-----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, LJKVggvkJNq9SatWI4cP9ODkSLbascZnEj/QwneYoTP4AtZSrUyOSa99leb68sgS VssGx3ijqzg7T/aHspjIIA== 0001047469-98-005374.txt : 19980217 0001047469-98-005374.hdr.sgml : 19980217 ACCESSION NUMBER: 0001047469-98-005374 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980212 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: SEC FILE NUMBER: 000-17490 FILM NUMBER: 98534201 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 DECEMBER 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 Identification No.) incorporation or organization) CARLSON CENTER, SUITE 500 601 CARLSON PARKWAY 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 No ---- ---- As of January 16, 1998, the number of shares outstanding of the registrant's common stock, $.01 par value was 16,398,781 shares. IN HOME HEALTH, INC. TABLE OF CONTENTS PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - 2-3 December 31, 1997 and September 30, 1997 Consolidated Statements of Operations - 4 For the three months ended December 31, 1997 and 1996 Consolidated Statements of Cash Flows - 5 For the three months ended December 31, 1997 and 1996 Notes to Unaudited Consolidated 6-10 Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11-15 OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION 16 1 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
Dec. 31, 1997 Sept. 30, (UNAUDITED) 1997 ----------- --------- Current Assets: Cash and cash equivalents $ 13,948 $ 13,853 Accounts receivable (net of allowances of $2,194 and $2,029 in December and September 1997, respectively) 11,481 14,125 Prepaid income tax 3,907 3,907 Deferred income tax 1,540 1,540 Prepaid expenses and other current assets 673 579 --------- --------- Total current assets 31,549 34,004 --------- --------- Property: Furniture and equipment 9,335 9,621 Computer equipment and software 7,506 7,506 Leasehold improvements 669 727 --------- --------- Total 17,510 17,854 Accumulated depreciation (10,916) (10,501) --------- --------- Property - net 6,594 7,353 --------- --------- Other Assets: Accounts receivable, long-term 2,890 2,891 Goodwill, net 5,392 5,432 Other assets 488 544 --------- --------- Total other assets 8,770 8,867 --------- --------- Total Assets $ 46,913 $ 50,224 --------- --------- --------- ---------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 2 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (AMOUNTS IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY
Dec. 31, 1997 Sept. 30, (UNAUDITED) 1997 ----------- ---------- Current Liabilities: Current maturities of long-term debt $ 573 $ 777 Accounts payable 2,649 4,255 Accounts payable - related party 74 59 Accrued liabilities: Third party 6,966 6,789 Compensation 3,348 4,034 Insurance 6,243 6,704 Restructuring 1,421 1,807 Other 383 583 ---------- --------- Total current liabilities 21,657 25,008 ---------- --------- Long-Term Debt 174 278 Deferred Revenue 293 398 Deferred Rent Payable 237 248 Deferred Income Tax 1,643 1,643 Commitments and Contingencies -- -- Redeemable Convertible Preferred Stock - $1.00 par value, $20,000 redemption value, authorized 200 shares; issued and outstanding December 31 and September 30 - 200 shares 19,135 19,061 Shareholders' Equity: Preferred stock - authorized 800 shares -- -- Common stock - $.01 par value: authorized - 40,000 shares; issued and outstanding - December 31 - 16,399 shares; September 30 - 16,399 shares 164 164 Additional paid-in capital 23,661 23,661 Retained earnings (deficit) (20,051) (20,237) ---------- --------- Total shareholders' equity 3,774 3,588 ---------- --------- Total Liabilities and Shareholders' Equity $ 46,913 $ 50,224 ---------- --------- ---------- ---------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 --------- --------- Revenue (net of Medicare reserves of $77 and $241 in 1997 and 1996, respectively) $ 27,858 $ 31,585 -------- --------- Operating Expenses: Direct costs of revenue (primarily payroll related costs) 16,125 17,181 General, administrative and selling expenses 11,205 14,508 Restructuring charge (146) -- -------- --------- Total operating expenses 27,184 31,689 -------- --------- Income (loss) from operations 674 (104) -------- --------- Interest: Interest income 216 223 Interest expense (30) (89) -------- --------- Net interest income 186 134 -------- --------- Income before income taxes 860 30 Income tax expense -- 16 -------- --------- Net income $ 860 $ 14 -------- --------- -------- --------- Net income (loss) available to common shareholders $ 186 $ (660) -------- --------- -------- --------- Basic and diluted earnings (loss) per share $ .01 $ (.04) -------- --------- -------- ---------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS)
1997 1996 -------- --------- Cash Flows From Operating Activities: Net income $ 860 $ 14 Adjustments: Depreciation and amortization 876 777 Accounts receivable 2,645 (2,774) Prepaid expenses and other assets (103) (348) Accounts payable (1,606) (1,036) Accounts payable - related party 15 (41) Accrued liabilities (1,556) (3,401) Deferred revenue (105) (106) Deferred rent payable (11) (24) Deferred income tax -- 110 --------- --------- Net cash provided (used) by operating activities 1,015 (6,829) --------- --------- Cash Flows From Investing Activities: Acquisition of property (20) (117) Repayments of advances to officers and employees 8 257 --------- --------- Net cash provided (used) by investing activities (12) 140 --------- --------- Cash Flows From Financing Activities: Payment of long term debt (308) (430) Preferred dividends paid (600) (600) Repurchase of common stock -- (505) --------- --------- Net cash used by financing activities (908) (1,535) --------- --------- Cash and Cash Equivalents: Net increase (decrease) 95 (8,224) Beginning of period 13,853 18,617 --------- --------- End of period $ 13,948 $ 10,393 --------- --------- --------- ---------
