-----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, G+qtxV/+lH+sp4qjSkXRnT8mSERmTAcqXsVTUXYxFgmnvOOc2nnTaSQ95dxKCCMB RSYFqXPIiLBvPDj+QRJWlw== 0000912057-97-028364.txt : 19970819 0000912057-97-028364.hdr.sgml : 19970819 ACCESSION NUMBER: 0000912057-97-028364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970818 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: 97665720 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, 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 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 15, 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 - June 30, 1997 and September 30, 1996 2-3 Consolidated Statements of Operations - For the three and nine months ended June 30, 1997 and 1996 4 Consolidated Statements of Cash Flows - For the nine months ended June 30, 1997 and 1996 5 Notes to Unaudited Consolidated Financial Statements 6-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-15 PART II. OTHER INFORMATION 16 1 ITEM 1. IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
June 30, 1997 Sept. 30, (Unaudited) 1996 ------------- --------- Current Assets: Cash and cash equivalents $11,521 $18,617 Accounts receivable, net of allowances of $1,010 and $802 in June 1997 and September 1996, respectively 17,913 19,418 Prepaid income tax 4,013 1,037 Deferred income tax 1,540 3,389 Prepaid expenses and other current assets 1,205 1,592 ------- ------- Total current assets 36,192 44,053 ------- ------- Property: Furniture and equipment 9,734 9,954 Computer equipment and software 8,239 8,561 Leasehold improvements 772 823 ------- ------- Total 18,745 19,338 Accumulated depreciation (10,739) (9,437) ------- ------- Property - net 8,006 9,901 ------- ------- Other Assets: Accounts receivable, long-term 3,868 22,018 Goodwill, net 5,518 5,590 Other assets 901 1,121 ------- ------- Total other assets 10,287 28,729 ------- ------- Total Assets $54,485 $82,683 ------- ------- ------- -------
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, 1997 Sept. 30, (Unaudited) 1996 ----------- ---- Current Liabilities: Current maturities of long-term debt $ 1,010 $ 1,455 Accounts payable 2,579 3,662 Accounts payable - related party -- 1,006 Accrued liabilities: Third party 5,576 13,568 Compensation 4,625 6,859 Insurance 6,590 6,133 Other 2,342 487 ------- ------- Total current liabilities 22,722 33,170 ------- ------- Long-Term Debt 330 1,080 Deferred Revenue 504 820 Deferred Rent Payable 199 267 Deferred Income Tax 1,749 1,822 Commitments and Contingencies -- -- Redeemable Convertible Preferred Stock - $1.00 par value, $20,000 redemption value, authorized 200 shares; issued and outstanding June 30 and September 30 - 200 shares 18,987 18,766 Shareholders' Equity: Preferred stock - authorized 800 shares -- -- Common stock - $.01 par value: authorized - 40,000 shares; issued and outstanding - June 30 - 16,296 shares; September 30 - 16,541 shares 163 165 Additional paid-in capital 23,513 23,978 Retained earnings (deficit) (13,682) 2,615 ------- ------- Total shareholders' equity 9,994 26,758 ------- ------- Total Liabilities and Shareholders' Equity $54,485 $82,683 ------- ------- ------- -------
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, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended June 30 June 30 ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenue (net of Medicare reserves of $13,970, $180, $14,421, $1,030 for the respective periods) $ 18,855 $30,302 $ 81,815 $94,562 ------- ------- ------- ------- Operating Expenses: Direct costs of revenue (primarily payroll related costs) 18,001 15,905 52,899 50,932 General, administrative and selling expenses 14,444 14,218 43,328 43,260 Restructuring charge 2,027 -- 2,027 -- ------- ------- ------- ------- Total operating expenses 34,472 30,123 98,254 94,192 ------- ------- ------- ------- Income (loss) from operations (15,617) 179 (16,439) 370 ------- ------- ------- ------- Interest: Interest income 183 268 586 826 Interest expense (51) (114) (203) (355) ------- ------- ------- ------- Net interest income 132 154 383 471 ------- ------- ------- ------- Income (loss) before income taxes (15,485) 333 (16,056) 841 Income tax expense (benefit) (1,716) 221 (1,780) 505 ------- ------- ------- ------- Net income (loss) $(13,769) $ 112 $(14,276) $ 336 ------- ------- ------- ------- ------- ------- ------- ------- Loss applicable to common stock $(14,443) $ (560) $(16,297) $(1,510) ------- ------- ------- ------- ------- ------- ------- ------- Loss per common and common equivalent share $ (.89) $ (.03) $ (1.00) $ (.09) ------- ------- ------- ------- ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,311 16,465 16,349 16,430 ------- ------- ------- ------- ------- ------- ------- -------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996 (AMOUNTS IN THOUSANDS)
1997 1996 ---- ---- Cash Flows From Operating Activities: Net income (loss) $(14,276) $ 336 -------- ------- Adjustments: Depreciation and amortization 2,435 2,396 Accounts receivable 19,655 (5,798) Prepaid expenses and other assets (2,941) 198 Accounts payable (2,089) (440) Accrued liabilities (7,914) 7,629 Deferred liabilities 1,392 (1,693) -------- ------- Net cash provided (used) by operating (3,738) 2,628 activities -------- ------- Cash Flows From Investing Activities: Business acquisitions (47) -- Acquisition of property (162) (1,206) Advances to officers and employees 351 42 -------- ------- Net cash provided (used) by investing 142 (1,164) activities -------- ------- Cash Flows From Financing Activities: Payment of long-term debt (1,195) (1,568) Issuance (repurchase) of common stock (505) 127 Issuance of preferred stock and warrants -- 17,720 Preferred dividends paid (1,800) (1,653) -------- ------- Net cash provided (used) by financing activities (3,500) 14,626 -------- ------- Cash and Cash Equivalents: Net increase (decrease) (7,096) 16,090 Beginning of period 18,617 3,665 -------- ------- End of period $ 11,521 $19,755 -------- ------- -------- ------- Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 203 $ 355 -------- ------- -------- ------- Income taxes $ 24 $ 1,932 -------- ------- -------- ------- Noncash Investing and Financing Activities: Property acquired by capital lease $ -- $ 148 -------- ------- -------- -------
