-----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, J5ORpHZ9wk4jwBIGGmKsnkr46mlNrCFeWILkBNNwtMgHJ6pneA/CeAKiAnSsmBfb x2EtTMWwqzLHAxxg4gZSgQ== 0000912057-97-005622.txt : 19970222 0000912057-97-005622.hdr.sgml : 19970222 ACCESSION NUMBER: 0000912057-97-005622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 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: 97536446 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, 1996 COMMISSION FILE NO. 0-17490 IN HOME HEALTH, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1458213 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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 (1) No As of January 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 - 2-3 December 31, 1996 and September 30, 1996 Consolidated Statements of Operations - 4 For the three months ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows - 5 For the three months ended December 31, 1996 and 1995 Notes to Unaudited Consolidated 6-10 Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11-14 OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION 15 1 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS Dec. 31, 1996 Sept. 30, (Unaudited) 1996 ---------- ------- Current Assets: Cash and cash equivalents $10,393 $18,617 Accounts receivable (net of allowances of $814 and $802 in December and September 1996, respectively) 20,880 19,418 Prepaid income tax 1,142 1,037 Deferred income tax 3,265 3,389 Prepaid expenses and other current assets 1,534 1,592 ------ ------ Total current assets 37,214 44,053 ------ ------ Property: Furniture and equipment 9,862 9,954 Computer equipment and software 8,574 8,561 Leasehold improvements 887 823 ------ ------ Total 19,323 19,338 Accumulated depreciation (10,009) (9,437) ------ ------ Property - net 9,314 9,901 ------ ------ Other Assets: Accounts receivable 23,330 22,018 Goodwill, net 5,591 5,590 Other assets 1,091 1,121 ------ ------ Total other assets 30,012 28,729 ------ ------ Total Assets $76,540 $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 Dec. 31, 1996 Sept. 30, (Unaudited) 1996 --------- ------- Current Liabilities: Current maturities of long-term debt $ 1,312 $ 1,455 Accounts payable 2,626 3,662 Accounts payable - related party 965 1,006 Accrued liabilities: Third party 11,799 13,568 Compensation 5,033 6,859 Insurance 6,364 6,133 Other 450 487 ------ ------ Total current liabilities 28,549 33,170 ------ ------ Long-Term Debt 793 1,080 Deferred Revenue 714 820 Deferred Rent Payable 243 267 Deferred Income Tax 1,808 1,822 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 18,840 18,766 Shareholders' Equity: Preferred stock - authorized 800 shares -- -- Common stock - $.01 par value: authorized - 40,000 shares; issued and outstanding - December 31 - 16,296 shares; September 30 - 16,541 shares 163 165 Additional paid-in capital 23,475 23,978 Retained earnings 1,955 2,615 ------ ------ Total shareholders' equity 25,593 26,758 ------ ------ Total Liabilities and Shareholders' Equity $76,540 $82,683 ------ ------ ------ ------ SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 ------ ------ Revenue (net of Medicare reserves of $241 and $450 in 1996 and 1995, respectively) $31,585 $32,468 ------ ------ Operating Expenses: Direct costs of revenue (primarily payroll related costs) 17,181 17,886 General, administrative and selling expenses 14,508 14,473 ------ ------ Total operating expenses 31,689 32,359 ------ ------ Income (Loss) From Operations (104) 109 ------ ------ Interest: Interest income 223 205 Interest expense (89) (134) ------ ------ Net interest income 134 71 ------ ------ Income Before Income Taxes 30 180 Income Tax Expense 16 82 ------ ------ Net Income $ 14 $ 98 ------ ------ ------ ------ Loss Applicable to Common Stock $ (660) $ (404) ------ ------ ------ ------ Loss Per Common and Common Equivalent Share $ (.04) $ (.02) ------ ------ ------ ------ Weighted Average Common and Common Equivalent Shares Outstanding 16,416 16,473 ------ ------ ------ ------ 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, 1996 AND 1995 (AMOUNTS IN THOUSANDS) 1996 1995 ------ ------ Cash Flows