-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GY7isDpgHBNMmjTN64fsMeu6fyj417NXdJ5yqts/CX1XOx27rffbaUnakXIZn47u IDW89c1kRH045X2U58/7dg== 0000912057-96-016811.txt : 19960812 0000912057-96-016811.hdr.sgml : 19960812 ACCESSION NUMBER: 0000912057-96-016811 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IN HOME HEALTH INC /MN/ CENTRAL INDEX KEY: 0000818645 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 411458213 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17490 FILM NUMBER: 96606845 BUSINESS ADDRESS: STREET 1: 601 LAKESHORE PKWY STE 500 STREET 2: CARLSON CENTER CITY: MINNETONKA STATE: MN ZIP: 55343-3837 BUSINESS PHONE: 6124497500 MAIL ADDRESS: STREET 1: 601 LAKESHORE PKWY STREET 2: STE 500 CITY: MINNETONKA STATE: MN ZIP: 55305 FORMER COMPANY: FORMER CONFORMED NAME: IN HOME HEALTH INC DATE OF NAME CHANGE: 19880803 10-Q 1 10-Q 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, 1996 COMMISSION FILE NO. 0-17490 IN HOME HEALTH, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1458213 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 601 CARLSON PARKWAY SUITE 500 MINNETONKA, MINNESOTA 55305-5214 (Address of principal executive offices) (Zip Code) 612-449-7500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x (1) No --- --- As of August 1, 1996, the number of shares outstanding of the registrant's common stock, $.01 par value was 16,377,399 shares. IN HOME HEALTH, INC. INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 1996 and September 30, 1995 2-3 Consolidated Statements of Operations - For the three and nine months ended June 30, 1996 and 1995 4 Consolidated Statements of Cash Flows - For the nine months ended June 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-14 PART II. OTHER INFORMATION 15 1 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
June 30, 1996 Sept. 30, (Unaudited) 1995 ------------- --------- Current Assets: Cash and cash equivalents $19,755 $ 3,665 Accounts receivable, net 14,606 14,130 Deferred income tax 3,411 2,129 Prepaid expenses and other current assets 1,654 1,470 ------- ------- Total current assets 39,426 21,394 ------- ------- Property: Furniture and equipment 9,946 9,997 Computer equipment and software 8,481 7,480 Leasehold improvements 831 807 ------- ------- Total 19,258 18,284 Accumulated depreciation (8,897) (7,163) ------- ------- Property - net 10,361 11,121 ------- ------- Other Assets: Accounts receivable 22,914 17,592 Goodwill, net 5,629 5,748 Deposits 559 558 Other assets 558 1,146 ------- ------- Total other assets 29,660 25,044 ------- ------- Total Assets $79,447 $57,559 ------- ------- ------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 2 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (AMOUNTS IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 1996 Sept. 30, (Unaudited) 1995 -------------- --------- Current Liabilities: Current maturities of long-term debt $ 1,793 $ 2,041 Accounts payable 4,028 4,468 Accrued liabilities: Third party 8,972 4,480 Compensation 6,117 4,142 Insurance 6,537 5,127 Income tax 222 240 Other 561 791 ------- ------- Total current liabilities 28,230 21,289 ------- ------- Long-Term Debt 1,271 2,443 Deferred Revenue 925 1,242 Deferred Rent Payable 237 351 Deferred Income Tax 1,745 1,725 Commitments and Contingencies -- -- Redeemable Convertible Preferred Stock - $1.00 par value authorized 200 shares; issued and outstanding June 30 - 200 shares; September 30 - none 18,693 -- Shareholders' Equity: Preferred stock - authorized 800 shares -- -- Common stock - $.01 par value: authorized - 40,000 shares; issued and outstanding - June 30 - 16,377 shares; September 30 - 16,277 shares 164 163 Additional paid-in capital 23,576 24,230 Retained earnings 4,606 6,116 ------- ------- Total shareholders' equity 28,346 30,509 ------- ------- Total Liabilities and Shareholders' Equity $79,447 $57,559 ------- ------- ------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended June 30 June 30 ------------------------- ------------------------ 1996 1995 1996 1995 ------------ ----------- ----------- ---------- Revenue (net of Medicare reserves of $180, $218, $1,030, $900 for the respective periods) $30,302 $32,239 $94,562 $97,166 ------- ------- ------- ------- Operating Expenses: Direct costs of revenue (primarily payroll related costs) 15,905 18,629 50,932 55,364 General, administrative and selling expenses 14,218 12,790 43,260 38,969 ------- ------- ------- ------- Total operating expenses 30,123 31,419 94,192 94,333 ------- ------- ------- ------- Income From Operations 179 820 370 2,833 ------- ------- ------- ------- Interest: Interest income 268 8 826 17 Interest expense (114) (182) (355) (640) ------- ------- ------- ------- Net interest income (expense) 154 (174) 471 (623) ------- ------- ------- ------- Income Before Income Taxes 333 646 841 2,210 Income Tax Expense 221 299 505 1,020 ------- ------- ------- ------- Net Income $ 112 $ 347 $ 336 $ 1,190 ------- ------- ------- ------- ------- ------- ------- ------- Earnings (Loss) Applicable to Common Stock $ (560) $ 347 $(1,510) $ 1,190 ------- ------- ------- ------- ------- ------- ------- ------- Earnings (Loss) Per Common and Common Equivalent Share $ (.03) $ .02 $ (.09) $ .07 ------- ------- ------- ------- ------- ------- ------- ------- Weighted Average Common and Common Equivalent Shares Outstanding 16,465 16,401 16,430 16,260 ------- ------- ------- ------- ------- ------- ------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
