within the next twelve months,
and, accordingly, has classified net receivables of that amount as a non-current
asset. Accrued liabilities to third-party of $8,277,000 at June 30, 2000
represent payments from Medicare in excess of amounts to which the Company may
be entitled upon ultimate settlement of Medicare cost reports.
8
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INVESTMENT BANKER AGREEMENT - In June 2000, the Company entered into an
agreement with an investment banker to assist in the evaluation of certain
strategic alternatives or any modifications to the existing terms of the
redeemable convertible preferred stock held by Manor Care. In connection with
the agreement, the Company paid a $50,000 non-refundable retainer fee upon
execution of the agreement in June 2000. The agreement also requires the Company
to pay a transaction fee upon the consummation of any "Transaction", as defined
in the agreement. The transaction fee would be equal to 2.5% of the "Transaction
Value" as defined in the agreement, except in the case that a Transaction is
completed with Manor Care. In that instance, the transaction fee would be equal
to 1.88% of the Transaction Value.
RETENTION PAY AND SEVERANCE AGREEMENTS - In June 2000, the Company
adopted a plan to pay 41 corporate office personnel a bonus of two months'
salary on December 15, 2000 if those individuals agreed to continue their
employment with the Company from July 1, 2000 through December 15, 2000. The
Company estimates that this retention pay plan will cost approximately $300,000.
In June 2000, the Company entered into agreements to pay one senior
officer and eight senior management employees of the Company severance pay of 12
or 18 months if the respective employee was involuntarily terminated prior to
December 31, 2001 or within 12 months of a "change in control" as defined in the
agreements of the Company. In the event that the Company becomes obligated to
make payments under the severance agreements, the Company estimates that the
total costs under the agreements will be approximately $993,000.
MANOR CARE PROPOSAL - On July 10, 2000, the Company received a letter from
Manor Care advising the Company of Manor Care's desire to negotiate a business
combination with the Company in which the Company's shareholders would receive
$3.375 in cash for each share of Common Stock, and the Company would be acquired
by Manor Care. The Board has created a Special Committee of Independent
Directors consisting of C. Michael Ford and Eugene Terry to evaluate the
proposal and conduct negotiations with Manor Care with the assistance of an
investment banker and legal counsel selected by the Special Committee.
LEGAL PROCEEDINGS - On July 24, 2000, the Company received notice of a suit
filed in Hennepin County District Court in Minneapolis, Minnesota, naming the
Company, Manor Care, Inc., Paul A. Ormond, Clyde Michael Ford, Eugene Terry,
Keith Weikel and Geoffrey Myers as defendants. The suit is styled as a class
action on behalf of the plaintiff and other shareholders of the Company and
alleges breach of fiduciary duties and misrepresentations by the Company's
directors, among other claims. The complaint seeks unspecified monetary damages.
The Company believes that the suit is without merit and intends to vigorously
defend the suit.
5. INCOME TAXES
At September 30, 1999, the Company had federal operating loss
carryforwards of $5,245,000 from tax losses incurred in the fiscal years ended
September 30, 1997 and 1998 that will expire in 2012 and 2013. Management
previously established a valuation allowance with respect to these tax loss
carryforwards and other temporary differences, as management had determined that
it was more likely than not that the tax benefits of these tax assets might not
be realized. At September 30, 1999, the valuation allowance was $3,601,000.
As a result of current earnings through the nine months ended June 30,
2000 and estimated earnings in the fourth quarter of fiscal 2000, the Company
recognized a $1,748,000 charge for income taxes. Additionally, at June 30, 2000,
based on a review of various financial factors, management
9
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determined that it is more likely than not that most of the remaining
deferred assets would be realized. Accordingly, the valuation allowance was
reduced by $3,601,000, resulting in a net income tax benefit of $1,853,000 for
the three and nine months ended June 30, 2000, which is reported in the
consolidated statements of income.
6. SEGMENT INFORMATION
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.
Revenue by service for the three and nine months ended June 30, 2000 and
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Visits $ 12,852 $ 10,381 $ 39,035 $ 31,370
Extended Hours 6,259 5,775 18,601 17,075
Hospice 4,626 3,576 12,352 10,314
Other 487 433 1,311 1,056
----------- ----------- ----------- ------------
$ 24,224 $ 20,165 $ 71,299 $ 59,815
=========== =========== =========== ===========
</TABLE>
Revenue from Medicare was $15,485,000 and $46,303,000 for the three and
nine months ended June 30, 2000 compared to $12,996,000 and $39,053,000 for the
same periods of the prior year.
10
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's level of operation and financial condition. This discussion should be
read with the consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
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") 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. In response to the
implementation of IPS, the Company initiated a series of cost reduction programs
and care delivery process improvements. The regulations governing PPS were
released July 3, 2000.