From Operating Activities: Net income $ 14 $ 98 Adjustments: Depreciation and amortization 777 842 Accounts receivable (2,774) (1,254) Prepaid expenses and other assets (348) 261 Accounts payable (1,077) 339 Accrued liabilities (3,401) 1,823 Deferred liabilities (20) (827) ------ ------ Net cash provided (used) by operating activities (6,829) 1,282 ------ ------ Cash Flows from Investing Activities: Business Acquisitions (40) - Acquisition of property (77) (300) Advances to officers and employees 257 19 ------ ------ Net cash provided (used) by investing activities 140 (281) ------ ------ Cash Flows from Financing Activities: Payment of long term debt (430) (507) Issuance (repurchase) of common stock (505) 31 Issuance of preferred stock and warrants - 17,987 Preferred dividends paid (600) (454) ------ ------ Net cash provided (used) by financing activities (1,535) 17,057 ------ ------ Cash and Cash Equivalents: Net increase (decrease) (8,224) 18,058 Beginning of period 18,617 3,665 ------ ------ End of period $10,393 $21,723 ------ ------ ------ ------ Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 89 $ 134 ------ ------ ------ ------ Income taxes $ 11 $ 246 ------ ------ ------ ------ 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, 1996 and the results of operations and its cash flows for the three month periods ended December 31, 1996 and 1995. The results of operations for any interim period are not necessarily indicative of the results for the year. These interim consolidated financial statements should be read in conjunction with the Company's annual financial statements and related notes in the Company's Form 10-K. 2. 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 months ended December 31, 1996 and 1995 are as follows (in thousands except per share data): 1996 1995 ------ ------ Shares outstanding: Weighted average outstanding 16,379 16,286 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 37 187 ------ ------ Adjusted outstanding 16,416 16,473 ------ ------ ------ ------ Adjusted loss applicable to common stockholders: Net income $ 14 $ 98 Dividends on preferred stock (600) (454) Preferred stock accretion (74) (48) ------ ------ Loss applicable to common stock $ (660) $ (404) ------ ------ ------ ------ Loss per common and common equivalent share $ (.04) $ (.02) ------ ------ ------ ------ 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 6 $35,000 and the acquisitions were accounted for as purchases for financial reporting purposes. Goodwill of $40,000 has been recorded as of December 31, 1996. 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 three months ended December 31, 1996 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 7 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 $18.5 million of costs as of December 31, 1996. There was an additional $17.1 million of costs at December 31, 1996 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($35.6 million at December 31, 1996) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 58% 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 $35.6 million at December 31, 1996 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 $1.8 million for the three months ended December 31, 1996. The amount of disputed costs has increased over the last several years as the Company's operations have grown, Medicare auditors have taken positions to disallow certain costs in certain cost reports as non-reimbursable, and the Company has extrapolated that amount of costs that may be challenged to other unaudited cost reporting years. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and the Health Care Financing Administration, and is vigorously pursuing these matters through administrative and legal channels. The disputed cost analysis process related to the community liaison and physical therapist positions (which comprise 66% of disputed costs) encompassed all of the authoritative, legal and historical sources discussed above. Based on this review the Company believes that the majority of the community liaison costs are probable of recovery, and that a relatively small portion of these costs are not probable of recovery. The Company has established, and is continuing to add to, a reserve for the portion of these costs not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether the level is appropriate. Nothing 8 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 a favorable ruling on the physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB). In May 1996, this ruling was reversed by the Health Care Financing Administration. The Company has appealed the decision to the U.S. Federal District Court in Minneapolis. Because the PRRB previously ruled in the Company's favor, the Company believes it has a strong basis for a favorable outcome on such an appeal. In June 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 $7,480,000 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, 1996. The net amount of disputed costs which the Company believes is probable of recovery has been included in revenues in the respective years in which services were rendered and, to the extent not paid to the Company, is included in accounts receivable. Total accounts receivable (net of reserves) due from Medicare at December 31, 1996 were $36,487,000, including the receivables (net of reserves) for disputed costs of $28,081,000. As of December 31, 1996 the Company had received $11,799,000 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 $23,330,000 as of December 31, 1996 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 9 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. 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, 1996 decreased 3% as compared to the same period in the prior year. Extended hours, infusion and hospice revenue increased 41% from the first quarter of fiscal 1996. This increase, however, was offset by a 17% decline in Visit division volume. The Visit division volume continues to be impacted by the trend of Medicare beneficiaries selecting coverage through HMO and Medicare risk providers and increased competition from hospital based home care companies. Direct costs of revenue, as a percentage of sales, were 54% versus 55% for the three months ended December 31, 1996 and 1995, respectively. The decrease was due to reduced Visit division volume with no corresponding reduction in general, administrative and selling expenses. General, administrative and selling expenses as a percent of revenue increased to 46% in 1996 compared to 45% in 1995. The increase was due to the decrease in total revenue without a corresponding decrease in general administrative and selling expenses. General administrative and selling expenses include costs related to development of elder care, cardiology and hospice specialty programs. Net interest income was $134,000 for the three months ended December 31, 1996 as compared to $71,000 for the comparable period in the prior year. Interest earnings are a result of the earnings on the cash proceeds from the investment by Manor Healthcare Corp. on October 24, 1995. Net income totaled $14,000 for the period ended December 31, 1996 versus $98,000 for the same period in the prior year. The decline in net income is a result of the decline in Visit division volume. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased $8,224,000 to $10,393,000 at December 31, 1996. 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. In addition, total accounts receivable increased $2.8 million 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 three months ended December 31, 1996 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 11 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 12 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 $18.5 million of costs as of December 31, 1996. There was an additional $17.1 million of costs at December 31, 1996 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($35.6 million at December 31, 1996) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately 58% 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 $35.6 million at December 31, 1996 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 $1.8 million for the three months ended December 31, 1996. The amount of disputed costs has increased over the last several years as the Company's operations have grown, Medicare auditors have taken positions to disallow certain costs in certain cost reports as non-reimbursable, and the Company has extrapolated that amount of costs that may be challenged to other unaudited cost reporting years. