-----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, RHN5jGCdxc1OVOi9TvZOFRMWxCMI7cn4n13rOTYSDrGUSRIVG57nTjesTwZ4Jkz6 HkgG2OEkAla5I8gz7LMJ6A== 0000912057-97-016270.txt : 19970512 0000912057-97-016270.hdr.sgml : 19970512 ACCESSION NUMBER: 0000912057-97-016270 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970509 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: 97598568 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 FORM 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 MARCH 31, 1997 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 incorporation or organization) Identification No.) 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 March 31, 1997, the number of shares outstanding of the registrant's common stock, $.01 par value was 16,295,897 shares. IN HOME HEALTH, INC. INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - March 31, 1997 and September 30, 1996 2-3 Consolidated Statements of Operations - For the three and six months ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows - For the six months ended March 31, 1997 and 1996 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 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS AND SHARES IN THOUSANDS) ASSETS March 31, 1997 Sept. 30, (Unaudited) 1996 -------------- -------- Current Assets: Cash and cash equivalents $11,910 $18,617 Accounts receivable, net of allowances of $701 and $802 in March 1997 and September 1996, respectively 18,787 19,418 Prepaid income tax 578 1,037 Deferred income tax 3,255 3,389 Prepaid expenses and other current assets 1,408 1,592 ------- -------- Total current assets 35,938 44,053 ------- -------- Property: Furniture and equipment 9,833 9,954 Computer equipment and software 8,600 8,561 Leasehold improvements 907 823 ------- -------- Total 19,340 19,338 Accumulated depreciation (10,635) (9,437) ------- -------- Property - net 8,705 9,901 ------- -------- Other Assets: Accounts receivable 24,039 22,018 Goodwill, net 5,558 5,590 Other assets 1,043 1,121 ------- -------- Total other assets 30,640 28,729 ------- -------- Total Assets $75,283 $82,683 ------- -------- ------- -------- SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY March 31, 1997 Sept. 30, (Unaudited) 1996 -------------- -------- Current Liabilities: Current maturities of long-term debt $ 1,124 $ 1,455 Accounts payable 2,811 3,662 Accounts payable - related party 894 1,006 Accrued liabilities: Third party 12,448 13,568 Compensation 4,712 6,859 Insurance 6,372 6,133 Other 440 487 ------- -------- Total current liabilities 28,801 33,170 ------- -------- Long-Term Debt 549 1,080 Deferred Revenue 609 820 Deferred Rent Payable 225 267 Deferred Income Tax 1,787 1,822 Commitments and Contingencies -- -- Redeemable Convertible Preferred Stock - $1.00 par value, $20,000 redemption value, authorized 200 shares; issued and outstanding March 31 and September 30 - 200 shares 18,913 18,766 Shareholders' Equity: Preferred stock - authorized 800 shares -- -- Common stock - $.01 par value: authorized - 40,000 shares; issued and outstanding - March 31 - 16,296 shares; September 30 - 16,541 shares 163 165 Additional paid-in capital 23,475 23,978 Retained earnings 761 2,615 ------- -------- Total shareholders' equity 24,399 26,758 ------- -------- Total Liabilities and Shareholders' Equity $75,283 $82,683 ------- -------- ------- -------- SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Three Months Ended Six Months Ended March 31 March 31 ------------------ ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenue (net of Medicare reserves of $210, $400, $451, $850 for the respective periods) $31,375 $31,792 $62,960 $64,260 ------- ------- ------- ------- Operating Expenses: Direct costs of revenue (primarily payroll related costs) 17,717 17,141 34,898 35,027 General, administrative and selling expenses 14,376 14,569 28,884 29,042 ------- ------- ------- ------- Total operating expenses 32,093 31,710 63,782 64,069 ------- ------- ------- ------- Income (Loss) From Operations (718) 82 (822) 191 ------- ------- ------- ------- Interest: Interest income 180 353 403 558 Interest expense (63) (107) (152) (241) ------- ------- ------- ------- Net interest income 117 246 251 317 ------- ------- ------- ------- Income (Loss) Before Income Taxes (601) 328 (571) 508 Income Tax Expense (Benefit) (80) 202 (64) 284 ------- ------- ------- ------- Net Income (Loss) $ (521) $ 126 $ (507) $ 224 ------- ------- ------- ------- ------- ------- ------- ------- Loss Applicable to Common Stock $(1,194) $ (546) $(1,854) $ (950) ------- ------- ------- ------- ------- ------- ------- ------- Loss Per Common and Common Equivalent Share $ (.07) $ (.03) $ (.11) $ (.06) ------- ------- ------- ------- ------- ------- ------- ------- Weighted