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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: May 31, 1997
Commission File No. 0-22155
IN-HOUSE REHAB CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0987697
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
325 West Main Street, Suite 1400B, Louisville, Kentucky 40202
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (502) 568-8923
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
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 October 21, 1997, 13,344,215 Shares of the Registrant's No Par Value
Common Stock were outstanding. The aggregate market value of voting stock
held by nonaffiliates of the Registrant on that date was approximately
$7,267,000.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year: $15,637,853.
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
In-House Rehab Corporation (the "Company") was formed under the laws of
the State of Colorado in May 1985 under the name of "Perennial Development
Corporation" for the purpose of engaging in real estate activities. In April
1987, the Company completed an initial public offering of its securities, and
became listed on Nasdaq.
The Company engaged in commercial land development operations. However,
due principally to escalating adverse economic conditions in the real estate
markets in which the Company was engaged, management eventually abandoned the
development of all of its projects. A combination of high leverage and severe
liquidity problems forced management to dispose of the properties during the
period from June 1989 to May 1994. A land development project in Somerton,
Arizona resulted in the filing of a bankruptcy petition on behalf of a
subsidiary which was settled during the year ended May 31, 1995.
On September 29, 1995, the Company acquired all of the outstanding stock
of In-House Rehab, Inc. ("IHR"), a Kentucky corporation, in exchange for
10,460,000 shares of the Company's authorized but unissued Common Stock. Such
shares were issued to the former shareholders of IHR and represent 85% of the
Company's Common Stock outstanding. As a result of this transaction, there
was a change in control of the Company. All of the Company's officers and
directors resigned, and new officers and directors selected by IHR were
elected.
IHR was formed in September 1994, and is engaged in providing, on a
contract basis, physical, speech and occupational therapy personnel to long-
term care providers.
Effective March 1, 1996, the Company acquired certain assets and
liabilities of Total Rehab South, Inc. ("TRS"), a Tampa, Florida based
provider of rehabilitation, speech and occupational therapists to nursing
homes and long-term care facilities in Florida and Georgia. Included in the
assets acquired by the Company were $900,000 in accounts receivable and the
rights of TRS under contracts it held to provide therapists to 28 facilities.
The Company also assumed up to $75,000 of liabilities of TRS. The total
price paid by the Company under the asset purchase agreement was $1,010,601
including a non-competition agreement in the amount of $185,601. In
connection with this acquisition, the therapists employed by TRS became
employees of the Company. TRS was merged into IHR on May 31, 1996.
Effective September 1, 1996, the Company acquired all of the stock of
Regal Health Care, Inc. ("RHC") for $1.00. RHC is a Clearwater, Florida based
provider of psyche/social services to nursing homes and long-term care
facilities in North Carolina. Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000. This
acquisition allowed the Company to add psych/social services to the
rehabilitation services it currently offers. Effective September 10, 1997,
RHC changed its name to In-House Medical Resources, Inc.
In November 1996, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to change the name of the Company to
"In-House Rehab Corporation," and this became effective on December 9, 1996.
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Effective December 1, 1996, the Company acquired all of the stock of RT
Group Inc. ("RTG"), in exchange for $150,000 in cash. RTG is a Indianapolis,
Indiana based provider of respiratory care to nursing homes and long-term care
facilities in Indiana. Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000. The
Company now offers respiratory therapy services along with rehabilitation and
psych/social services in facilities under contract.
Effective December 1, 1996, the Company acquired all of the stock of
Daily Rehabilitation Institute, Inc. ("DRI") in exchange for $1.00 and an
option to purchase 30,000 shares of the Company's Common Stock at $2.25 per
share. DRI is a Jacksonville, Florida based provider of outpatient rehab
services in a clinic setting. Upon acquisition, DRI had assets totaling
approximately $116,000 and liabilities totaling approximately $124,000. The
clinic is a Medicare certified facility that the Company now markets in the
Florida based assisted living community.
Effective January 1, 1997, the Company acquired nine contracts to
provide therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. ("TSI") in exchange for $100,000 in cash which included $10,000
for a noncompete agreement. TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.
In July 1997, the Company entered into an agreement with an unrelated
company whereby the Company would provide operational support while the
partner company would provide the marketing support to sell the services
offered by the Company. This new company is a limited liability company,
Rehab Partners, L.L.C. (RPI). The Company currently has an 80% interest in
RPI.
All references to the "Company" herein refers to the Company and its
subsidiaries, unless the context otherwise requires.
In April 1997, the Company announced that it had entered into a letter
agreement concerning the proposed acquisition of Quality Care and Rehab, Inc.
("QCR"), a privately-held provider of therapy services serving Louisiana,
Mississippi and Arkansas. In August 1997, after conducting its due diligence
review, the Company announced that it had terminated its negotiations and
that the acquisition of QCR would not occur.
In August 1997, the Company entered into a letter of intent to acquire
Gateway Rehab, Inc., which provides therapy services in Illinois and Indiana.
The Company is presently conducting a due diligence review of Gateway Rehab,
Inc. This proposed acquisition is contingent on the completion of this review
and the negotiation of a definitive agreement. Under the terms of the letter
of intent, the acquisition would be accomplished through a stock for stock
exchange.
On September 30, 1997, the Company acquired the assets of Rehab &
Therapy Center of Naples, Inc.("RTCN"), an operator of a comprehensive
outpatient rehabilitation facility in southern Florida. This acquisition was
made in exchange for $20,000 in cash and 2,857 shares of the Company's Common
Stock.
CONTRACT THERAPY SERVICES
The Company primarily provides rehabilitation therapists to nursing
facilities on a contract basis. These include physical therapists,
occupational therapists, speech-language pathologists, respiratory therapists
and psych/social services counseling, working together to improve the ability
of patients to perform the activities of daily living. Physical therapy
effects muscular and
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neural responses in an effort to improve patients' physical strength and range
of motion. Occupational therapy is the evaluation and treatment of physical,
cognitive and psychosocial performance deficits in activities of daily living.
Speech-language pathology is the diagnosis and treatment of speech, language,
voice and swallowing disorders. Respiratory therapy is the evaluation and
treatment of breathing disorders. Psych/social services is the evaluation and
psychological counseling of patients suffering from severe depression.