1996 1995 --------- ---------- Cash Flows From Operating Activities: Net income $ 336 $ 1,190 ------- ------- Adjustments: Depreciation and amortization 2,396 2,365 Accounts receivable (5,798) (2,057) Prepaid expenses and other assets 198 (730) Accounts payable (440) 165 Accrued liabilities 7,629 2,822 Deferred items (1,693) (1,766) ------- ------- Net cash provided by operating activities 2,628 1,989 ------- ------- Cash Flows From Investing Activities: Acquisition of property (1,206) (570) Advances to officers and employees 42 39 ------- ------- Net cash used by investing activities (1,164) (531) ------- ------- Cash Flows From Financing Activities: Payment of long-term debt (1,568) (1,496) Notes payable to banks -- 1,000 Issuance of common stock 127 78 Issuance of preferred stock and warrants 17,720 -- Preferred dividends paid (1,653) -- ------- ------- Net cash provided (used) by financing activities 14,626 (418) ------- ------- Cash and Cash Equivalents: Net increase 16,090 1,040 Beginning of period 3,665 911 ------- ------- End of period $19,755 $ 1,951 ------- ------- ------- ------- Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 355 $ 636 ------- ------- ------- ------- Income taxes $ 1,932 $ 1,420 ------- ------- ------- ------- Noncash Investing and Financing Activities: Property acquired by capital lease $ 148 $ 907 ------- ------- ------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5 IN HOME HEALTH, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENTS In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal, recurring accruals) necessary to present fairly the financial position of the Company and its subsidiaries as of June 30, 1996 and the results of operations for the three and nine months and cash flows for the nine month periods ended June 30, 1996 and 1995. The results of operations for any interim period are not necessarily indicative of the results for the year. These interim consolidated financial statements should be read in conjunction with the Company's annual financial statements and related notes in the Company's Form 10-K. 2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Primary earnings per common and common equivalent share is computed by dividing the earnings applicable to common stock, as adjusted for the dividends and accretion on the Preferred Stock (see Note 4) by the weighted average number of shares of common stock and common stock equivalents, consisting of dilutive stock options and warrants, outstanding during the period. Earnings per share assuming full dilution would be substantially the same. Primary EPS for the three and nine months ended June 30, 1996 and 1995 are as follows:
Three Months Nine Months ------------------- --------------------- 1996 1995 1996 1995 -------- --------- --------- ---------- Shares outstanding: Weighted average outstanding 16,351 16,120 16,279 16,020 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 114 281 151 240 -------- ------- -------- ------- Adjusted outstanding 16,465 16,401 16,430 16,260 -------- ------- -------- ------- -------- ------- -------- ------- Adjusted net income applicable to common stockholders: Net income $ 112 $ 347 $ 336 $ 1,190 Dividends on preferred stock (600) -- (1,653) -- Preferred stock accretion (72) -- (193) -- -------- ------- -------- ------- Earnings (loss) applicable to common stock $ (560) $ 347 $ (1,510) $ 1,190 -------- ------- -------- ------- -------- ------- -------- ------- Earnings (loss) per common and common equivalent share $ (.03) $ .02 $ (.09) $ .07 -------- ------- -------- ------- -------- ------- -------- -------
3. COMMITMENTS AND CONTINGENCIES Approximately 73% of revenue for the nine months ended June 30, 1996 was derived from services provided to Medicare beneficiaries. Payment for these services is made by the Medicare program based on reimbursable costs incurred in rendering the services. Payments are made via an interim payment rate as services are rendered. Cost reports are filed with Medicare on an annual basis, which are subject to audit and retroactive adjustment by Medicare. The Company reports revenue only for those costs that it 6 believes are probable (as defined in Statement of Financial Accounting Standards No. 5) of recovery under the applicable Medicare statutes and regulations and reports its accounts receivable balances at net realizable value. The Company utilizes an extensive system of internal controls to ensure such proper reporting of revenues. The Company employs personnel with significant Medicare reimbursement experience to prepare its cost reports and to monitor its operations on an ongoing basis to identify and minimize those costs