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and the Health Care Financing Administration, and is vigorously pursuing these matters through administrative and legal channels. The disputed cost analysis process related to the community liaison and physical therapist positions (which comprise 66% of disputed costs) encompassed all of the authoritative, legal and historical sources discussed above. Based on this review the Company believes that the majority of the community liaison costs are probable of recovery, and that a relatively small portion of these costs are not probable of recovery. The Company has established, and is continuing to add to, a reserve for the portion of these costs not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether 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 a favorable ruling on the physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB). In May 1996, this ruling was 13 reversed by the Health Care Financing Administration. The Company has appealed the decision to the U.S. Federal District Court in Minneapolis. Because the PRRB previously ruled in the Company's favor, the Company believes it has a strong basis for a favorable outcome on such an appeal. In June 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 $7,480,000 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, 1996. The net amount of disputed costs which the Company believes is probable of recovery has been included in revenues in the respective years in which services were rendered and, to the extent not paid to the Company, is included in accounts receivable. Total accounts receivable (net of reserves) due from Medicare at December 31, 1996 were $36,487,000, including the receivables (net of reserves) for disputed costs of $28,081,000. As of December 31, 1996 the Company had received $11,799,000 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 $23,330,000 as of December 31, 1996 have been classified as a non-current asset. The Company has letter of credit facilities from a commercial bank totaling $3,815,000. 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. 14 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 (a) Exhibits (10) Letter of Credit Agreement dated December 16, 1996 with First Bank National Association (11) Computation of Per Share Earnings (b) Reports on Form 8-K None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. In Home Health, Inc. ------------------------ Registrant Date: February 13, 1997 /s/ Mark L. Gildea ------------------------ Mark L. Gildea Chief Executive Officer Date: February 13, 1997 /Thomas R. Gross ------------------------ Thomas R. Gross Acting Chief Financial Officer Vice President - Controller 16 EX-10 2 EXHIBIT 10 LETTER OF CREDIT AGREEMENT [LOGO FIRST BANK] FIRST BANK NATIONAL ASSOCIATION International Banking Division Minneapolis Office Cable: FIRSTBANK, MPS 601 Second Avenue South TELEX: 192179 FBNA INTL MPS Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44 612 973-0736/0710 Fax: 612 973-0838 -------------------------------------------------- FOR INTERNAL IDENTIFICATION PURPOSES ONLY: APPLICANT: IN HOME HEALTH, INC. 601 CARLSON PARKWAY, SUITE 500 MINNETONKA, MINNESOTA 55305-5214 -------------------------------------------------- IRREVOCABLE LETTER OF CREDIT NO. 76471 THE TRAVELERS INDEMNITY COMPANY (BENEFICIARY) DATE: DECEMBER 16, 1996 NATIONAL ACCOUNTS COLLATERAL UNIT ONE TOWER SQUARE HARTFORD, CONNECTICUT 06183 WE HEREBY ESTABLISH THIS CLEAN IRREVOCABLE LETTER OF CREDIT IN FAVOR OF THE AFORESAID ADDRESSEE ("BENEFICIARY") FOR DRAWINGS UP TO UNITED STATES $2,900,000.00 EFFECTIVE IMMEDIATELY. THIS LETTER OF CREDIT IS ISSUED, PRESENTABLE AND PAYABLE AT OUR OFFICE AT 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 AND EXPIRES WITH OUR CLOSE OF BUSINESS ON DECEMBER 15, 1997. AFTER THE LETTER OF CREDIT HAS BEEN ISSUED, IT