The long-term care industry has typically contracted for therapy
services for the following reasons:
INSUFFICIENT CASELOAD. The average nursing facility of
approximately 100 beds has insufficient and/or irregular caseloads, which
makes it uneconomical to operate its own therapy program with the full-time
employment of therapists and the associated costs of administration.
SUPPLY OF THERAPISTS. There is an inadequate supply of therapists
and the work force is characterized by high turnover. Consistent staffing
levels are difficult to maintain, which jeopardizes service levels and
quality.
EXPERTISE. Therapy revenues represent a relatively small
percentage of a nursing facility's total revenues and operating activities.
Reimbursement and regulatory complexities concerning appropriate utilization,
documentation, denials management and quality oversight, if inadequately
administered, can seriously erode the profitability of therapy programs
staffed by and managed by employees of the nursing facility. As a result,
nursing facilities frequently choose to contract for specialized expertise.
In the current unsettled environment, the Company believes that it is
well-positioned to compete effectively with other contractors due to: (i) a
multi-disciplinary team approach to therapy that is designed to deliver a high
level of quality, (ii) reimbursement and regulatory expertise to assist
nursing facility operators in their dealings with third-party payors,
principally Medicare, and (iii) sophisticated management information systems
to assist operators in analyzing clinical outcomes, therapy utilization, claim
denials, staffing and marketing and educational activities.
The supply of therapists is growing at a rate of less than 5% per year,
yet the demand for therapists is growing at 8% to 10% per year. The Bureau of
Labor Statistics estimates that the shortage of therapists will continue into
the first decade of the next century. The principal limitations on the supply
of therapists are the lack of funding to increase the number and size of
educational programs and increasingly stringent accreditation requirements.
To address these issues, the Company has developed the following programs:
1. UNIVERSITY RECRUITMENT PROGRAM. Utilizing a director of university
and client relations, the Company has developed a comprehensive program to
establish relationships with the pool of therapists coming into the
marketplace. The strategy includes two levels of involvement depending upon
the target university:
LEVEL ONE - The Company is in contact with over 100 schools around
the country where students are provided with Company and industry specific
promotional materials.
LEVEL TWO - The Company coordinates on-site visits to 30 to 50
schools per year and conducts job fairs, receptions and other activities to
establish a presence and build relationships.
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2. DIVERSIFIED CAREER PATHS. Access to long-term care, acute care
hospitals, free-standing clinics, and other work settings, provides the
Company with the ability to offer a therapist exposure and experience in
various clinical settings.
3. ON-SITE MANAGEMENT SUPPORT. The Company is committed to on-site
management in every facility, clinic or other work setting regardless of size.
Management believes this feature differentiates the Company from the
competition in its ability to attract new business and retain therapists.
The deficiency in the ratio of therapists supply and demand will
continue to require the utmost attention from the Company's management.
Employee turnover in the rehabilitation industry is high relative to
other industries because of the supply/demand imbalance. Also affecting
turnover is the aggressive recruiting that occurs within the industry and the
demographics of the largely young, female and mobile therapist population.
Furthermore, therapist turnover rates in nursing facilities are traditionally
higher than in other therapy settings due to the increased difficulties in
treating geriatric patients.
SERVICE AGREEMENTS
The Company enters into Contracts for Therapy Program Services with
operators of long-term care facilities which provide that the Company will
provide rehabilitation services to the facilities' patients based upon medical
necessity, professional recruiting, rehabilitation management, and support to
the facilities for obtaining reimbursement from third-party payors. The
Company's services include:
(1) Recruiting physical therapists, speech therapists, occupational
therapists, rehabilitation case managers, and other personnel as agreed upon,
to provide services at the nursing home to be employed either by the Company,
or, in some instances, by the nursing home;
(2) Providing a program enhancement specialist in long-term care and
rehabilitation to support, council, advise and assist in directing the
development of the rehabilitation activity within the facility;
(3) Providing a reimbursement specialist to assist with
recommendations on financial matters to the facility's administration;
(4) Procuring equipment as needed for the facility to assure that
rehabilitation activities function at a level commensurate with patient
requirements;
(5) Reviewing compliance with all state and federal guidelines
relative to therapist credentials; and
(6) Providing manuals and other educational materials to enhance the
overall capabilities of the rehabilitation departments of the facility.
In exchange for the services provided, the Company receives a monthly
management fee, which may be adjusted if the quantity of equipment, therapists
or other services subsequently change; a one-time set up fee; and a monthly
fee based on the number of treatment units of service provided by employees of
the Company.
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The Contract terms for Therapy Program Services vary from one to five
years. However, the contracts may be terminated upon either thirty or sixty
days notice, depending upon the specific contract in question.
COMPETITION
The health care industry in general, and rehabilitation in particular,
is highly competitive and subject to continual changes in methods of service
delivery and provider selection. Rehabilitation is largely a local market
business and competition varies considerably among markets. The primary
competitive factors in such local markets are quality of patient care
services, charges for services and responsiveness to meeting the needs of
patients, customer health care facilities, referral sources and payors.
Key competitive factors in the contract therapy services business
include the ability to provide therapy staff to meet the therapy needs at
customer facilities and the ability to provide management and clinical support
to such staff. The Company will compete in local markets with other national
and regional and local contract therapy providers. The demographics of
potential customers are expected to change as some larger nursing home chains
attempt to take their services in-house. This may increase the competition
for remaining customers. Although the Company intends to expand its customer
contracts in the nursing home industry, the successful development of such
in-house programs by a large number of customers could adversely affect the
Company's ability to do so.
The Company believes that its ability to compete is enhanced by the
relationships management has established within the long-term care industry.
The Company's services are also unique in that the facility administrator has
the option to have the Company manage the rehabilitation department totally,
or to utilize the Company as a traditional provider in selected disciplines.
The flexibility of service approach is different from the larger competitors
which typically offer only contract therapy. The Company also provides a
rehabilitation director to oversee treatment in each facility. This feature
should appeal to smaller nursing home chains. The Company is also involved in
the development of sub-acute care units. This particular aspect of service
appeals to mid-size chains that cannot afford to hire management personnel
with this highly specialized expertise.