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 necessary to present fairly the financial position of the Company and its subsidiaries as of June 30, 1997 and the results of operations for the three and nine months and cash flows for the nine month periods ended June 30, 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 nine months ended June 30, 1997 and 1996 are as follows (in thousands, except per share data):
Three Months Nine Months ------------------- ------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Shares outstanding: Weighted average outstanding 16,296 16,351 16,296 16,279 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 15 114 53 151 -------- ------- -------- ------- Adjusted outstanding 16,311 16,465 16,349 16,430 -------- ------- -------- ------- -------- ------- -------- ------- Adjusted loss applicable to common stockholders: Net income (loss) $(13,769) $112 $(14,276) $ 336 Dividends on preferred stock (600) (600) (1,800) (1,653) Preferred stock accretion (74) (72) (221) (193) -------- ------- -------- ------- Loss applicable to common stock $(14,443) $ (560) $(16,297) $(1,510) -------- ------- -------- ------- -------- ------- -------- ------- Loss per common and common equivalent share $ (.89) $ (.03) $ (1.00) $ (.09) -------- ------- -------- ------- -------- ------- -------- -------
3. RESTRUCTURING CHARGE The Company has recorded a $2,027,000 restructuring charge as a result of the implementation of a plan to restructure its field operations and reduce the Company's cost structure. The charge includes costs associated with the closing of six pharmacies, the consolidation of three sites in multi-site markets, 6 the relocation of ten other sites to more economical locations, and severance related to administrative staff reductions. As of June 30, 1997, $1,869,000 of costs, primarily related to estimated lease costs associated with vacated sites, remain to be paid out and are included in other current liabilities. The restructuring plan is expected to be completed by the end of the third quarter of fiscal year 1998. 4. COMMITMENTS AND CONTINGENCIES Approximately 55% of revenue for the nine months ended June 30, 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, and 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, to estimate the gross amount of reimbursement that would be affected. The Company, through this ongoing control and monitoring process, establishes 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 7 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. During the quarter ended June 30, 1997 and subsequent to June 30, 1997, the Company has settled various disputed NPRs and received decisions from the Provider Reimbursement Review Board and the U.S. District Court. As a result, the Company currently has NPRs challenging $18.0 million of costs as of June 30, 1997. There was an additional $7.7 million of costs at June 30, 1997 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($25.7 million at June 30, 1997) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 61% 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 and certain other branch and corporate expenses. 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 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. Subsequent to the third quarter of fiscal 1997, the Company received two decisions which has caused the Company to conclude that the reserve should be changed. As a result, a Medicare reserve of $14.0 million was recorded during the third quarter of fiscal 1997. In August 1997 the U.S. District Court ruled that the Company was not entitled to Medicare reimbursement for approximately $1.6 million of community liaison costs incurred prior to June 1992, but was entitled to partial reimbursement of the costs for the period from June through September 1992. The total costs for June through September 1992 were $300,000. In another case the Department of Health and Human Services' Provider Reimbursement Review Board (PRRB) ruled that the Company would be partially reimbursed for costs associated with its home care coordinator/community liaison personnel at certain Company offices in fiscal years ending September 30, 1991 through 1993. The amount of Medicare reimbursement in dispute in this case was approximately $3 million. The Company 8 had previously recorded a reserve equal to 16% of all revenue related to all community liaison personnel costs. After careful assessment of the U.S. District Court, PRRB and Health Care Financing Administrator's decisions and the facts and documentation supporting the nature of the personnel costs at issue, the Company believes that a substantial portion of the community liaison costs are no longer recoverable under the Medicare program. As a result, during the third quarter of fiscal 1997, the Company has increased the reserve on the community liaison costs which have been disputed or are anticipated to be disputed. The Company received, in March 1996, a favorable ruling on the physical therapist issue by the 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 Department of Health and Human Services for further proceeding consistent with its order. As a result, the Company has not established a reserve for these disputed costs. As of June 30, 1997, the Company, based on its analysis process, believes that recovery of $21,856,000 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, 1997. Total accounts receivable (net of reserves) due from Medicare at June 30, 1997 were $13,276,000, including the receivables (net of reserves) for disputed costs of $3,868,000. As of June 30, 1997 the Company had received $5,576,000 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 $3,868,000 as of June 30, 1997 have been classified as a non-current asset. 