Revenue for the three and nine months ended June 30, 2000 increased 20%
and 19%, respectively, over the same periods in the prior year. Prior year
revenue for the nine-month period ended June 30, 1999 was positively impacted by
$2,183,000 due to final settlements received by the Company on several
reimbursement issues with HCFA realized in the prior year second quarter. Visit
revenue increased 24% and 24%, respectively, for such periods due to an increase
in visit volume and increased business from six home health agencies purchased
in October 1999. Extended Hours revenue increased 8% and 9%, respectively, for
such periods due primarily to the additional revenue generated by the newly
acquired agencies. Hospice revenue increased 29% and 20%, respectively, for such
periods due to increased overall patient census. Other revenue increased 12% and
24%, respectively, for such periods due to a modest increase in service volume.
Direct costs, as a percent of revenue, were 57% and 57% for the three and
nine months ended June 30, 2000 versus 56% and 54% for the same periods of the
previous year. The increased percent of costs to revenue was primarily due to
lower margin patient services in the newly acquired agencies and increases in
direct labor rates in excess of rate increases provided by the Company's primary
payers.
General, administrative and selling expenses, as a percent of revenue,
were 40% and 40% for the three and nine months ended June 30, 2000 compared to
40% and 42% for the same periods last year. The decrease in general,
administrative and selling expenses for the nine months ended June 30, 2000, as
a percent of revenue, was principally due to continued controls over corporate
overhead leveraged over the expanded revenue base generated through increased
volume.
Net interest income for the three and nine months ended June 30, 2000 was
$280,000 and $849,000 versus $251,000 and $846,000 for the same periods of the
previous year. The Company has realized increases in interest rates on its
short-term cash investments.
Net income for the three and nine months ended June 30, 2000 was
$3,005,000 and $4,827,000 compared to $1,149,000 and $3,048,000 for the same
periods of the previous year. Included in net income for the three and nine
months ended June 30, 2000 is a $1,853,000 tax benefit representing the
11
<PAGE>
change in the valuation allowance against the deferred tax assets
associated with the net operating loss carryforwards established in 1997 (see
Note 5 to the unaudited consolidated financial statements). Net income before
the tax allowance adjustment was $1,152,000 and $2,974,000 for the three and
nine months ended June 30, 2000. Net income available to common shareholders was
$2,355,000 and $2,877,000 for the three and nine months ended June 30, 2000,
compared to $500,000 and $1,100,000 for the same periods of the previous year.
The difference between net income and net income available to common
shareholders is primarily the result of the preferred stock dividend to
ManorCare Health Services, Inc., a wholly owned subsidiary of Manor Care, Inc.
("Manor Care"), for its $20 million preferred stock investment in the Company.
Basic earnings per share for the three and nine months ended June 30, 2000 were
$.43 and $.52 compared to $.09 and $.20 per share last year. Diluted earnings
per share for the three and nine months ended June 30, 2000 were $.42 and $.51
compared to $.09 and $.20 per share last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $2,661,000 to
$18,745,000 at June 30, 2000 from $21,406,000 at September 30, 1999. During the
nine months ended June 30, 2000, the Company paid $1,800,000 to Manor Care for
preferred stock dividends.
Approximately 49% of revenue for both nine month periods ended June 30,
2000 and 1999 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 June 30, 2000, total disputed costs were $11,093,000. The Company believes
that recovery of $3,224,000 of such costs (including extrapolation for all
unsettled cost reporting periods) may not be probable and, accordingly, has
established reserves totaling $3,224,000 at June 30, 2000.
At June 30, 2000, disputed costs totaling $7,869,000 were not reserved.
Of these costs, $2,770,000 relates to a miscalculation on the part of the
Company's fiscal intermediary regarding the accounting for a previously signed
agreement concerning the allocation of the Company's home office costs. In
connection with this miscalculation, the Company requested and received an
interim payment of $3,000,000 during the quarter ended March 31, 2000.
$1,445,000 of unreserved disputed costs involves the Company's home
office costs (including extrapolation for all unsettled cost reporting periods)
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
12
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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 issue.
$2,685,000 of unreserved disputed costs involves the Company's skilled
nursing costs related to fiscal intermediary audited results. 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
attributable to the Company's Visits services. The Company believes that it will
prevail in this issue.
$969,000 of unreserved disputed costs involves the Company's payments for
services from Manor Care (including extrapolation for all unsettled cost
reporting periods). 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 issue.
At June 30, 2000, total accounts receivable (net of reserves) due from
the Medicare cost reimbursement system were $10,851,000. Based on the progress
toward resolution of the disputed costs, management estimates that net
receivables of $7,869,000 will not be realized within the next twelve months,
and, accordingly, has classified net receivables of that amount as a non-current
asset. Accrued liabilities to third-party of $8,277,000 at June 30, 2000
represent payments from Medicare in excess of amounts to which the Company may
be entitled upon ultimate settlement of Medicare cost reports.
The Company has unused letter of credit facilities for $1,915,000. These
credit facilities are collateralized by secured investments and expire in
December 2000.
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. Management has identified long-term financial alternatives, that in
combination with existing cash balances, will provide the Company with
sufficient liquidity to satisfy redemption of the Company's preferred stock,
however there are no assurances such long-term financing will ultimately be
obtained.