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 December 31, 1997 and the results of operations and its cash flows for the three month periods ended December 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. BASIC AND DILUTED EARNINGS PER SHARE Effective October 1, 1997 the Company adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS No. 128). Earnings per share amounts presented for 1996 have been restated for the adoption of SFAS No. 128. The following table reflects the calculation of basic and diluted earnings per share for the three months ended December 31, 1997 and 1996.
(in thousands, except per share amounts) 1997 1996 ------ ----- EARNINGS PER SHARE: Net income $ 860 $ 14 Dividends on preferred stock (600) (600) Preferred stock accretion (74) (74) ------- ------- Income (loss) available to common shareholders $ 186 $ (660) ------- ------- ------- ------- Weighted average shares outstanding 16,399 16,379 ------- ------- ------- ------- Income (loss) per share-basic and diluted $ .01 $ (.04) ------- ------- ------- -------
Options to purchase 1,281,541 shares of common stock were outstanding during the three months ended December 31, 1997. These options were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. Options to purchase 1,761,000 shares of common stock were outstanding during the three months ended December 31, 1996, which were not included in the computation of diluted earnings per share due to the loss in the period. Redeemable convertible preferred stock was issued to ManorCare Health Services, Inc. In October 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. A private warrant was issued in October 1995 to ManorCare Health Services, Inc. to purchase 6 million shares of common stock at $3.75 per share and expires in October 1998. The impact of the redeemable convertible preferred stock and the warrant on diluted earnings per share would be anti-dilutive and therefore, they have been excluded. 6 3. RESTRUCTURING CHARGE During fiscal 1997, the Company recorded $2,476,000 in restructuring charges as a result of the implementation of a plan to restructure its field operations and reduce the Company's cost structure. The charge includes $1,820,000 of costs associated with lease costs and related equipment write-offs associated with the closing of eight pharmacies, the consolidation of seven sites in multi-site markets, the relocation of eight other sites to more economical locations and $361,000 of severance costs related to administrative staff reductions. Total expenditures related to facilities consolidation were $240,000 during the three months ended December 31, 1997. As of December 31, 1997, $1,421,000 of costs, comprised of lease costs and related equipment write-offs associated with vacated sites remain to be paid out, are included in other current liabilities. The restructuring plan is expected to be completed by the end of the third quarter of fiscal 1998. 4. COMMITMENTS AND CONTINGENCIES Approximately 59% and 62% of revenue for the three months ended December 31, 1997 and 1996, respectively, was derived from services provided to Medicare beneficiaries. Payments for reimbursable services are made by the Medicare program based on reimbursable costs incurred in rendering the services. Medicare makes interim payments as services are rendered, and the Company files cost reports on an annual basis which are subject to audit and retroactive adjustment by Medicare. The Company reports revenue only for those costs that it believes are probable (as defined in Statement of Financial Accounting Standards No. 5) of recovery under the applicable Medicare statutes and regulations and reports its accounts receivable balances at net realizable value. The Company utilizes an extensive system of internal controls to attempt 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 "Health Insurance 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 Department of Health and Human Services' Provider Reimbursement Review Board ("PRRB") 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, the Blue Cross Association and HCFA. 7 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, 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 also reports as a liability disputed costs for which it has received payment, but 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 fiscal intermediaries are usually determined from Medicare's Notices 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 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 disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and HCFA, and is vigorously pursuing these matters through administrative and legal channels. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company has established a reserve for the portion of these costs not considered probable of recovery. As additional costs are incurred, the Company is increasing the reserve to cover such additional costs that are not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether the level is appropriate. The Company currently has NPRs challenging $15.1 million of costs as of December 31, 1997. There was an additional $4.5 million of costs at December 31, 1997 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($19.6 million at December 31, 1997) comprise the total amount the Company considers to be disputed costs. The major cost categories in dispute are the treatment of certain personnel costs relating to the Company's community liaison positions, pharmacy indirect expenses, the cost of physical therapists employed by the Company and certain other branch and corporate expenses. 8 During fiscal 1997, the Company settled various disputed NPRs and received decisions from the PRRB and the U.S. District Court regarding the community liaison and other disputed costs. In the fourth quarter of fiscal 1997 the Company was notified by HCFA that pharmacy expenses retroactive to fiscal 1995 would be challenged. As a result, a Medicare reserve of $14.0 million was recorded in the third quarter of fiscal 1997 and $2.8 million was recorded in the fourth quarter of fiscal 1997. In August 1997, the Company received two rulings in which it was determined that community liaison costs are reimbursable to the degree that they are documented clearly enough to establish a differentiation between reimbursable and non-reimbursable activities. The rulings were from the U.S. District Court and from the PRRB. The U.S. District Court ruled that the Company was not entitled to Medicare reimbursement of community liaison costs incurred by some of its offices prior to June 1992 due to insufficient documentation, but was entitled to partial reimbursement of the costs by those offices for the period from June through September 1992, based on daily activity records. The PRRB also ruled that a portion of community liaison costs incurred by some of its offices from fiscal 1991 through 1993 should be reimbursed. The PRRB specifically concluded that the costs for intake coordination activities are allowable, and that the costs for assessment/evaluation, patient status and coordination are allowable where patient names are provided. The PRRB found, with respect to education activities and the provision of information to referral sources, that repeat visits to the same referral sources would be viewed as marketing and patient solicitation, which is unallowable. In each of these decisions, the Medicare intermediaries' determinations that all community liaison costs are non-reimbursable was reversed, and it was ordered that the matter be remanded for further action or audit. Because the decisions of the Court and the PRRB clarified the definition of allowable activities and the required documentation to support allowable activities, the Company has changed its determination of recoverability on all community liaison costs. Of the total disputed costs of $8,332,000 at December 31, 1997 regarding the community liaison issues, the Company has established reserves of $7,124,000. The Company believes that in applying the decisions of the U.S. District Court and the PRRB, the remaining $1,208,000 of costs are recoverable. The Company received, in March 1996, a favorable ruling by the PRRB on the physical therapist issue. In May 1996, this ruling was reversed by the HCFA Administrator. 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 HCFA which denied the Company reimbursement of some of its costs for providing physical therapy services provided in 1992. The Court found that HCFA 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. In October 1997, HCFA, in response to the U.S. District Court's Order, issued its revised decision in which it again ruled that the physical therapist costs at issue are not reimbursable by Medicare. The Company has appealed HCFA's revised order to the U.S. District Court. The Company's legal counsel in this matter, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota, has advised the Company that in its opinion it is probable that the Company will ultimately prevail in the courts and be reimbursed for the physical therapy costs which are disputed in this case. As of December 31, 1997, the Company, based on its analysis process, believes that recovery of $16,730,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of December 31, 1997. Total accounts receivable (net of reserves) due from Medicare at December 31, 1997 were $7,990,000, including the 9 receivables (net of reserves) for disputed costs of $2,890,000. As of December 31, 1997 the Company had received $6,966,000 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 $2,890,000 as of December 31, 1997 have been classified as a non-current asset. 5. INCOME TAXES At September 30, 1997, the Company had federal operating loss carryforwards of $11,000,000 which will expire in 2012. Management believes it is more likely than not that certain of these net operating loss carryforwards may expire unused and, accordingly, has established a valuation allowance against them. During the three months ended December 31, 1997, income tax expense of $400,000 was offset by utilization of a portion of the net operating loss carryforward. 6. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131 "Disclosures about Segments of an Enterprise and Related Information" which is effective for fiscal years beginning after December 15, 1997. The Company has not determined the impact of adoption of the standard. 