At May 31, 1997, the Company had Contracts for Therapy Program Services
with 71 facilities in the southeastern United States; 36 of these facilities
are either owned, operated or managed by Retirement Care Associates,
Inc.("Retirement Care"), a principal shareholder of the Company. During the
year ended May 31, 1997, contracts with Retirement Care facilities represented
approximately $8,900,000 in revenue to the Company. The Company intends to
increase the number of contracts it has with long-term care facilities
operated by entities other than Retirement Care. However, the Company is
currently highly dependent on its contracts with Retirement Care. If, for any
reason, Retirement Care were to cancel some or all of these contracts (which
could occur on as little as 60-days' notice), there could be a significantly
unfavorable effect on the Company's cash flow from operations.
In February 1997, Retirement Care announced that it had entered into a
merger agreement with Sun Healthcare Group, Inc. ("Sun Healthcare") pursuant
to which Retirement Care would be merged into a subsidiary of Sun Healthcare.
Sun Healthcare currently has a subsidiary which provides rehabilitation
services. The Company is currently working with Sun Healthcare on a
transition schedule for the transition of the Retirement Care facilities that
are serviced by the Company to Sun Healthcare. The transition period is
tentatively scheduled to begin
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approximately thirty (30) days after the issuance of the proxy relating to the
Retirement Care/Sun Healthcare Merger and will conclude approximately ninety
(90) days thereafter.
REIMBURSEMENT/GOVERNMENT PROGRAMS
Reimbursement for medical rehabilitation services is available through
Medicare, Medicaid, commercial insurance, managed care programs, veterans
benefits, workers' compensation and other government programs. Medicare is a
federally funded health program which provides health insurance coverage for
certain disabled persons and persons age 65 or older. Medicaid is a health
insurance program, jointly funded by the federal and state governments, which
provides health insurance coverage for certain financially or medically needy
persons regardless of age. Medicaid benefits supplement Medicare benefits for
financially needy persons age 65 or older. Congress has provided, through the
Medicare program, for coverage of contract therapy services. A substantial
portion of the Company's business, in effect, is reimbursed by Medicare, and a
small portion by Medicaid. As a result, regulations regarding Medicare and
Medicaid eligibility, certification and reimbursement are important to the
Company's activities and changes in these programs or regulations could
adversely affect the Company's business.
The Congress has passed, and the President has signed health care reform
in the Balanced Budget Act of 1997. This legislation is intended to slow the
annual rate of growth of Medicare and Medicaid expenditures. The legislation
includes a prospective payment system for all Medicare services provided in a
skilled nursing facility, including medical rehabilitation services. The
skilled nursing facility will receive a fixed reimbursement rate per patient
day, based upon a patient acuity rating system, which includes an added-on
amount for rehab services. Although the regulations implementing this change
are not yet finalized, the effective date of prospective payment for skilled
nursing facilities is on or after July 1, 1998. The new legislation also
provides for a $1,500 cap on outpatient therapy charges. These changes will
not impact the Company's current fiscal year. However, they will impact
reimbursement for future rehabilitation services.
Currently, Medicare reimburses the skilled nursing facility for contract
therapy services on a cost basis, and reimbursement levels are determined
based on a reasonable-cost standard. Specific guidelines exist for evaluating
the reasonable cost of physical therapy and respiratory therapy. General
guidelines exist for evaluating the reasonable cost of occupational therapy,
speech-language pathology services and psych/social services. When a nursing
facility contracts with a third party, such as the Company, for physical
therapy or respiratory therapy services, a standard rate system applies. This
system is called salary-equivalency. The physical and respiratory therapy
salary-equivalency rates have been adjusted annually based on a 1983 standard,
but do not adequately reflect salary inflation since 1983. As a result,
physical therapy contract services are essentially a break-even business for
many contractors.
The Health Care Financing Administration ("HCFA"), the federal agency
responsible for the rules governing Medicare and Medicaid, has issued specific
reimbursement guidelines for physical therapy, occupational therapy and
speech-language pathology services. The guidelines have been circulated for
public comment, but no effective date has yet been established.
Until such time as salary-equivalency guidelines are formally
promulgated, contract occupational therapy and speech-language pathology
services are evaluated based upon the reasonableness of costs incurred by the
provider under a "prudent buyer" standard. During the past two years, HCFA
has issued several
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directives to its fiscal intermediaries instructing them on how to ensure
therapy costs are reasonable. One such advisory issued in April 1995 was
controversial as it included a series of data tables with incomplete
instructions. Responding to concerns raised by the nursing home and
rehabilitation sectors, HCFA clarified its guidance in a June 1995 directive
reiterating that fiscal intermediaries must apply the "prudent buyer"
principle when evaluating whether a facility's costs are substantially
out-of-line. Intermediaries are instructed to consider relevant facts and
circumstances concerning a facility's contracting costs. The attention being
given by HCFA to these instructions has increased scrutiny of contracting
practices.
GOVERNMENT REGULATION
The health care industry, including rehabilitation services, is subject
to extensive federal, state and local regulation. The various layers of
regulation affect the Company's business by requiring licensure or
certification of its employees and controlling reimbursements for services
provided. Government and other third-party payors' health care policies and
programs have been subject to changes in payment and methodologies for a
number of years.
Various state and federal laws and regulations govern relationships
between providers of health care services and physicians, including employment
or service contracts and investment relationships. These laws and regulations
include the fraud and abuse provisions of the Medicare and Medicaid statutes,
which prohibit the payment, receipt or offering of any direct or indirect
remuneration for the referral or inducement of a referral of Medicare or
Medicaid patients or for the ordering or providing of Medicare or Medicaid
covered services, items or equipment and the self-referral provisions of
federal and state law which generally prohibit referrals by a physician to
persons with whom the physician has certain types of financial relationships.
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicare
and Medicaid programs. Management believes it is in compliance with these
laws and regulations and has established a broad-based compliance program to
ensure conformity to these rules as well as to other laws and regulations.
INSURANCE
Companies which provide rehabilitation therapy services are subject to
personal injury and other liability claims which are normally covered by
insurance. The Company maintains liability insurance coverage in amounts
deemed appropriate based on the nature and risks of the business. There can
be no assurance that a future claim will not exceed insurance coverage or that
such coverage will continue to be available. In addition, continued
substantial increases in the cost of such insurance could have an adverse
effect on the Company's business.
EMPLOYEES
As of October 1, 1997, the Company had approximately 363 employees of
which 174 are full-time. The Company's employees are not represented by any
labor union. Management believes that its relationship with its employees are
favorable.
ITEM 2. DESCRIPTION OF PROPERTY.