Average Common and Common Equivalent Shares Outstanding 16,322 16,443 16,366 16,458 ------- ------- ------- ------- ------- ------- ------- ------- SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS) 1997 1996 ---- ---- Cash Flows From Operating Activities: Net income (loss) $ (507) $ 224 Adjustments: Depreciation and amortization 1,561 1,620 Accounts receivable (1,390) (1,473) Prepaid expenses and other assets 222 126 Accounts payable (963) 55 Accrued liabilities (3,075) 4,330 Deferred liabilities (154) (1,158) ------- ------- Net cash provided (used) by operating activities (4,306) 3,724 ------- ------- Cash Flows From Investing Activities: Business acquisitions (47) -- Acquisition of property (137) (785) Advances to officers and employees 350 10 ------- ------- Net cash provided (used) by investing activities 166 (775) ------- ------- Cash Flows From Financing Activities: Payment of long-term debt (862) (998) Issuance (repurchase) of common stock (505) 24 Issuance of preferred stock and warrants -- 17,720 Preferred dividends paid (1,200) (1,053) ------- ------- Net cash provided (used) by financing activities (2,567) 15,693 ------- ------- Cash and Cash Equivalents: Net increase (decrease) (6,707) 18,642 Beginning of period 18,617 3,665 ------- ------- End of period $11,910 $22,307 ------- ------- ------- ------- Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 152 $ 241 ------- ------- ------- ------- Income taxes $ 24 $ 1,167 ------- ------- ------- ------- Noncash Investing and Financing Activities: Property acquired by capital lease $ -- $ 128 ------- ------- ------- ------- 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 March 31, 1997 and the results of operations for the three and six months and cash flows for the six month periods ended March 31, 1997 and 1996. 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. LOSS PER COMMON AND COMMON EQUIVALENT SHARE Primary loss per common and common equivalent share is computed by dividing the loss applicable to common stock, as adjusted for the dividends and accretion on the Preferred Stock 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. Loss per share assuming full dilution would be substantially the same. Primary loss per share for the three and six months ended March 31, 1997 and 1996 are as follows (in thousands, except per share data):
Three Months Six Months ------------------- -------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Shares outstanding: Weighted average outstanding 16,296 16,290 16,338 16,288 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 26 153 28 170 ------ ----- ----- ------ Adjusted outstanding 16,322 16,443 16,366 16,458 ------ ----- ----- ------ ------ ----- ----- ------ Adjusted loss applicable to common stockholders: Net income (loss) $ (521) $ 126 $ (507) $ 224 Dividends on preferred stock (600) (599) (1,200) (1,053) Preferred stock accretion (73) (73) (147) (121) ------ ----- ----- ------ Loss applicable to common stock $(1,194) $ (546) $(1,854) $ (950) ------ ----- ----- ------ ------ ----- ----- ------ Loss per common and common equivalent share $ (.07) $ (.03) $ (.11) $ (.06) ------ ----- ----- ------ ------ ----- ----- ------
3. ACQUISITIONS Effective October 28, 1996, the Company acquired certain assets of Community Health Professionals, Inc., a Maryland corporation engaged in providing home care staffing services and all of the common stock of Health Careers Institute, Inc., a Maryland corporation engaged in the business of a post-secondary, non- degree school for various health care related classes. The purchase price totaled $35,000 and the acquisitions were accounted for as purchases for financial reporting purposes. Goodwill of $47,000 has been recorded as of March 31, 1997. Neither of the acquisitions are individually significant and the operations of the acquired businesses are included in the statement of operations from the dates of acquisition. 4. COMMITMENTS AND CONTINGENCIES Approximately 62% of revenue for the six months ended March 31, 1997 was derived from services provided to Medicare beneficiaries through cost reimbursement programs. Primarily all of the payments for these services are 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 seek to 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, 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 $18.2 million of costs as of March 31, 1997. There was an additional $18.2 million of costs at March 31, 1997 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($36.4 million at March 31, 1997) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 59% 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 $36.4 million at March 31, 1997 arose in the fiscal years ended September 30, 1996 ($6.6 million), 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4 million), 1991 ($2.1 million) and $2.6 million for the six months ended March 31, 1997. 