which are not reimbursed. As a part of its system of internal controls, the Company uses a detailed analysis process in calculating its Medicare revenue at the time services are rendered. This process considers the nature and amounts of the disputed costs (as described in more detail below) along with several authoritative, legal and historical sources of information including: - Applicable statutes and regulations, such as those contained in the Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care", Health Care Financing Administration (HCFA) Publication 11 "Home Health Agency Manual", applicable sections of HCFA Publication 15-1 "Provider Reimbursement Manual" and intermediary letters and program memoranda issued by HCFA. - Administrative decisions and rulings on related issues by the Provider Reimbursement Review Board and Administrative Law Judges. - Judicial decisions from Federal District Courts on relevant cases. - Consultation with independent industry experts such as Medicare Cost Reimbursement Consultants. - Opinions of outside legal counsel who specialize in dealing with Medicare reimbursement issues. - Historical knowledge gained internally from past Medicare audits. - Meetings and other communication with Medicare Intermediaries, Blue Cross Association and HCFA. This detailed analysis process is updated on a quarterly basis, taking into account any new information (such as decisions relating to the Company's disputed costs, and administrative and judicial decisions relating to similar issues) that may affect the determination of the net realizable value of accounts receivable or of liabilities to repay amounts received for disputed costs. Results of this detailed analysis process are extrapolated to other unaudited cost reporting years for all of the Company's operations, including operations that have not yet been audited by Medicare, to estimate the gross amount of reimbursement that would be affected. The Company, through this ongoing control and monitoring process, provides a reserve (by means of a revenue reduction) for any costs incurred which the Company believes are not probable of recovery. This reserve is reported as a reduction of accounts receivable for disputed costs for which the Company may not ultimately receive payment. The Company has also reported as a liability disputed costs for which it has received payment, which may have to be returned to Medicare. Accordingly, the Company believes that its accounts receivable are stated at net realizable value, and that it has recorded all probable liabilities for repayment of disputed costs. Over the years, Medicare auditors employed by the Medicare fiscal intermediaries have, in connection with their retrospective audit process, taken certain positions with respect to certain types of costs, claiming that they are not reimbursable and thus not recoverable by the Company from the Medicare program. These positions are based on interpretations promulgated after the period covered by the cost reports and applied retroactively, on interpretations of cost reimbursement principles that are contrary to the Company's interpretations, or on what the Company believes to be misapplications of specific reimbursement principles, that could not have been foreseen at the time services were rendered and revenue recorded. These positions taken by Medicare auditors are usually determined from Medicare's Notice of Program Reimbursement ("NPR") which typically are not received until two to three years after the services are rendered. In those situations where the Company decides to not challenge an NPR finding, 7 any revenue relating to these costs, as well as the extrapolated impact, if any, on other open cost reporting years, if not written off or provided for earlier, is written off as a revenue reduction at that time. The results of all NPRs are included in the analysis process in calculating net Medicare revenue as described above. The Company has received NPRs challenging $14.3 million of costs as of June 30, 1996. There was an additional $18.2 million of costs at June 30, 1996 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($32.5 million at June 30, 1996) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 60% of total disputed costs, is the treatment of certain personnel costs relating to the Company's community liaison positions, which Medicare auditors allege are unreimbursable sales costs; other costs in dispute relate to the cost of physical therapists employed by the Company, the method of allocation of administrative and general costs to branch operations and certain corporate expenses. These disputed costs (including the extrapolated impact) of $32.5 million at June 30, 1996 arose in the fiscal years ended September 30, 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4 million), and 1991 ($2.1 million) and $5.3 million for the nine months ending June 30, 1996. The amount of disputed costs has increased over the last several years as the Company's operations have grown, Medicare auditors have taken positions to disallow certain costs in certain cost reports as non-reimbursable, and the Company has extrapolated that amount of costs that may be challenged to other unaudited cost reporting years. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and the Health Care Financing Administration, and is vigorously pursuing these matters through administrative and legal channels. The disputed cost analysis process related to the community liaison and physical therapist positions (which comprise 66% of disputed costs) encompassed all of the authoritative, legal and historical sources discussed above. Based on this review the Company believes that the majority of the community liaison costs are probable of recovery, and that a relatively small portion of these costs are not probable of recovery. The Company has established, and is continuing to add to, a reserve for the portion of these costs not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether their level is appropriate. Nothing has occurred in the legal or administrative process which the Company is pursuing concerning the disputes which has caused the Company to conclude that the reserve should be changed. Therefore, no change has been made in the rate of reserve used to record additional reserves on community liaison related costs incurred on an ongoing basis. On the physical therapist issue, the Company believes Medicare has no basis in the regulations for its disallowance of certain costs related to physical therapists employed by the Company, and therefore the Company has not established a reserve for these disputed costs. The Company has filed two suits against the U.S. Department of Health and Human Services ("HHS") and several members of the Blue Cross Association which act as fiscal intermediaries to administer the Medicare program. The two suits related to the community liaison and physical therapist issues discussed above allege that the defendants have unjustly withheld payments that are owed to the Company for services it provided to Medicare beneficiaries from fiscal 1989 through fiscal 1994. Legal opinions have been received on both the community liaison and physical therapist issues from an attorney specializing in Medicare reimbursement issues indicating that it is probable that the Company will prevail in both issues. The Company received in March a favorable ruling on the physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB). In May this ruling was reversed by the Health Care Financing Administration. The Company has appealed the decision in the U.S. Federal District Court in Minneapolis. Because the PRRB previously ruled in the 8 Company's favor, the Company believes it has a strong basis for a favorable outcome on such an appeal. In June, the PRRB ruled that approximately 53% of the $1,700,000 of community liaison costs subject to review as part of this hearing were reimbursable to the Company. The Administrator of HHS' Health Care Financing Administration has decided to review this opinion and has 60 days to uphold or reverse the decision. The Company will, at that time, consider all potential options regarding this issue including whether to appeal the decision to the U.S. District Court. The Company is currently evaluating whether the rationale for the PRRB's decision in this case is applicable to other similar pending disputes which involve a total of $16,700,000 in personnel costs. The Company had previously recorded a reserve equal to 16% of all revenue related to the $1,700,000 of costs as well as the $16,700,000 of costs. The Company will evaluate whether to establish an additional reserve on either or both of these amounts, once the decision of the Administrator is known. The Company, based on its analysis process, believes that recovery of $6,696,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of June 30, 1996. The net amount of disputed costs which the Company believes is probable of recovery has been included in revenues in the respective years in which services were rendered and, to the extent not paid to the Company, is included in accounts receivable. Total accounts receivable (net of reserves) due from Medicare at June 30, 1996 were $30,514,000, including the receivables (net of reserves) for disputed costs of $25,817,000. As of June 30, 1996 the Company had received $8,972,000 in payments from Medicare for disputed costs. Medicare may seek repayment for such amounts and accordingly, the potential liability for repayments is recorded as Accrued Liabilities - Third Party. The Company believes it is probable that it has not incurred any other liability to repay disputed costs. In view of the expectation that resolution of the disputed costs will not likely be accomplished within the next twelve months, related net receivables of $22,914,000 as of June 30, 1996 have been classified as a non-current asset. The Company's line of credit with a commercial bank expired in December 1995. The Company has obtained new letter of credit facilities for $5,435,000. The letters of credit are collateralized by secured investments and will expire on December 12, 1996. 