Effective February 1, 1997, the Company entered into a new five year
lease for approximately 7,400 square feet of office space at Waterfront Plaza,
325 West
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Main Street, Louisville, Kentucky 40202. The base rent is $7,068 per month
and is fixed for the five year period.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are not currently parties to any
litigation that management believes would have a material adverse effect on
the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the fourth quarter of the period covered by this Report.
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The principal market for trading the Company's Common Stock has been the
over-the-counter market. Since December 1995, prices for the Company's Common
Stock have been quoted on the OTC Bulletin Board. The trading symbol is
currently "IHRB."
The range of high and low bid quotations for the Company's Common Stock
provided below were obtained from the OTC Bulletin Board and the National
Quotation Bureau. The stock is principally owned or controlled by officers
and directors, and the bid prices reported may not be indicative of the value
of the Common Stock. The volume of trading in the Company's Common Stock has
been very limited. The existence of an active trading market may not exist at
any given time and shareholders may have difficulty selling their shares.
These over-the-counter market quotations reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent
actual transactions.
BID
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YEAR ENDED MAY 31, 1997 HIGH LOW
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First Quarter $2.25 $1.75
Second Quarter $2.25 $2.25
Third Quarter $2.25 $2.00
Fourth Quarter $4.25 $2.00
YEAR ENDED MAY 31, 1996
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Third Quarter $1.25 $0.50
Fourth Quarter $1.75 $1.00
As of October 17, 1997, there were approximately 333 record holders of
the Company's Common Stock. Based on securities position listings, the
Company believes that there are more than 500 beneficial owners of the
Company's Common Stock.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of the Company. Payment of cash dividends in the future will
depend, among other things, upon the Company's future earnings, requirements
for capital improvements and financial condition.
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During the period from March 1996 through August 1996, the Company sold
units consisting of shares of its Common Stock to 34 accredited investors in
a private offering. A total of 1,300,000 shares of Common Stock were sold in
this offering for an aggregate of $1,625,000 in cash. In addition, the
Company issued warrants to purchase an aggregate of 520,000 shares of Common
Stock at $2.50 per share to three investors who invested at least $200,000 in
the offering. The Company paid the following commissions for its services as
a sales agent in this offering:
Marion Bass Securities Corp. $ 20,000
Stockbridge Associates, Inc. 16,000
Lawson Financial Corporation 8,000
La Jolla Securities Corp. 65,000
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$108,000
In addition, the Company issued options to purchase shares of the
Company's Common Stock at $1.25 per share to Terry Lewis (to purchase 14,000
shares) and to La Jolla Securities, Inc. (to purchase 6,000 shares) as
compensation for their services in connection with this private offering.
With respect to these sales, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder. Each investor was given a copy of a Private Placement Memorandum
containing complete information concerning the Company, a Form D was filed
with the SEC and the Company complied with the other applicable requirements
of Rule 506. Each investor signed a subscription agreement in which he
represented that he was purchasing the shares for investment only and not for
the purpose of resale or distribution. The appropriate restrictive legends
were placed on the certificates and stop transfer instructions were issued to
the transfer agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
This Report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements.
OVERALL SUMMARY
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
The Company generated $15,638,000 in gross revenue for the fiscal year
ended May 31, 1997 compared with $6,623,000 in the prior year. The increase
is due to both the addition of new service contracts and acquisitions made
during the year. A very small portion of the change resulted from rate
adjustments.
Operating expenses as a percentage of revenue for the year ended May 31,
1997 were 72.4%. This compares with 71.6% in the prior year. The increase is
attributed to the addition of clinical specialists hired to improve the
quality of service and the amortization of goodwill associated with the
acquisition of Total Rehab South.
Selling, general and administrative expenses for the year ended May 31,
1997 were 14.9% of revenue compared to 17.8% in the prior year. The
improvement resulted from increasing revenue at a faster rate than the
associated overhead.
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Interest expense for the year ended May 31, 1997 was $159,000 versus
$66,000 in the prior year. The increase resulted from expanding the credit
line in order to finance the Company's increase in accounts receivable
reflecting the Company's growth.
The income tax provisions for the year ended May 31, 1997 and 1996 were
39.8% and 38.2%, respectively.
The factors discussed above have resulted in earnings of $1,100,000 for
the year ended May 31, 1997 compared with $394,000 in the prior year.
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO PERIOD FROM SEPTEMBER 21, 1994
(INCEPTION) TO MAY 31, 1995
During the fiscal year ended May 31, 1996, the Company had revenues of
approximately $6,623,000 as compared to $335,000 during the period ended May
31, 1995. The substantial increase reflects the fact that prior to May 31,
1995, the Company was in a start-up phase and had only limited operations.
Operating expenses as a percentage of revenues during the year ended May
31, 1996 were approximately 71.6% as compared to approximately 95.8% during
the prior period. The reduction in the percentage reflects the fact that the
Company was in a start-up phase in the prior period and was not able to
achieve normal operations until the year ended May 31, 1996.
Selling, general and administrative expenses as a percentage of revenues
during the year ended May 31, 1996, were approximately 17.8% as compared to
approximately 30.4% during the prior period. The reduced percentage reflects
the Company's start-up of operations in the prior period.
Interest expense during the year ended May 31, 1996 was approximately
$66,000. The Company had no interest expense in the prior period. The
interest expense is a result of borrowings under a line of credit which the
Company obtained in June 1995.
As a result of the factors described above, the Company had a net income
of approximately $394,000 during the year ended May 31, 1996, as compared to a
loss of $92,000 during the prior period.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1997, the Company had working capital of approximately
$2,555,000 as compared to working capital of approximately $1,712,000 at
May 31, 1996. The increase was primarily due to an increase in trade
receivables which were the result of an increase in the number of contracts
being serviced. As of May 31, 1997, the Company had 82 contracts to provide
rehabilitation, respiratory and/or psych/social services compared with 66
contracts on May 31, 1996.
Net cash used in operating activities totaled approximately $2,480,000
for the year ended May 31, 1997. This compares with $1,262,000 for the prior
year. The increase was primarily due to an increase in accounts receivable
caused by higher service revenue. The change was partially offset by an
increase in net income.
The Company used approximately $437,000 toward investing activities
during the year ended May 31, 1997, compared with $573,000 in the prior year.