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FORWARD LOOKING INFORMATION
Statements included in this Form 10-Q that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. The Company's ability to succeed in the future is dependent
upon government regulation, third party reimbursement, competition and factors
affecting the health care industry in general. The Company's future results of
operations and financial condition will be affected by factors such as (i)
proposed changes to the Medicare reimbursement system from a retrospective
cost-based system to a prospective payment system, (ii) settlements which may be
reached with the HCFA regarding cost reports, and (iii) its ability to establish
and maintain close working relationships with referral sources, including
payers, hospitals, physicians and other health care professionals. Please refer
to our Form 10-K for the fiscal year ended September 30, 1999 for a more
thorough discussion of forward looking information.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - On July 24, 2000, the Company received notice
of a suit filed in Hennepin County District Court in
Minneapolis, Minnesota, naming the Company, Manor Care, Inc., Paul A.
Ormond, Clyde Michael Ford, Eugene Terry, Keith Weikel and Geoffrey
Myers as defendants. The suit is styled as a class action on behalf of
the plaintiff and other shareholders of the Company and alleges breach
of fiduciary duties and misrepresentations by the Company's directors,
among other claims. The complaint seeks unspecified monetary damages.
The Company believes that the suit is without merit and intends to
vigorously defend the suit.
ITEM 2 - CHANGE IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
ITEM 5 - OTHER INFORMATION - On May 31, 2000, the Company received a demand
from ManorCare Health Services, Inc. (which, together with its parent
corporation, Manor Care, Inc., is referred to as "Manor Care") that the
Company call a special meeting of shareholders. The purposes specified
by Manor Care for the special meeting were to vote on proposals by
Manor Care to: (i) remove all members of the Board of Directors of the
Company other than C. Michael Ford and Eugene Terry (which proposal, if
adopted, would have resulted in the removal from the Board of Steven M.
Jessup, James J. Lynn and Judith I. Storfjell); (ii) fix the size of
the Board of Directors at six; and (iii) elect to the Board four
persons, M. Keith Weikel, Geoffrey C. Meyers, Rodney A. Hildebrant and
Steven M. Cavanaugh, who are officers of Manor Care. On June 16, 2000
the Company filed with the United States Securities and Exchange
Commission ("SEC") preliminary proxy materials relating to Manor Care's
demand for the special meeting.
On June 29 and 30, 2000, Manor Care filed with the SEC amendments to
Manor Care's Schedule 13D stating that on June 28 and 29, 2000 Manor
Care purchased from three shareholders in privately negotiated
transactions (and obtained from the sellers irrevocable proxies to
vote) a total of 1,146,735 additional shares of Common Stock of the
Company, par value $.03 per share (the "Common Stock"). This increased
Manor Care's holdings of Common Stock to a total of 3,396,735 shares,
or 61.4% of the outstanding shares of Common Stock. Manor Care also
owns 200,000 shares of Series A Preferred Stock, par value $1.00 per
share, convertible into an additional 3,333,334 shares of Common Stock.
On an as if converted basis, Manor Care controls 6,730,069 shares of
Common Stock, or 75.9% of the outstanding Common Stock.
In light of these additional purchases by Manor Care, which made it the
Company's majority shareholder, Mr. Jessup, Dr. Lynn and Dr. Storfjell
advised the Board that they were resigning from the Board effective
July 7, 2000. The remaining members of the Board, Mr. Ford and Mr.
Terry, elected M. Keith Weikel and Geoffrey G. Meyers (two of the Manor
Care nominees) to the Board on July 7, 2000 to fill two of the
vacancies created by the resignations. This resulted in Manor Care
withdrawing its demand for the special meeting in a letter to the
Company dated July 10, 2000.
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The Board intends to elect Rodney A. Hildebrant and Steven M. Cavanaugh
(the other two Manor Care nominees) not less than twenty days after the
mailing of Schedule 14f(1), Information Statement to shareholders, and
Schedule 13E-3, Transaction Statement under Section 13 (E) of the
Securities Exchange Act of 1934, which occurred on July 24, 2000.
On July 10, 2000, the Company received a letter from Manor Care
advising the Company of Manor Care's desire to negotiate a business
combination with the Company in which the Company's shareholders would
receive $3.375 in cash for each share of Common Stock, and the Company
would be acquired by Manor Care. The Board has created a Special
Committee of Independent Directors consisting of C. Michael Ford and
Eugene Terry to evaluate the proposal and conduct negotiations with
Manor Care with the assistance of an investment banker and legal
counsel selected by the Special Committee.
Schedule 14f(1), Information Statement to shareholders, was filed July
18, 2000 as required by the Securities Exchange Act of 1934 and Rule
14f-1.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - A report on Form 8-K was filed on June 5,
2000 containing disclosure pursuant to Item 5 of Form 8-K. A report on
Form 8-K was filed on July 12, 2000 containing disclosure pursuant to
Item 1 of Form 8-K. See ITEM 5 above.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q report to be signed on its behalf by
the undersigned, thereunto duly authorized.
IN HOME HEALTH, INC.
--------------------
Registrant
Date: August 9, 2000 /s/ ROBERT J. HOFFMAN, JR.
------------------------------
Robert J. Hoffman, Jr.
Chief Financial Officer
A Duly Authorized Officer
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