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK Redeemable convertible preferred stock was issued to Manor Healthcare Corp. on October 24, 1995. The 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. The redeemable preferred shares have voting rights on an as-if converted basis, and are initially convertible into 10 million common shares at an initial conversion price of $2.00 per share. The redeemable preferred shares bear dividends payable quarterly at 12% per annum. The redeemable preferred stock will accrete over five years from its fair value of $18,500,000 on the date of issuance to its redeemable value of $20,000,000 as of the redemption date. 5. RELATED PARTY TRANSACTIONS On October 24, 1995 the Company closed an agreement with Manor Healthcare Corp., a wholly owned subsidiary of Manor Care, Inc., a national health care and international lodging firm. Pursuant to this agreement, the Company conducted a cash self-tender offer and purchased 6,750,000 shares of its common stock (41% of outstanding) at $3.40 per share and Manor Healthcare purchased 6,750,000 shares from the Company at $3.40 per share. In addition, Manor Healthcare Corp. invested $20 million to purchase redeemable convertible preferred shares and a warrant to purchase 6,000,000 shares of common stock at an exercise price of $3.75 per share. 9 The Purchase Agreement with Manor Healthcare Corp. also contemplated that the Company and Manor Healthcare would enter into agreements or arrangements which they deem prudent and mutually beneficial for the provision of services between them on terms that are fair to each party. The Company and Manor Healthcare entered into an agreement dated February 27, 1996 whereby Manor Healthcare or its parent company, Manor Care, Inc. will provide to the Company certain administrative services, financial and treasury management services, reimbursement services, legal services, accounting services and other similar types of services until June 30, 1996. This agreement is renewable for three month periods and is terminable upon 90 day notice. Administrative fees of $1,224,000 were accrued from October 24, 1995 based on a time allocation method which Manor Healthcare Corp. utilized to charge administrative services to all of its subsidiaries. Management believes that the foregoing charges are reasonable allocations of the costs incurred by Manor Healthcare Corp. on the Company's behalf. Based solely on this accrual, $1,224,000 was payable (but not paid) to Manor Healthcare Corp. at June 30, 1996. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's level of operation and financial condition. This discussion should be read with the consolidated financial statements appearing in Item 1. RESULTS OF OPERATIONS Revenue for the three and nine months ended June 30, 1996 decreased by 6% and 3% respectively over the same periods in the prior year. The decrease is the result of an 8% decline in Visit division revenue offset by a 16% increase in extended hours, infusion and hospice revenue. Direct costs of revenue, as a percentage of sales, were 52% and 54% for the three and nine month periods ended June 30, 1996 as compared to 58% and 57%, respectively, for the comparable prior year periods. The decrease was due to reduced volume within our Visit division along with an increase in general, administrative and selling expenses. General administrative and selling expenses, as a percent of revenue, increased to 47% and 46% of revenue, respectively, for the three and nine months ended June 30, 1996 compared to 40% for the comparable prior year periods. This increase is primarily due to the decline in Visit division volume accompanied by the addition of certain management personnel necessary to meet strategic plans and increased costs associated with our Hospice program. This has resulted in costs exceeding Medicare allowable reimbursement ceilings in certain markets. Net interest income was $154,000 and $471,000, respectively, for the three and nine months ended June 30, 1996 compared to net interest expense of $174,000 and $623,000, respectively, for the comparable prior year periods. Interest earnings are a result of earnings on the cash proceeds from the investment by Manor Healthcare Corp. on October 24, 1995 (see Note 5 to the accompanying financial statements). For the nine months ended June 30, 1996 and 1995, respectively, the Company has recorded income tax expense at 60% and 46% of income before income taxes. The increase in 1996 in the effective tax rate is due to non-deductible expenses being a higher proportion of pretax earnings. Net income for the three and nine months ended June 30, 1996 was $112,000 and $336,000 compared to $347,000 and $1,190,000 in the same periods during the previous year. The change in year-to-date net income was principally due to costs exceeding reimbursement ceilings and the decrease in Visit division volume. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents increased $16,090,000 to $19,755,000 at June 30, 1996. The increase in cash was principally a result of the issuance of preferred stock and common stock warrants to Manor Healthcare Corp. Approximately 73% of revenue for the nine months ended June 30, 1996 was 11 derived from services provided to Medicare beneficiaries. Payment for these services is made by the Medicare program based on reimbursable costs incurred in rendering the services. Payments are made via an interim payment rate as services are rendered. Cost reports are filed with Medicare on an annual basis, which are subject to audit and retroactive adjustment by Medicare. The Company reports revenue only for those costs that it believes are probable (as defined in Statement of Financial Accounting Standards No. 5) of recovery under the applicable Medicare statutes and regulations and reports its accounts receivable balances at net realizable value. The Company utilizes an extensive system of internal controls to ensure such proper reporting of revenues. The Company employs personnel with significant Medicare reimbursement experience to prepare its cost reports and to monitor its operations on an ongoing basis to identify and minimize those costs which are not reimbursed. As a part of its system of internal controls, the Company uses a detailed analysis process in calculating its Medicare revenue at the time services are rendered. This process considers the nature and amounts of the disputed costs (as described in more detail below) along with several authoritative, legal and historical sources of information including: - Applicable statutes and regulations, such as those contained in the Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care", Health Care Financing Administration (HCFA) Publication 11 "Home Health Agency Manual", applicable sections of HCFA Publication 15-1 "Provider Reimbursement Manual" and intermediary letters and program memoranda issued by HCFA. - Administrative decisions and rulings on related issues by the Provider Reimbursement Review Board and Administrative Law Judges. - Judicial decisions from Federal District Courts on relevant cases. - Consultation with independent industry experts such as Medicare Cost Reimbursement Consultants. - Opinions of outside legal counsel who specialize in dealing with Medicare reimbursement issues. - Historical knowledge gained internally from past Medicare audits. - Meetings and other communication with Medicare Intermediaries, Blue Cross Association and HCFA. This detailed analysis process is updated on a quarterly basis, taking into account any new information (such as decisions relating to the Company's disputed costs, and administrative and judicial decisions relating to similar issues) that may affect the determination of the net realizable value of accounts receivable or of liabilities to repay amounts received for disputed costs. Results of this detailed analysis process are extrapolated to other unaudited cost reporting years for all of the Company's operations, including operations that have not yet been audited by Medicare, to estimate the gross amount of reimbursement that would be affected. The Company, through this ongoing control and monitoring process, provides a reserve (by means of a revenue reduction) for any costs incurred which the Company believes are not probable of recovery. This reserve is reported as a reduction of accounts receivable for disputed costs for which the Company may not ultimately receive payment. The Company has also reported as a liability disputed costs for which it has received payment, which may have to be returned to Medicare. Accordingly, the Company believes that its accounts receivable are stated at net realizable value, and that it has recorded all probable liabilities for repayment of disputed costs. Over the years, Medicare auditors employed by the Medicare fiscal intermediaries have, in connection with their retrospective audit process, taken certain positions with respect to certain types of costs, claiming that they are not reimbursable and thus not recoverable by the Company from the Medicare program. These positions are based on interpretations promulgated after the period covered by the cost reports and applied retroactively, on interpretations of cost reimbursement principles that are contrary to the Company's interpretations, or on what the Company believes to be misapplications of specific 12 reimbursement principles, that could not have been foreseen at the time services were rendered and revenue recorded. These positions taken by Medicare auditors are usually determined from Medicare's Notice of Program Reimbursement ("NPR") which typically are not received until two to three years after the services are rendered. In those situations where the Company decides to not challenge an NPR finding, any revenue relating to these costs, as well as the extrapolated impact, if any, on other open costs reporting years, if not written off or provided for earlier, is written off as a revenue reduction at that time. The results of all NPRs are included in the analysis process in calculating net Medicare revenue as described above. The Company has received