The increase resulted from the addition of equipment and two minor
acquisitions: RT Group, Inc. (a respiratory therapy company) and the purchase
of nine Arkansas
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facility contracts. Other than the potential acquisition of new companies,
the Company does not anticipate any other significant investing activities.
Net cash provided by financing activities for the year ended May 31,
1997 was approximately $2,917,000 compared with $1,732,000 for the prior year.
The increase was almost entirely due to the use of short-term borrowing under
the Company's credit line. The need for financing is a normal result of the
Company's growth, and the Company's management expects it to continue.
At May 31, 1996 the Company had working capital of approximately
$1,712,000 as compared to approximately $239,000 at May 31, 1995. The
increase was a result of the sale of common stock during the year ended May
31, 1996 as well as the net income for the year.
Net cash used in operating activities totaled approximately $1,262,000
for the year ended May 31, 1996 as compared to approximately $222,000 used in
operation activities during the period from September 21, 1994 (inception) to
May 31, 1995. The increased use of cash was primarily due to an increase in
accounts receivable as a result of increased operations.
The Company used approximately $573,000 in investing activities during
the year ended May 31, 1996 as compared to approximately $15,000 used in
investing activities during the prior period. The increase was a result of
the purchase of equipment and the purchase of Total Rehab South, Inc.
During the year ended May 31, 1996, the Company had cash flows from
financing activities of approximately $1,732,000 as compared to $340,000
provided from financing activities during the prior period. The increase was
primarily due to a private offering of common stock which provided net
proceeds of approximately $1,292,000.
As of May 31, 1997, the Company had a $4.5 million line of credit under
which $3,525,000 had been borrowed. The amount available under the borrowing
base formula at May 31, 1997 was $361,000. This line of credit together with
cash flows from operations are sufficient to meet the Company's current cash
requirements. Business expansion may create a need for additional funding
which the Company could attempt to raise through additional borrowing and/or
an offering of debt securities.
The Company has been increasing the number of contracts it has with
long-term care facilities operated by entities other than Retirement Care.
However, Retirement Care continues to be a major customer of the Company. A
delay in regular periodic payments of accounts receivable from Retirement Care
due to the Sun Healthcare/Retirement Care Merger not being consummated, or for
any other reason, could have a significantly unfavorable effect on the
Company's cash flow from operations.
Retirement Care has issued its financial statements for the year ended
June 30, 1997 which includes an unqualified opinion from its auditors. In the
footnotes to the aforementioned financial statements, it states that
Retirement Care "has experienced a significant net operating loss and at the
same time a decline in liquidity, resulting from the operating loss and a
heightened level of investment in new facilities." It also states that
"closing of the Merger of the Company with Sun Healthcare... will provide
access to additional sources of liquidity..." and outlines Retirement Care
management's plan if the Sun Healthcare Merger does not take place. In
Retirement Care's June 30, 1997 Form 10-K, it states that Retirement Care and
Sun Healthcare "have filed with the
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Securities and Exchange Commission, on a confidential basis, a preliminary
proxy statement with respect to the Merger..." and it is "anticipated to occur
in the fourth quarter of calendar year 1997." For further information, see
Retirement Care's Form 10-K and other SEC filings.
NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation," which encourages, but does not require, companies to
measure the compensation cost of stock-based compensation plans at the grant
date based on the fair value of the stock-based award. Companies may continue
accounting for stock-based compensation under APB Opinion 25, "Accounting for
Stock Issued to
Employees," provided the Company discloses the pro forma effects on net income
and earnings per share had the new accounting requirements been applied. This
statement is effective for the Company's fiscal year ending May 31, 1997
annual financial statements. The Company intends to continue accounting for
stock-based compensation awards under the provisions of APB 25.
The Company will adopt Statement of Financial Accounting Standards No.
128 "Earnings Per Share" for the year ended May 31, 1998 including interim
periods. This accounting pronouncement requires the disclosure of basic and
diluted earnings per share. The Company believes that, upon adoption, diluted
earnings per share will approximate earnings per share as previously reported.
Because the concept of basic earnings per share does not include the impact of
common stock equivalents, such as stock options, basic earnings per share will
be higher than diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The provisions of SFAS No. 130 will
be effective for fiscal years beginning after December 15, 1997, and will not
have a material impact on the Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS.
See the consolidated financial statements and the notes thereto
beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On October 1, 1997, Coopers & Lybrand L.L.P. ("C&L"), which served as
the Company's independent accountants for the fiscal years ended May 31, 1995
and 1996, and had been retained for the Company's fiscal year ended May 31,
1997, resigned as the Company's independent accountants. The reports of C&L
on the Company's financial statements for the fiscal years ended May 31, 1995
and 1996 did not contain an adverse opinion or disclaimer of an opinion nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles or practices. The Company filed a report on Form 8-K dated October
1, 1997 reporting the resignation of C&L.
The Company is not aware of any "disagreement" or "reportable event"
within the meaning of Item 304 of Regulation S-B, with C&L during the fiscal
years ended May 31, 1995 and 1996, and from that date to the date of C&L's
resignation on October 1, 1997, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
except as described below.
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<PAGE>
In its audit of the Company's financial statements for the year ended
May 31, 1997, C&L had completed most of its audit procedures by the end of
July 1997 and had not raised any significant concerns about the Company's
financial statements, other than the following. On Friday, August 1, 1997,
prior to the Company's scheduled fourth quarter earnings release on Monday,
August 4, 1997, C&L advised the Company that it had concerns about the
collectability of certain accounts receivable from Retirement Care, a major
customer of the Company and a 27.4% shareholder of the Company's outstanding
Common Stock. Retirement Care had historically been a slow paying customer,
but even at this time continues to make payments on the balances due to the
Company for services rendered.
C&L also served as the independent accountants for Retirement Care until
August 14, 1997, when C&L resigned as the independent accountants of
Retirement Care. In a letter filed with the Securities and Exchange
Commission concerning its resignation, C&L stated that it was unable to rely
on representations of Retirement Care's management, and did not intend to be
associated with any filings which may be made by Retirement Care with the
Securities and Exchange Commission.