5. INCOME TAXES As a result of the restructuring charge noted in Footnote 3 and the Medicare reserve adjustment noted in Footnote 4, the Company recorded a tax benefit for the carry back of tax losses to preceding years. This tax benefit was offset by the write-off of certain deferred tax assets. 6. 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 9 with employees. SFAS 123 disclosures are not required on an interim reporting basis unless a complete set of financial statements is presented. 7. RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board 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. 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 month periods ended June 30, 1997 decreased 38% and 13%, respectively, as compared to the same periods of the previous year. The decline is due to a $14 million revenue reserve recorded in the third quarter of fiscal year 1997. In August 1997, the U.S. District Court for Minnesota held that the Company was not entitled to Medicare reimbursement for approximately $1.6 million of community liaison costs incurred prior to June 1992, but was entitled to partial reimbursement of the costs for the period from June through September 1992. The total costs for June through September 1992 were $300,000. In a second case the Department of Health and Human Services' Provider Reimbursement Review Board ruled that the Company was entitled to partial reimbursement for approximately $3 million of home care coordinator/community liaison costs incurred in fiscal years 1991 through 1993. These decisions are likely to affect whether the Company is entitled to Medicare reimbursement for similar costs in subsequent years. Based on its preliminary evaluation, the Company has recorded $13,970,000 of revenue reserves in the third quarter of fiscal 1997. Direct costs of revenue, as a percentage of revenue, were 95% and 65% for the three and nine months ended June 30, 1997 versus 52% and 54% in the comparable periods of the prior year. The increase is due to the $14 million Medicare reserve previously discussed, which reduced revenues, and margin pressures in the Extended Hours, Infusion and Hospice divisions. General, administrative and selling expenses for the three and nine months ended June 30, 1997 were 77% and 53%, respectively, versus 47% and 46% in the previous year. The increase is due to the $14 million Medicare reserve previously discussed. During the third quarter of fiscal 1997 the Company announced plans to restructure its field operations. As a result of the $2 million restructuring the Company anticipates a reduction in future general and administrative expenses including rent and personnel charges. Net interest income for the three and nine month periods ended June 30, 1997 was $132,000 and $383,000 as compared with $154,000 and $471,000 during the same periods of the previous year. The decrease is due to less interest bearing cash and cash equivalents as a result of $4.6 million in payments for previously accrued settlements and severance agreements and repayment of prior year Medicare overpayments. Net loss for the third quarter of fiscal 1997 was $13,769,000 versus net income of $112,000 for the same period of fiscal 1996. Net loss for the nine month period ended June 30, 1997 was $14,276,000 compared with net income of $336,000 for the same period of the prior year. The net losses are primarily the result of the $14 million Medicare revenue reserve and the $2 million restructuring charge. 11 LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased $7,096,000 to $11,521,000 at June 30, 1997. During fiscal year 1997 the Company has paid out $2.3 million for previously accrued settlements and severance agreements with former employees and $2.3 million in repayments of Medicare overpayments during fiscal 1996. The Company has also paid $1.8 million in preferred dividends and $900,000 in management fees to ManorCare Health Services, Inc. Approximately 55% of revenue for the nine months ended June 30, 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, and 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, to estimate the gross amount of reimbursement that would be affected. The Company, through this ongoing control and monitoring process, establishes 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 12 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. During the quarter ended June 30, 1997 and subsequent to June 30, 1997, the Company has settled various disputed NPRs and received decisions from the Provider Reimbursement Review Board and the U.S. District Court. As a result, the Company currently has NPRs challenging $18.0 million of costs as of June 30, 1997. There was an additional $7.7 million of costs at June 30, 1997 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($25.7 million at June 30, 1997) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 61% 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 and certain other branch and corporate expenses. 