NPRs challenging $14.3 million of costs as of June 30, 1996. There was an additional $18.2 million of costs at June 30, 1996 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($32.5 million at June 30, 1996) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 60% of total disputed costs, is the treatment of certain personnel costs relating to the Company's community liaison positions, which Medicare auditors allege are unreimbursable sales costs; other costs in dispute relate to the cost of physical therapists employed by the Company, the method of allocation of administrative and general costs to branch operations and certain corporate expenses. These disputed costs (including the extrapolated impact) of $32.5 million at June 30, 1996 arose in the fiscal years ended September 30, 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4 million), and 1991 ($2.1 million) and $5.3 million for the nine months ending June 30, 1996. The amount of disputed costs has increased over the last several years as the Company's operations have grown, Medicare auditors have taken positions to disallow certain costs in certain cost reports as non-reimbursable, and the Company has extrapolated that amount of costs that may be challenged to other unaudited cost reporting years. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and the Health Care Financing Administration, and is vigorously pursuing these matters through administrative and legal channels. The disputed cost analysis process related to the community liaison and physical therapist positions (which comprise 66% of disputed costs) encompassed all of the authoritative, legal and historical sources discussed above. Based on this review the Company believes that the majority of the community liaison costs are probable of recovery, and that a relatively small portion of these costs are not probable of recovery. The Company has established, and is continuing to add to, a reserve for the portion of these costs not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether their level is appropriate. Nothing has occurred in the legal or administrative process which the Company is pursuing concerning the disputes which has caused the Company to conclude that the reserve should be changed. Therefore, no change has been made in the rate of reserve used to record additional reserves on community liaison related costs incurred on an ongoing basis. On the physical therapist issue, the Company believes Medicare has no basis in the regulations for its disallowance of certain costs related to physical therapists employed by the Company, and therefore the Company has not established a reserve for these disputed costs. The Company has filed two suits against the U.S. Department of Health and Human Services ("HHS") and several members of the Blue Cross Association which act as fiscal intermediaries to administer the Medicare program. The two suits related to the community liaison and physical therapist issues discussed above allege that the defendants have unjustly withheld payments that are owed to the Company for services it provided to Medicare beneficiaries from fiscal 1989 through fiscal 1994. Legal opinions have been received on both the community liaison and physical therapist issues from an attorney specializing in Medicare reimbursement issues indicating that 13 it is probable that the Company will prevail in both issues. The Company received in March a favorable ruling on the physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB). In May this ruling was reversed by the Health Care Financing Administration. The Company has appealed the decision in the U.S. Federal District Court in Minneapolis. Because the PRRB previously ruled in the Company's favor, the Company believes it has a strong basis for a favorable outcome on such an appeal. In June, the PRRB ruled that approximately 53% of the $1,700,000 of community liaison costs subject to review as part of this hearing were reimbursable to the Company. The Administrator of HHS' Health Care Financing Administration has decided to review this opinion and has 60 days to uphold or reverse the decision. The Company will, at that time, consider all potential options regarding this issue including whether to appeal the decision to the U.S. District Court. The Company is currently evaluating whether the rationale for the PRRB's decision in this case is applicable to other similar pending disputes which involve a total of $16,700,000 in personnel costs. The Company had previously recorded a reserve equal to 16% of all revenue related to the $1,700,000 of costs as well as the $16,700,000 of costs. The Company will evaluate whether to establish an additional reserve on either or both of these amounts, once the decision of the Administrator is known. The Company, based on its analysis process, believes that recovery of $6,696,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of June 30, 1996. The net amount of disputed costs which the Company believes is probable of recovery has been included in revenues in the respective years in