During August and September 1997, the Company, Retirement Care and Chris
Brogdon, the President of Retirement Care and a Director of the Company, made
proposals to C&L to alleviate its concerns. Such proposals included
Retirement Care paying down the balance of the accounts receivable and
providing collateral which the Company's management believed would more than
adequately secure the payment of the remaining accounts receivable of
Retirement Care. However, C&L took the position that the collateral was
insufficient. C&L noted that even if such proposals were adopted that it
would still render an opinion with a "going concern" qualification based on
what C&L believed was the uncollectability of the Retirement Care accounts
receivables. The Company's management offered another proposal to provide a
letter of credit from an unaffiliated third party which would more than
adequately secure the Retirement Care accounts receivable, but C&L would not
provide a written commitment to the Company that this would be sufficient
collateral.
The Company's management believed that C&L's position with respect to
the Retirement Care accounts receivable was unreasonable and appeared to be a
result of C&L's adverse relationship with Retirement Care. Based on this
concern, the Company asked C&L to evaluate C&L's relationship with the Company
under applicable independence and conflicts of interest rules. In response,
C&L denied that any conflicts of interest or independence rules had been
violated, but stated that it was no longer appropriate for it to serve as the
Company's independent accountants because of a deterioration of the client-
auditor relationship.
The Company's management has fully advised the Audit Committee of the
Board of Directors of all of the above matters, and certain members of the
Board of Directors and the Audit Committee of the Board of Directors discussed
the above matters with C&L. However, neither the full Board of Directors nor
the full Audit Committee have discussed these matters with C&L.
The Company provided a copy of its Report on Form 8-K to C&L and
requested that C&L provide the Company with a letter addressed to the
Commission, as required by Item 304(a)(3) of Regulation S-B.
On October 14, 1997, C&L provided the Company with its response to the
Form 8-K (the "Response Letter"), wherein it disagreed with certain statements
made by the Company therein. The Company's management continues to stand by
the statements it made in the Form 8-K. The Company did not want a change in
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accountants during an audit and continued to work with C&L to satisfy them
with respect to the collectability of the Retirement Care receivables during
August and September, until C&L's resignation on October 1, 1997.
The Company has authorized C&L to respond fully to the inquiries of the
Company's successor independent accountants.
On October 10, 1997, the Company engaged the firm of Strothman & Company
PSC ("Strothman") as its independent accountants for its fiscal year ended May
31, 1997, and to reaudit its financial statements for the year ended May 31,
1996.
Neither the Company nor any person acting on its behalf consulted with
Strothman with regard to the application of accounting principles to a
specific completed or contemplated transaction, or the type of audit opinion
that might be rendered on the Company's financial statements.
Certain members of the Company's management contacted Strothman prior to
their being engaged as the new auditors for the Company. The Company's
management sought advice from Strothman to address the implications that the
Company was facing given that C&L had advised the Company that it may want to
consider dismissing them as the Company's auditors prior to the audit being
completed.
During the conversation between the Company's management and Strothman,
Strothman inquired as to why C&L would make such a suggestion. The Company's
management advised Strothman that it was management's opinion that it related
to the receivable due from Retirement Care. Strothman advised the Company to
continue to work with C&L to gain resolution to the Retirement Care receivable
issue and to finalize the audit. The Company continued to work with C&L
through August and September of 1997 until C&L's resignation on October 1,
1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and Officers of the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
---- --- --------------------------
David V. Hall 54 President and a Director
Robert J. Babine 53 Chief Financial Officer, Treasurer
and a Director
Chris Brogdon 47 Director
Mark P. Clein 38 Director
Timothy M. Graven 46 Director
Rebecca H. Krueger 41 Chief Operations Officer
Michael J. Kitchen 31 Vice President, Secretary and
General Counsel
Nicole D. Perry 33 Vice President of Finance
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There is no family relationship between any Director or Executive
Officer of the Company.
Effective in August 1997, the Company established a compensation
committee and an audit committee. The members of both of these committees are
Mark P. Clein and Timothy M. Graven. The Company has no nominating
committee.
Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
DAVID V. HALL - PRESIDENT AND DIRECTOR. Mr. Hall has been President and
Director of the Company since September 1995, and has held these same
positions with In-House Rehab, Inc. ("IHR"), the Company's wholly-owned
subsidiary, since September 1994. From 1986 to 1993, he was President of The
Cardinal Group, a nursing home operator which he founded, which grew to 26
nursing homes. Mr. Hall sold this company in 1993, and he was actively
involved in winding up this sale until the Summer of 1994. During this period
of time and until September 1994, he also worked on plans for starting In-
House Rehab, Inc. Since 1994, Mr. Hall has also served as Chairman of the
Board of Hallmark Communications, a company engaged in selling long distance
telephone service, primarily to businesses. From 1980 to 1985, he was
President, founder and sole owner of Cardinal Medical Corporation which
operated six full service nursing homes in Kentucky, which were sold to
Hillhaven Corp. in 1985 due to a change in Kentucky's Medicaid reimbursement
regulations. From 1977 to 1980, he was President, founder and sole owner of
Clinical Management Associates, a contract respiratory and cardiopulmonary
company which provided professionals and equipment to acute care hospitals.
At the time that Mr. Hall sold this company, it provided services to 22
hospitals in five states, had annual revenues of $6 million and had
approximately 220 employees. He received a B.A. Degree from the University
of Louisville in 1964.
ROBERT J. BABINE - CHIEF FINANCIAL OFFICER, TREASURER AND DIRECTOR. Mr.
Babine has been Chief Financial Officer, Secretary, Treasurer and a Director
of the Company since September 1995, and has held these same positions with
IHR, the Company's wholly-owned subsidiary, since September 1994. From 1993
to 1994, he was Vice President of Management Alternatives, Inc., a financial
consulting firm specializing in mergers and acquisitions. Since 1990, Mr.
Babine has also been owner of RJB Holdings, Inc., which has investments in
real estate and service related businesses. From 1989 to 1990, Mr. Babine was
Vice President and CFO for Burris Foods, Inc., a wholesale food distributor.
From 1984 to 1989, he was controller for KFC International which handled
international operations for the Kentucky Fried Chicken restaurant chain.
Prior to that time he was Director of Accounting for KFC International from
1982 to 1984. Mr. Babine also has experience as an auditor with Arthur Young
International accounting firm from 1974 to 1978. He received a B.S. Degree in
1972 and a MSBA Degree in Finance/Accounting in 1974 from the University of
Massachusetts. Mr. Babine became a CPA in Connecticut in 1976.