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 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. Subsequent to the third quarter of fiscal 1997, the Company received two decisions which has caused the Company to conclude that the reserve should be changed. As a result, a Medicare reserve of $14.0 million was recorded during the third quarter of fiscal 1997. In August 1997 the U.S. District Court ruled that the Company was not entitled to Medicare reimbursement for approximately $1.6 million of community liaison costs incurred prior to June 1992, but was entitled to partial reimbursement of the costs for the period from June through September 1992. The total costs for June through September 1992 were $300,000. In another case the Department of Health and Human Services' Provider Reimbursement Review Board (PRRB) ruled that the Company would be partially reimbursed for costs associated with its home care coordinator/community liaison 13 personnel at certain Company offices in fiscal years ending September 30, 1991 through 1993. The amount of Medicare reimbursement in dispute in this case was approximately $3 million. The Company had previously recorded a reserve equal to 16% of all revenue related to all community liaison personnel costs. After careful assessment of the U.S. District Court, PRRB and Health Care Financing Administrator's decisions and the facts and documentation supporting the nature of the personnel costs at issue, the Company believes that a substantial portion of the community liaison costs are no longer recoverable under the Medicare program. As a result, during the third quarter of fiscal 1997, the Company has increased the reserve on the community liaison costs which have been disputed or are anticipated to be disputed. The Company received, in March 1996, a favorable ruling on the physical therapist issue by the 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 Department of Health and Human Services for further proceeding consistent with its order. As a result, the Company has not established a reserve for these disputed costs. As of June 30, 1997, the Company, based on its analysis process, believes that recovery of $21,856,000 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, 1997. Total accounts receivable (net of reserves) due from Medicare at June 30, 1997 were $13,276,000, including the receivables (net of reserves) for disputed costs of $3,868,000. As of June 30, 1997 the Company had received $5,576,000 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 $3,868,000 as of June 30, 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 through fiscal 1998. 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 dependant 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 14 to the Medicare reimbursement system from a retrospective cost-based system to a prospective payment system, (ii) settlements which may be reached with the Department of Health and Human Services regarding cost reports, and (iii) its ability to establish and maintain close working relationships with referral sources, including payors, hospitals, physicians and other health care professionals. 15 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS - Information about certain legal proceedings, set forth under Note 4 to the Unaudited Consolidated Financial Statements included herein, is incorporated by reference in this Item. 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 16 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 18, 1997 /s/Wolfgang von Maack ---------------------- Wolfgang von Maack Chief Executive Officer Date: August 18, 1997 /s/Thomas R. Gross ------------------- Thomas R. Gross Chief Financial Officer 17 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT (11) IN HOME HEALTH, INC. COMPUTATION OF PER SHARE EARNINGS FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended June 30 June 30 ------------------- ------------------- 1997 1996 1997 1996 ---- ---- ---- ---- PRIMARY: Net Income (loss) $(13,769) $ 112 $(14,276) $ 336 Preferred stock accretion (74) (72) (221) (193) Dividends on preferred stock (600) (600) (1,800) (1,653) -------- ------- -------- ------- Loss applicable to common stock $(14,443) $ (560) $(16,297) $(1,510) -------- ------- -------- ------- -------- ------- -------- ------- Shares: Weighted average number of shares outstanding during the period 16,296 16,351 16,296 16,279 Shares issuable in connection with stock options and warrants less shares assumed purchasable from proceeds 15 114 53 151 -------- ------- -------- ------- Total shares 16,311 16,465 16,349 16,430 -------- ------- -------- ------- -------- ------- -------- ------- Loss per Common and Common Equivalent Share $ (.89) $ (.03) $ (1.00) $ (.09) -------- ------- -------- ------- -------- ------- -------- ------- ASSUMING FULL DILUTION (1): Net Income (loss) $(13,769) $ 112 $(14,276) $ 336 Preferred stock accretion (74) (72) (221) (193) Dividends on preferred stock (600) (600) (1,800) (1,653) -------- ------- -------- ------- Loss applicable to common stock $(14,443) $ (560) $(16,297) $(1,510) -------- ------- -------- ------- -------- ------- -------- ------- Shares: Weighted average number of shares outstanding during the period 16,296 16,351 16,296 16,279 Shares issuable in connection with stock options and warrants less shares assumed purchasable from proceeds 16 114 53 151 -------- ------- -------- ------- Total shares 16,312 16,465 16,349 16,430 -------- ------- -------- ------- -------- ------- -------- ------- Loss per Common and Common Equivalent Share $ (.89) $ (.03) $ (1.00) $ (.09) -------- ------- -------- ------- -------- ------- -------- -------
(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. EX-27 3 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. 9-MOS SEP-30-1997 APR-01-1997 JUN-30-1997 11,521 0 22,791 1,010 0 36,192 18,745 10,739 54,485 22,722 0 0 18,987 163 9,831 54,485 0 81,815 0 52,899 45,355 0 (383) (16,056) (1,780) (14,276) 0 0 0 (14,276) (1.00) 0
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