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 68% 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 the 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. 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 1996 a favorable ruling on the physical therapist issue by the Health and Human Services Provider Reimbursement Review Board (PRRB). In May 1996, this ruling was reversed by the Health Care Financing Administration. The Company appealed the decision to the U.S. Federal District Court in Minneapolis. During the second quarter of fiscal 1997, the Company was notified that the U.S. District Court granted the Company's motion to set aside the decision by the Health Care Financing Administration which denied the Company reimbursement of some of its costs for providing physical therapy services provided in 1992. The Court found that the Health Care Financing Administration had provided an insufficient explanation of its decision, and therefore, the decision was arbitrary and capricious. The Court remanded the matter to the Secretary of the Health Care Financing Administration for further proceedings consistent with its order. In June 1996, 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. In August 1996, the Health Care Financing Administration reversed this ruling. The Company had previously recorded a reserve equal to 16% of all revenue related to the $1,700,000 of costs as well as other personnel costs relating to the Company's community liaison position. After careful assessment of the PRRB and Health Care Financing Administrator's decisions and the facts and documentation supporting the nature of the personnel costs at issue, the Company continues to believe that the majority of the community liaison costs are recoverable under the Medicare program. The Company has concluded that the reserve on this issue in total remains appropriate and has appealed the decision to the U.S. Federal District Court in Minneapolis. The Company, based on its analysis process, believes that recovery of $7,678,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of March 31, 1997. 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 March 31, 1997 were $34,490,000, including the receivables (net of reserves) for disputed costs of $28,760,000. As of March 31, 1997 the Company had received $12,448,000 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 $24,039,000 as of March 31, 1997 have been classified as a non-current asset. 5. STOCK BASED COMPENSATION In fiscal year 1997, the Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), 'Accounting for Stock-Based Compensation'. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and nonemployees and encourages a new method of accounting for employee stock compensation awards based on their estimated fair value at the date of grant and the recognition of associated compensation expense over the service period in the income statement. Companies are permitted to continue following Accounting Principles Board Opinion No. 25 (APB 25), 'Accounting for Stock Issued to Employees', but must disclose pro forma net income and pro forma earnings per share, as if the fair value method of SFAS 123 had been applied, in a footnote to the financial statements. The fair value measurement and recognition provisions of SFAS 123 must be applied to all stock-based arrangements with nonemployees. As permitted by SFAS 123, the Company has elected to continue following the guidance of APB 25 for measurement and recognition of stock-based transactions with employees. SFAS 123 disclosures are not required on an interim reporting basis unless a complete set of financial statements is presented. 6. RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" which will be effective in fiscal 1998. The Company does not expect the impact of the new standard to have a material effect on the financial statements. 