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 months ended December 31, 1997 decreased 12% as compared to the same period in the prior year. Visit division revenues declined by 20% due to the impact on revenue from the cost reductions enacted in fiscal 1997 and lower Medicare payments under the new cost limits which were effective October 1, 1997. This decline, combined with a 3% decrease in extended hours, infusion and hospice revenue, resulted in an overall revenue reduction of 12% compared to the first quarter of fiscal 1997. Direct costs, as a percent of revenue, were 58% versus 54% for the three months ended December 31, 1997 and 1996, respectively. The increase was due to the change in Visit Division revenue volume and overall revenue mix. General, administrative and selling expenses as a percent of revenue decreased to 40% in 1997 compared to 46% in 1996. The decrease was due to the decrease in costs in conjunction with the Company's restructuring plan. Net interest income was $186,000 for the three months ended December 31, 1997 as compared to $134,000 for the comparable period in the prior year. Interest earnings are a result of the earnings on the cash proceeds from the investment by ManorCare Health Services, Inc. in October, 1995. Total reported net income of $860,000 for the quarter ended December 31, 1997 was an $846,000 increase compared to prior year first quarter net income of $14,000. The net income improvement is primarily due to a significant reduction in general, administrative and selling expenses resulting from fiscal 1997 restructuring initiatives. Net income available to common shareholders was $186,000 compared to a loss of $660,000 in the same period last year. The difference between net income and net income available to common shareholders is primarily the result of the preferred stock dividend payable to ManorCare Health Services, Inc. for its $20 million preferred stock investment in In Home Health. Basic and diluted earnings per share were $.01 compared to a loss of $.04 per share a year ago. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents increased $95,000 to $13,948,000 at December 31, 1997. A decrease in total accounts receivable of $2,645,000 was offset by a reduction in accounts payable of $1,606,000 and in other liabilities. 11 Approximately 59% and 62% of revenue for the three months ended December 31, 1997 and 1996, respectively, was derived from services provided to Medicare beneficiaries. Payments for reimbursable services are made by the Medicare program based on reimbursable costs incurred in rendering the services. Medicare makes interim payments as services are rendered, and the Company files cost reports on an annual basis which are subject to audit and retroactive adjustment by Medicare. The Company reports revenue only for those costs that it believes are probable (as defined in Statement of Financial Accounting Standards No. 5) of recovery under the applicable Medicare statutes and regulations and reports its accounts receivable balances at net realizable value. The Company utilizes an extensive system of internal controls to attempt 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 "Health Insurance 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 Department of Health and Human Services' Provider Reimbursement Review Board ("PRRB") 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, the 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, 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 also reports as a liability disputed costs for which it has received payment, but 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 12 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 fiscal intermediaries are usually determined from Medicare's Notices 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 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 disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and HCFA, and is vigorously pursuing these matters through administrative and legal channels. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company has established a reserve for the portion of these costs not considered probable of recovery. As additional costs are incurred, the Company is increasing the reserve to cover such additional costs that are not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether the level is appropriate. The Company currently has NPRs challenging $15.1 million of costs as of December 31, 1997. There was an additional $4.5 million of costs at December 31, 1997 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($19.6 million at December 31, 1997) comprise the total amount the Company considers to be disputed costs. The major cost categories in dispute are the treatment of certain personnel costs relating to the Company's community liaison positions, pharmacy indirect expenses, the cost of physical therapists employed by the Company and certain other branch and corporate expenses. During fiscal 1997, the Company settled various disputed NPRs and received decisions from the PRRB and the U.S. District Court regarding the community liaison and other disputed costs. In the fourth quarter of fiscal 1997 the Company was notified by HCFA that pharmacy expenses retroactive to fiscal 1995 would be challenged. As a result, a