CHRIS BROGDON - DIRECTOR. Mr. Brogdon has been a Director of the
Company since September 1995. He has served as President and a Director of
Retirement Care Associates, Inc. ("Retirement Care"), a New York Stock
Exchange listed company, since October 1991. He also served as Treasurer of
Retirement Care from October 1991 to November 1993. He served as Secretary of
Capitol Care from July 1990 until it was merged into Retirement Care in
November 1992, and now serves in these same capacities with Capitol Care. Mr.
Brogdon has been involved in financing and operating nursing homes and
retirement communities since 1982. From 1969 until 1982, Mr. Brogdon was
employed in the securities business as a
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retail salesman. Mr. Brogdon attended Georgia State University in Atlanta,
Georgia. Since March 1987, Mr. Brogdon has been Secretary/Treasurer of Winter
Haven Homes, Inc. ("WHH") and since August 1990, he has been
Secretary/Treasurer of National Assistance Bureau, Inc. ("NAB"). Both WHH and
NAB are engaged in the business of owning and operating nursing homes and
retirement communities. Mr. Brogdon also serves as Chairman of the Board of
Contour Medical, Inc., a publicly-held company, which is a manufacturer and
distributor of orthopedic care and rehabilitation products and disposable
medical products.
MARK P. CLEIN - DIRECTOR. Mr. Clein has been a Director of the Company
since August 1997. Since 1996 he has been Chief Financial Officer of PMR
Corporation, a NASDAQ National Market System-listed company which develops,
manages and markets psychiatric partial hospitalization programs. From 1982
to 1996, Mr. Clein was employed by several New York based investment banking
firms, including Jefferies & Co., where he held the position of managing
director of investment banking (specializing in the health care industry),
Sprout Group, an affiliate of Donaldson, Lufkin and Jenrette, Inc., and
Merrill Lynch Venture Capital, Inc., where he focuses on early stage investing
in the healthcare industry. Mr. Clein received a Masters of Business
Administration Degree from Columbia University in 1983 and a Bachelor's Degree
from the University of North Carolina in 1981. He is also a Director of
Children's Discovery Centers of America, Inc., which is publicly held.
TIMOTHY M. GRAVEN - DIRECTOR. Mr. Graven has been a Director of the
Company since August 1997, and is the Managing Partner and co-founder of Triad
Investment Company, LLC, a private investment firm founded in 1995. Mr.
Graven previously served as President and Chief Operating Officer of Steel
Technologies, Inc., of Louisville, Kentucky, a steel processing company, from
March 1990 to November 1994, as Chief Financial Officer from May 1985 to March
1990, and as Director from 1982 to 1994. Mr. Graven is currently also a
Director of Performance Food Group Company, a publicly-held company listed on
the Nasdaq Stock Market. Mr. Graven received a B.S. Degree in Accounting from
Murray State University in 1973.
REBECCA H. KRUEGER - CHIEF OPERATIONS OFFICER. Mrs. Krueger became
employed by the Company in June 1996, and became Chief Operations Officer in
September 1996. From September 1990 to December 1995, she was employed by
Transitional Health Services ("THS") which was acquired by WelCare
International Management Corporation, Atlanta, Georgia ("WelCare") in December
1995, and continued to be employed by WelCare until June 1996. THS and
WelCare operate and manage a large number of nursing home facilities.
Initially, Mrs. Krueger was Director of Nursing of a facility owned by THS
where she supervised a nursing staff of approximately 160 persons, and
directed a rehabilitation program. Beginning in May 1992, she became a
Regional Nurse Consultant/Quality Assurance Specialist for THS, and was
responsible for eight facilities in evaluating staff performance and
compliance with federal and state regulations. In January 1994, Mrs. Krueger
became a Regional Director of Operations for THS where she was responsible for
the total operations of three to six long-term care facilities in Indiana,
Kentucky and Arkansas. Finally, from March 1996 to June 1996, she was
National Director of Subacute Services for WelCare, where she was responsible
for the development of all subacute and postacute programs for up to 78
facilities. Mrs. Krueger graduated from the University of the State of New
York in 1989 with an Associate Science and Nursing Degree.
MICHAEL J. KITCHEN - VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL. Mr.
Kitchen has been Secretary of the Company since July 1997, and has been the
general counsel and a Vice President since October 1996. From May 1994 to
October 1996, he was an attorney with the J. Bruce Miller Law Group in
Louisville, Kentucky, where he concentrated his practice in commercial
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<PAGE>
litigation, business law and employment relations. From August 1992 to May
1994, Mr. Kitchen was an attorney with the firm of Segal and Shanks in
Louisville, Kentucky, where his practice was concentrated in the area of
insurance law. From 1991 to 1992, he was an attorney with the firm of Chauvin
& White in Louisville, Kentucky, where he practiced civil litigation/personal
injury law. Mr. Kitchen received a B.A. Degree in Marketing from the
University of Kentucky in 1988 and a J.D. Degree in law from the University
of Louisville in 1991. He is licensed to practice law in Kentucky and Indiana.
NICOLE D. PERRY - VICE PRESIDENT OF FINANCE. Ms. Perry has been Vice
President of Finance of the Company since June 1997. From February 1994 to
June 1996, she was a Manager for Coopers & Lybrand L.L.P. in Louisville,
Kentucky, where she managed audit engagements for a number of companies.
From March 1993 to February 1994, Ms. Perry was Controller for Atelier
International and Assistant Controller for Vecta, which are subsidiaries of
Steelcase, Inc. in Grand Prairie, Texas. From October 1990 to March 1993,
she was a Senior Accountant with Price Waterhouse L.L.P. in Dallas, Texas,
where she was responsible for planning, performing and supervising financial
audits. From October 1987 to October 1990, she was a Senior Accountant with
Deloitte & Touche, L.L.P. in Dallas, Texas, where she also planned, performed
and supervised financial audits of various private and public entities. Ms.
Perry received an AA Degree in Liberal Arts from Bakersfield (California)
College in 1984, and a BBA Degree in Accounting from the University of
Oklahoma in 1987. She became licensed as a Certified Public Accountant in
1989.
The Company's executive officers hold office until the next annual
meeting of directors of the Company. There are no known arrangements or
understandings between any director or executive officer and any other person
pursuant to which any of the above-named executive officers or directors was
selected as an officer or director of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of the Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's common
stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, except that David V. Hall
filed one Form 4 reporting two transactions late.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other Executive Officer who
received total salary and bonus in excess of $100,000 for the fiscal years
ended May 31, 1997 and 1996, and the period of September 21, 1994 through May
31, 1995.