which services were rendered and, to the extent not paid to the Company, is included in accounts receivable. Total accounts receivable (net of reserves) due from Medicare at June 30, 1996 were $30,514,000, including the receivables (net of reserves) for disputed costs of $25,817,000. As of June 30, 1996 the Company had received $8,972,000 in payments from Medicare for disputed costs. Medicare may seek repayment for such amounts and accordingly, the potential liability for repayments is recorded as Accrued Liabilities - Third Party. The Company believes it is probable that it has not incurred any other liability to repay disputed costs. In view of the expectation that resolution of the disputed costs will not likely be accomplished within the next twelve months, related net receivables of $22,914,000 as of June 30, 1996 have been classified as a non-current asset. The Company's line of credit with a commercial bank expired in December 1995. The Company has obtained new letter of credit facilities for $5,435,000. The letters of credit are collateralized by secured investments and will expire on December 12, 1996. The Company's current cash and cash equivalents are expected to provide sufficient capital to fund the Company's operations and expansion plans through fiscal 1996. On October 24, 1995 the Company consummated a Securities Purchase and Sale Agreement with Manor Healthcare Corp. under which the Company received net cash proceeds of $18,000,000. These proceeds will be available to the Company for general corporate purposes. The Company anticipates that it will principally use the proceeds to invest in the expansion of Company operations into the eight geographic areas where Manor Healthcare is present and the Company is not, and to finance the Company's continued operations. 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS - None. ITEM 2 - CHANGE IN SECURITIES - None. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None ITEM 5 - OTHER INFORMATION - None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (11) Computation of Per Share Earnings (b) Reports on Form 8-K None 15 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, 1996 /s/ Mark L. Gildea --------------------------- Mark L. Gildea Chief Executive Officer Date: August 9, 1996 /s/ Thomas R. Gross --------------------------- Thomas R. Gross Vice President - Controller 16 EX-11 2 EXHIBIT 11 EXHIBIT (11) IN HOME HEALTH, INC. COMPUTATION OF PER SHARE EARNINGS FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended June 30 June 30 ----------------------- --------------------- 1996 1995 1996 1995 -------- -------- --------- -------- PRIMARY: Net Income $ 112 $ 347 $ 336 $ 1,190 Preferred stock accretion (72) -- (193) -- Dividends on preferred stock (600) -- (1,653) -- -------- --------- --------- -------- Earnings (loss) applicable to common stock $ (560) $ 347 $ (1,510) $ 1,190 -------- --------- --------- -------- -------- --------- --------- -------- Shares: Weighted average number of shares outstanding during the period 16,351 16,120 16,279 16,020 Shares issuable in connection with stock options and warrants less shares assumed purchasable from proceeds 114 281 151 240 -------- --------- --------- -------- Total shares 16,465 16,401 16,430 16,260 -------- --------- --------- -------- -------- --------- --------- -------- Earnings (Loss) per Common and Common Equivalent Share $ (.03) $ .02 $ (.09) $ .07 -------- --------- --------- -------- -------- --------- --------- -------- ASSUMING FULL DILUTION (1): Net Income $ 112 $ 347 $ 336 $ 1,190 Preferred stock accretion (72) -- (193) -- Dividends on preferred stock (600) -- (1,653) -- -------- --------- --------- -------- Earnings (loss) applicable to common stock $ (560) $ 347 $ (1,510) $ 1,190 -------- --------- --------- -------- -------- --------- --------- -------- Shares: Weighted average number of shares outstanding during the period 16,351 16,120 16,279 16,020 Shares issuable in connection with stock options and warrants less shares assumed purchasable from proceeds 114 302 151 324 -------- --------- --------- -------- Total shares 16,465 16,422 16,430 16,344 -------- --------- --------- -------- -------- --------- --------- -------- Earnings (Loss) per Common and Equivalent Share $ (.03) $ .02 $ (.09) $ .07 -------- --------- --------- -------- -------- --------- --------- --------
(1) Because assumed conversion of redeemable preferred stock would be antidilutive, fully diluted earnings per share is equivalent to primary earnings per share with respect to the preferred stock. 17 EX-27 3 EXHIBIT 27
5 This Schedule contains summary financial information extracted from the Balance Sheets, the Statements of Operations and the Statements of Cash Flows and is qualified in its entirety by reference to such Financial Statements. 0000818645 IN HOME HEALTH, INC. 1,000 9-MOS SEP-30-1996 OCT-01-1996 JUN-30-1996 19755 0 37,520 0 0 39426 19258 8897 79447 28230 0 0 18693 164 28182 79447 0 94562 0 50932 43260 0 (471) 841 505 336 0 0 0 336 (.09) 0
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