CANNOT BE REVOKED OR REDUCED WITHOUT THE CONSENT OF THE BENEFICIARY. THE TERM "BENEFICIARY" INCLUDES ANY SUCCESSOR BY OPERATION OF LAW OF THE NAMED BENEFICIARY INCLUDING, WITHOUT LIMITATION, ANY LIQUIDATOR, REHABILITATOR, RECEIVER OR CONSERVATOR. WE HEREBY UNDERTAKE TO PROMPTLY HONOR YOUR SIGHT DRAFT(S) DRAWN ON US, INDICATING OUR CREDIT NO. 76471, FOR ALL OR ANY PART OF THIS CREDIT IF PRESENTED AT OUR OFFICE SPECIFIED IN PARAGRAPH ONE ON OR BEFORE THE EXPIRY DATE OR ANY AUTOMATICALLY EXTENDED EXPIRY DATE. IF YOU SO CHOOSE, YOU WILL BE ABLE TO DRAW ON THIS LETTER OF CREDIT MORE THAN ONCE, SO LONG AS THE SUM OF THE AMOUNTS WHICH YOU DRAW DOES NOT EXCEED THE FULL AMOUNT OF THE LETTER OF CREDIT. THIS LETTER OF CREDIT SETS FORTH IN FULL THE TERMS OF OUR UNDERTAKING, AND SUCH UNDERTAKING SHALL NOT IN ANY WAY BE MODIFIED, AMENDED OR AMPLIFIED BY REFERENCE TO ANY NOTE, DOCUMENT, INSTRUMENT OR AGREEMENT REFERRED TO HEREIN OR IN WHICH THIS LETTER OF CREDIT RELATES AND ANY SUCH REFERENCE SHALL NOT BE DEEMED TO BE INCORPORATED HEREIN BE REFERENCE TO ANY NOTE, DOCUMENT OR AGREEMENT. THE CONTINUED ON PAGE TWO [LOGO FIRST BANK] FIRST BANK NATIONAL ASSOCIATION International Banking Division Minneapolis Office Cable: FIRSTBANK, MPS 601 Second Avenue South TELEX: 192179 FBNA INTL MPS Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44 612 973-0736/0710 Fax: 612 973-0838 THE TRAVELERS INDEMNITY COMPANY (BENEFICIARY) NATIONAL ACCOUNTS COLLATERAL UNIT ONE TOWER SQUARE HARTFORD, CONNECTICUT 06183 IRREVOCABLE LETTER OF CREDIT NO. 76471 DECEMBER 16, 1996 PAGE TWO OBLIGATION OF FIRST BANK NATIONAL ASSOCIATION, MINNEAPOLIS OFFICE UNDER THIS LETTER OF CREDIT IS THE INDIVIDUAL OBLIGATION OF FIRST BANK NATIONAL ASSOCIATION, MINNEAPOLIS OFFICE, AND IS IN NO WAY CONTINGENT UPON REIMBURSEMENT WITH RESPECT THERETO. IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT IS DEEMED TO BE AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR ONE YEAR FROM THE EXPIRY DATE HEREOF, OR ANY FUTURE EXPIRATION DATE, UNLESS 90 DAYS PRIOR TO ANY EXPIRATION DATE WE NOTIFY YOU BY REGISTERED MAIL THAT WE ELECT NOT TO CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD. IN THAT EVENT, YOU MAY DRAW HEREUNDER ON OR PRIOR TO THE THEN RELEVANT EXPIRATION DATE, UP TO THE FULL AMOUNT THEN AVAILABLE HEREUNDER, AGAINST YOUR SIGHT DRAFT(S) ON US, BEARING THE NUMBER OF THIS LETTER OF CREDIT. THIS LETTER OF CREDIT IS SUBJECT TO AND GOVERNED BY THE LAWS OF THE STATE OF CONNECTICUT AND THE 1993 REVISION OF THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS OF THE INTERNATIONAL CHAMBER OF COMMERCE (PUBLICATION NO. 500) AND, IN THE EVENT OF ANY CONFLICT, THE LAWS OF THE STATE OF CONNECTICUT WILL CONTROL. IF THIS CREDIT EXPIRES DURING AN INTERRUPTION OF BUSINESS AS DESCRIBED IN ARTICLE 17 OF SAID PUBLICATION 500, THE BANK HEREBY SPECIFICALLY AGREES TO EFFECT PAYMENT IF THIS CREDIT IS DRAWN AGAINST WITHIN 30 DAYS AFTER THE RESUMPTION OF BUSINESS. FIRST BANK NATIONAL ASSOCIATION, MINNEAPOLIS OFFICE /s/ Patricia J.D. Turner /s/ Dawn Johnston - ------------------------------- --------------------------------- PATRICIA J.D. TURNER DAWN JOHNSTON INTERNATIONAL BANK OFFICER INTERNATIONAL BANK OFFICER [LOGO FIRST BANK] FIRST BANK NATIONAL ASSOCIATION International Banking Division Minneapolis Office Cable: FIRSTBANK, MPS 601 Second Avenue South TELEX: 192179 FBNA INTL MPS Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44 612 973-0736/0710 Fax: 612 973-0838 -------------------------------------------------- FOR INTERNAL IDENTIFICATION PURPOSES ONLY: APPLICANT: IN HOME HEALTH, INC. 601 CARLSON PARKWAY, SUITE 500 MINNETONKA, MINNESOTA 55305-5214 -------------------------------------------------- LETTER OF CREDIT DECEMBER 16, 1996 IRREVOCABLE LETTER OF CREDIT NO. 76470 ROYAL INDEMNITY COMPANY (BENEFICIARY), ON BEHALF OF ITSELF AND ITS AFFILIATED COMPANIES 9300 ARROWPOINT BOULEVARD CHARLOTTE, NORTH CAROLINA 28273-8135 WE HEREBY ESTABLISH THIS IRREVOCABLE LETTER OF CREDIT IN FAVOR OF THE AFORESAID ADDRESSEE ("BENEFICIARY") FOR DRAWINGS UP TO UNITED STATES DOLLARS NINE HUNDRED FIFTEEN THOUSAND ($915,000.00) EFFECTIVE IMMEDIATELY. THIS LETTER OF CREDIT