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 six months ended March 31, 1997 decreased 1% and 2%, respectively, over the same periods in the prior year. The decline in revenue is primarily a result of a 14% decrease in Visit division volume through March 31, 1997, offset by a 38% increase in Extended Hours, Infusion and Hospice revenue. Direct costs of revenue, as a percentage of sales, were 56% and 55% for the three and six months ended March 31, 1997 versus 54% and 55% for the same periods of the previous year. Increase for the three months ended March 31, 1997 is a result of margin pressures in the Extended Hours, Infusion and Hospice divisions. General, administrative and selling expenses for the three and six months ended March 31, 1997 were 46%, respectively, versus 46% and 45% for the same periods of the previous year. These expenses have increased as a percentage of sales as a result of the decrease in revenue without a corresponding reduction in general, administrative and selling expenses. Net interest income for the three and six month periods ended March 31, 1997 was $117,000 and $251,000 versus $246,000 and $317,000 for the same periods of the previous year. The decrease in interest income is due to less interest bearing cash and cash equivalents resulting from approximately $4.9 million in payments for previously accrued settlements and severance agreements and repayment of prior year Medicare overpayments. Net loss totaled $507,000 for the six months ended March 31, 1997 versus net income of $224,000 through the six month period ended March 31, 1996. Net loss for the three months ended March 31, 1997 totaled $521,000 versus net income of $126,000 for the same period of the prior year. The net loss is a result of profit margins below expectations on Extended Hours, Hospice and Infusion revenue coupled with a decline in Visit division volume. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased $6,707,000 to $11,910,000 at March 31, 1997. During the first quarter of fiscal 1997 the Company paid out $2.3 million for previously accrued settlements and severance agreements with former employees, and $2.6 million in repayments of Medicare overpayments during fiscal 1996. The Company also paid $1.2 million in preferred dividends to Manor Healthcare Corp. for the six months ended March 31, 1997. In addition, total accounts receivable increased $1.4 million for the six months ended March 31, 1997 principally as a result of increases in disputed costs with Medicare, timing of payments from Medicare and an increase in receivables related to the hospice program. Approximately 62% of revenue for the six months ended March 31, 1997 was derived from services provided to Medicare beneficiaries through cost reimbursement programs. Primarily all of the payments for these services are 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 seek to 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, 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 $18.2 million of costs as of March 31, 1997. There was an additional $18.2 million of costs at March 31, 1997 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($36.4 million at March 31, 1997) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 59% 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 $36.4 million at March 31, 1997 arose in the fiscal years ended September 30, 1996 ($6.6 million), 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4 million), 1991 ($2.1 million) and $2.6 million for the six months ended March 31, 1997. 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 68% 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 the 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. 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 1996 a favorable ruling on the physical therapist issue by the Health and Human Services Provider Reimbursement Review Board (PRRB). In May 1996, this ruling was reversed by the Health Care Financing Administration. The Company appealed the decision to the U.S. Federal District Court in Minneapolis. During the second quarter of fiscal 1997, the Company was notified that the U.S. District Court granted the Company's motion to set aside the decision by the Health Care Financing Administration which denied the Company reimbursement of some of its costs for providing physical therapy services provided in 1992. The Court found that the Health Care Financing Administration had provided an insufficient explanation of its decision, and therefore, the decision was arbitrary and capricious. The Court remanded the matter to the Secretary of the Health Care Financing Administration for further proceedings consistent with its order. In June 1996, 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. In August 1996, the Health Care Financing Administration reversed this ruling. The Company had previously recorded a reserve equal to 16% of all revenue related to the $1,700,000 of costs as well as other personnel costs relating to the Company's community liaison position. After careful assessment of the PRRB and Health Care Financing Administrator's decisions and the facts and documentation supporting the nature of the personnel costs at issue, the Company continues to believe that the majority of the community liaison costs are recoverable under the Medicare program. The Company has concluded that the reserve on this issue in total remains appropriate and has appealed the decision to the U.S. Federal District Court in Minneapolis. The Company, based on its analysis process, believes that recovery of $7,678,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of March 31, 1997. 