Medicare reserve of $14.0 million was recorded in the third quarter of fiscal 1997 and $2.8 million was recorded in the fourth quarter of fiscal 1997. In August 1997, the Company received two rulings in which it was determined that community liaison costs are reimbursable to the degree that they are documented clearly enough to establish a differentiation between reimbursable and non-reimbursable activities. The rulings were from the U.S. District Court and from the PRRB. The U.S. District Court ruled that the Company was not entitled to Medicare reimbursement of community liaison costs incurred by some of its offices prior to June 1992 due to insufficient documentation, but was entitled to partial reimbursement of the costs by those offices for the period from June through September 1992, based on daily activity records. The PRRB also ruled that a portion of community liaison costs incurred by some of its offices from fiscal 1991 through 1993 should be reimbursed. The PRRB specifically concluded that the costs for intake coordination activities are allowable, and that the costs for assessment/evaluation, patient status and coordination are allowable where patient names are provided. The PRRB found, with respect to education activities and the provision of information to referral sources, that repeat visits to the same referral sources would be viewed as marketing and patient solicitation, which is unallowable. In each of these decisions, the 13 Medicare intermediaries' determinations that all community liaison costs are non-reimbursable was reversed, and it was ordered that the matter be remanded for further action or audit. Because the decisions of the Court and the PRRB clarified the definition of allowable activities and the required documentation to support allowable activities, the Company has changed its determination of recoverability on all community liaison costs. Of the total disputed costs of $8,332,000 at December 31, 1997 regarding the community liaison issues, the Company has established reserves of $7,124,000. The Company believes that in applying the decisions of the U.S. District Court and the PRRB, the remaining $1,208,000 of costs are recoverable. The Company received, in March 1996, a favorable ruling by the PRRB on the physical therapist issue. In May 1996, this ruling was reversed by the HCFA Administrator. 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 HCFA which denied the Company reimbursement of some of its costs for providing physical therapy services provided in 1992. The Court found that HCFA 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. In October 1997, HCFA, in response to the U.S. District Court's Order, issued its revised decision in which it again ruled that the physical therapist costs at issue are not reimbursable by Medicare. The Company has appealed HCFA's revised order to the U.S. District Court. The Company's legal counsel in this matter, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota, has advised the Company that in its opinion it is probable that the Company will ultimately prevail in the courts and be reimbursed for the physical therapy costs which are disputed in this case. As of December 31, 1997, the Company, based on its analysis process, believes that recovery of $16,730,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of December 31, 1997. Total accounts receivable (net of reserves) due from Medicare at December 31, 1997 were $7,990,000, including the receivables (net of reserves) for disputed costs of $2,890,000. As of December 31, 1997 the Company had received $6,966,000 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 $2,890,000 as of December 31, 1997 have been classified as a non-current asset. The Company has letter of credit facilities from a commercial bank totaling $3,127,000. These credit facilities are collateralized by secured investments and will expire on December 15, 1998. Overall, In Home Health believes the cash provided by operations along with its existing cash balance of $13,948,000 will be sufficient to finance its current operations through at least fiscal 2000. 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 14 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 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. As a result of these developments, the Company is not able to conclude that it is more likely than not that it will be able to generate future earnings which will allow it to utilize its NOLs and, accordingly, has established a valuation allowance against the NOLs. Please refer to our Form 10-K for the fiscal year ended September 30, 1997 for a more thorough discussion of forward looking information. 15 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS - None ITEM 2 - CHANGES 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 - 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: February 13, 1998 /s/ Wolfgang Von Maack ------------------------------ Wolfgang von Maack Chief Executive Officer Date: February 13, 1998 /s/ Thomas R. Gross --------------------------- Thomas R. Gross Chief Financial Officer 17 EX-27 2 EXHIBIT 27 FDS
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. 3-MOS SEP-30-1998 OCT-01-1997 DEC-31-1997 13,948 0 16,565 2,194 0 31,549 17,510 10,916 46,913 28,549 0 0 19,135 164 3,610 46,913 0 27,858 0 16,125 11,059 0 (186) 860 0 860 0 0 0 860 .01 .01
-----END PRIVACY-ENHANCED MESSAGE-----