IS ISSUED, PRESENTABLE AND PAYABLE AT OUR OFFICE AT 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302 AND EXPIRES WITH OUR CLOSE OF BUSINESS ON DECEMBER 15, 1997. THE TERM "BENEFICIARY" INCLUDES ANY SUCCESSOR BY OPERATION OF LAW OF THE NAMED BENEFICIARY INCLUDING, WITHOUT LIMITATION, ANY LIQUIDATOR, REHABILITATOR, RECEIVER OR CONSERVATOR. WE HEREBY UNDERTAKE TO PROMPTLY HONOR YOUR SIGHT DRAFT(S) DRAWN ON US, INDICATING OUR CREDIT NO. 76470, FOR ALL OR ANY PART OF THIS CREDIT IF PRESENTED ACCOMPANIED BY THE ORIGINAL OF THIS LETTER OF CREDIT, AT OUR OFFICE SPECIFIED IN PARAGRAPH 1 ON OR BEFORE THE EXPIRY DATE OR ANY AUTOMATICALLY EXTENDED EXPIRY DATE. EXCEPT AS EXPRESSLY STATED HEREIN, THIS UNDERTAKING IS NOT SUBJECT TO ANY CONDITION OR QUALIFICATION. THIS OBLIGATION OF THIS BANK UNDER THIS LETTER OF CREDIT IS THE INDIVIDUAL OBLIGATION OF THIS BANK, AND IS NO WAY CONTINGENT UPON REIMBURSEMENT WITH RESPECT THERETO. IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT IS DEEMED TO BE AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR ONE YEAR FROM THE EXPIRY DATE HEREOF, OR ANY FUTURE EXPIRATION DATE, UNLESS AT LEAST THIRTY (30) DAYS PRIOR TO ANY EXPIRATION CONTINUED ON PAGE TWO [LOGO FIRST BANK] FIRST BANK NATIONAL ASSOCIATION International Banking Division Minneapolis Office Cable: FIRSTBANK, MPS 601 Second Avenue South TELEX: 192179 FBNA INTL MPS Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44 612 973-0736/0710 Fax: 612 973-0838 ROYAL INDEMNITY COMPANY (BENEFICIARY), ON BEHALF OF ITSELF AND ITS AFFILIATED COMPANIES 9300 ARROWPOINT BOULEVARD CHARLOTTE, NORTH CAROLINA 28273-8135 IRREVOCABLE LETTER OF CREDIT NO. 76470 DECEMBER 16, 1996 PAGE TWO DATE WE NOTIFY YOU BY REGISTERED MAIL OR COURIER SERVICE THAT WE ELECT NOT TO CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD. THIS LETTER OF CREDIT IS SUBJECT TO AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND 1993 REVISION OF THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS OF THE INTERNATIONAL CHAMBER OF COMMERCE (PUBLICATION NO. 500) AND, IN THE EVENT OF ANY CONFLICT, THE LAWS OF THE STATE OF NEW YORK WILL CONTROL. IF THIS CREDIT EXPIRES DURING AN INTERRUPTION OF BUSINESS AS DESCRIBED IN ARTICLE 17 OF SAID PUBLICATION 500, THIS BANK HEREBY SPECIFICALLY AGREES TO EFFECT PAYMENT IF THIS CREDIT IS DRAWN AGAINST WITHIN 30 DAYS AFTER THE RESUMPTION OF BUSINESS. FIRST BANK NATIONAL ASSOCIATION, MINNEAPOLIS OFFICE /s/ Patricia J.D. Turner /s/ Dawn Johnston - --------------------------------- ----------------------------------- PATRICIA J.D. TURNER DAWN JOHNSTON INTERNATIONAL BANK OFFICER INTERNATIONAL BANK OFFICER EX-11 3 EXHIBIT 11 EXHIBIT (11) IN HOME HEALTH, INC. COMPUTATION OF PER SHARE EARNINGS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 ------ ------ PRIMARY: Net Income $ 14 $ 98 Preferred stock accretion (74) (48) Dividends on preferred stock (600) (454) ------- ------- Loss applicable to common stock $ (660) $ (404) ------- ------- ------- ------- Shares: Weighted average number of shares outstanding during the period 16,379 16,286 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 37 187 ------- ------- Total Shares 16,416 16,473 ------- ------- ------- ------- Loss per Common and Common Equivalent Share $ (.04) $ (.02) ------- ------- ------- ------- ASSUMING FULL DILUTION: Net Income $ 14 $ 98 Preferred stock accretion (74) (48) Dividends on preferred stock (600) (454) ------- ------- Loss applicable to common stock $ (660) $ (404) ------- ------- ------- ------- Shares: Weighted average number of shares outstanding during the period 16,379 16,286 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 37 187 ------- ------- Total Shares 16,416 16,473 ------- ------- ------- ------- Loss per Common and Common Equivalent Share $ (.04) $ (.02) ------- ------- ------- ------- EX-27 4 EXHIBIT 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. 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 10,393 0 45,024 814 0 37,214 19,323 10,009 76,540 28,549 0 0 18,840 163 25,430 76,540 0 31,585 0 17,181 14,508 0 (134) 30 16 14 0 0 0 14 (.04) 0
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