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 March 31, 1997 were $34,490,000, including the receivables (net of reserves) for disputed costs of $28,760,000. As of March 31, 1997 the Company had received $12,448,000 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 $24,039,000 as of March 31, 1997 have been classified as a non-current asset. The Company has letter of credit facilities from a commercial bank totaling $3,348,000. These credit facilities are collateralized by secured investments and will expire on December 15, 1997. 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 1997. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS - None. ITEM 2 - CHANGE IN SECURITIES - None. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - The Company held its Annual Meeting of Shareholders on March 6, 1997. The shareholders present in person or in proxy voted to re-elect the existing board of directors. Each nominee received the number of votes indicated below. There were no broker non-votes with respect to the election of directors. Nominees Votes For Withheld -------- ---------- -------- Mark L. Gildea 17,765,753 352,537 James J. Lynn 17,753,408 364,882 Donald C. Tomasso 17,789,684 328,606 Joseph Buckley 17,780,325 337,965 James M. Rempe 17,787,899 330,391 The shareholders approved the amendment to the 1991 Employee Stock Purchase Plan by a vote of 17,357,712 shares in favor, 569,663 shares against, 81,300 shares abstaining and zero broker non-voted. The shareholders ratified the selection of Deloitte & Touche LLP as the Company's independent auditors for 1997 by a vote of 17,928,785 shares in favor, 126,227 shares against, 63,278 abstaining and zero shares broker non-voted. 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 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. In Home Health, Inc. ------------------------ Registrant Date: May 8, 1997 /s/Mark L. Gildea ------------------------ Mark L. Gildea Chief Executive Officer Date: May 8, 1997 /s/Thomas R. Gross ------------------------ Thomas R. Gross Chief Financial Officer EX-11 2 EX 11 COMPUTATION OF PER SHARE EARNINGS EXHIBIT (11) IN HOME HEALTH, INC. COMPUTATION OF PER SHARE EARNINGS FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended March 31 March 31 ---------------------- ---------------------- 1997 1996 1997 1996 ---- ---- ---- ---- PRIMARY: Net Income (loss) $ (521) $ 126 $ (507) $ 224 Preferred stock accretion (73) (73) (147) (121) Dividends on preferred stock (600) (599) (1,200) (1,053) -------- --------- --------- -------- Loss applicable to common stock $ (1,194) $ (546) $ (1,854) $ (950) -------- --------- --------- -------- -------- --------- --------- -------- Shares: Weighted average number of shares outstanding during the period 16,296 16,290 16,338 16,288 Shares issuable in connection with stock options and warrants less shares assumed purchasable from proceeds 26 153 28 170 -------- --------- --------- -------- Total shares 16,322 16,443 16,366 16,458 -------- --------- --------- -------- -------- --------- --------- -------- Loss per Common and Common Equivalent Share $ (.07) $ (.03) $ (.11) $ (.06) -------- --------- --------- -------- -------- --------- --------- -------- ASSUMING FULL DILUTION (1): Net Income (loss) $ (521) $ 126 $ (507) $ 224 Preferred stock accretion (73) (73) (147) (121) Dividends on preferred stock (600) (599) (1,200) (1,053) -------- --------- --------- -------- Loss applicable to common stock $ (1,194) $ (546) $ (1,854) $ (950) -------- --------- --------- -------- -------- --------- --------- -------- Shares: Weighted average number of shares outstanding during the period 16,296 16,290 16,338 16,288 Shares issuable in connection with stock options and warrants less shares assumed purchasable from proceeds 26 157 28 170 -------- --------- --------- -------- Total shares 16,322 16,447 16,366 16,458 -------- --------- --------- -------- -------- --------- --------- -------- Loss per Common and Equivalent Share $ (.07) $ (.03) $ (.11) $ (.06) -------- --------- --------- -------- -------- --------- --------- --------
(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 EX 27 FINANCIAL DATA SCHEDULE
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. 6-MOS SEP-30-1997 JAN-01-1997 MAR-31-1997 11,910 0 43,527 701 0 35,938 19,340 10,635 75,283 28,801 0 0 18,913 163 24,236 75,283 0 62,960 0 34,898 28,884 0 (251) (571) (64) (507) 0 0 0 (507) (.11) 0
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