<TABLE>
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<PAGE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
AWARDS PAYOUTS
------------------ -------
ANNUAL COMPENSATION SECURI-
-------------------------------- TIES UN-
OTHER RE- DERLYING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------- -------- ------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David V. Hall, 1997 $192,308 $ 28,803 $11,271 -0- 200,000 -0- $12,215
President <FN1> <FN2>
1996 $ 69,200 $100,522 $14,654 -0- -0- -0- $ 3,881
<FN3> <FN2>
1995 $ -0- $ -0- $ 1,946 -0- -0- -0-
<FN4>
Robert J. Babine, 1997 $110,000 $ 15,568 $ 8,347 -0- -0- -0- $ 1,515
Chief Financial <FN5> <FN6>
Officer
- ---------------
<FN>
<FN1>
Represents $11,271 paid for expenses of an automobile provided for Mr. Hall's
use.
<FN2>
Represents the premium paid for a term life insurance policy provided for Mr.
Hall's benefit.
<FN3>
Represents $4,974 paid for medical insurance benefits above those provided to
other full-time employees of the Company, and $9,680 paid for expenses of an
automobile provided for Mr. Hall's use.
<FN4>
Represents $1,181 paid for medical insurance benefits above those provided to
other full-time employees of the Company, and $765 paid for expenses of an
automobile provided for Mr.Hall's use.
<FN5>
Represents compensation paid to Mr. Babine for the use of an automobile.
<FN6>
Represents the premium paid for a term life insurance policy provided for Mr.
Babine's benefit.
</FN>
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options made to each of the Executive Officers named above
during the fiscal year ended May 31, 1997.
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INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE
OPTION/SARs EMPLOYEES IN OR BASE EXPIRATION
GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE
----------- ---------------- ------------ ----------
David V. Hall 200,000* 30.5% $2.00 12/26/99
Robert J. Babine -0- -- -- --
* These options were immediately transferred to two adult children of Mr. Hall
who are also employees of the Company.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES VALUE OF
UNDERLYING EXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTION/SARs OPTION/SARs
ACQUIRED ON AT FY-END AT FY-END
EXERCISE EXERCISABLE/ EXERCISABLE/
(NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
----------- -------- ------------- -------------
David V. Hall -0- -0- 0 / 0 0 / 0
Robert J. Babine -0- -0- 0 / 0 0 / 0
Effective February 1, 1996, the Company entered into three year
employment agreements with David V. Hall, President of the Company, and Robert
J. Babine, Chief Financial Officer, Secretary and Treasurer of the Company.
The Employment Agreements provide that each will devote a substantial portion
of their time to the Company, and that Mr. Hall will receive a base salary of
$200,000 per year and Mr. Babine will receive a base salary of $100,000 per
year. Mr. Hall and Mr. Babine will also receive bonuses at the discretion of
the Board of Directors and the use of an automobile at a maximum cost of
$10,000 per year for Mr. Hall and $6,000 per year for Mr. Babine. In
addition, the employment agreements provide that the Company will pay for
term life insurance policies in the amount of $2,000,000 for Mr. Hall and
$500,000 for Mr. Babine. The proceeds of these policies will be payable to
the respective estates of Mr. Hall and Mr. Babine.
Effective February 1, 1997, Mr. Babine entered into a new three year
employment agreement replacing his earlier agreement. The new agreement has
substantially the same terms as his prior agreement except that his salary was
increased to $120,000 per year and his automobile allowance was increased to
$7,500 per year.
In the event that the Company terminates either of these employment
agreements without cause, or as a result of a change in control, the Company
will be required to pay the base salary for the remaining initial term of the
agreement, or twelve (12) months, whichever is greater. In addition, the
Company may be required to repurchase up to 50% of the stock held by the
Officers and provide for family medical insurance until the age of 65.
Effective January 1, 1997, the Company entered into an employment
agreement with Rebecca Krueger, who is Chief Operating Officer of the Company,
pursuant to which Ms. Krueger has agreed to devote a substantial portion of
her time to the business of the Company. The initial term of the agreement is
for one year, but
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is automatically renewed for one year on a monthly basis. Ms. Krueger's base
salary was $103,500 per year, and her base salary will be increased each year
by at least the increase in the cost of living index. She will also receive
bonuses at the discretion of the Company and an automobile allowance of $400
per month. In the event that the Company terminates this employment agreement
without cause or as a result of a change in control, the Company will be
required to pay her base salary for twelve (12) months. Effective August 1,
1997, Ms. Krueger's base salary was increased to $112,500 per year.
Effective January 1, 1997, the Company entered into an employment
agreement with Michael J. Kitchen, who is Vice President, Secretary and
General Counsel to the Company, pursuant to which Mr. Kitchen has agreed to
devote a substantial portion of his time to the business of the Company. The
initial term of the agreement is for one year, is automatically renewed for
one year on a monthly basis. Mr. Kitchen's base salary is $93,375 per year,
and his base salary will be increased each year by at least the increase in
the cost of living index. He will also receive bonuses at the discretion of
the Company and an automobile allowance of $400 per month. In the event that
the Company terminates this employment agreement without cause or as a result
of a change in control, the Company will be required to pay his base salary
for twelve (12) months.
Effective June 9, 1997, the Company entered into an employment agreement
with Nicole Perry, who is Vice President of Finance to the Company, pursuant
to which Ms. Perry has agreed to devote a substantial portion of her time to
the business of the Company. The initial term of the agreement is for one
year. Ms. Perry's base salary is $72,500 per year, and her base salary will
be increased each year by at least the increase in the cost of living index.
She will also receive bonuses at the discretion of the Company and an
automobile allowance of $350 per month. In the event that the Company
terminates this employment agreement without cause or as a result of a change
in control, the Company will be required to pay her base salary for twelve
(12) months.
DIRECTOR COMPENSATION
Effective in August 1997, outside Directors of the Company receive a fee
of $500 per month and will receive stock options to purchase 2,500 shares of
Common Stock each year for their services in such capacity. Directors are
also reimbursed for all reasonable and necessary costs and expenses incurred
as a result of being a Director of the Company.
STOCK OPTION PLAN
In October 1996, the Company's Board of Directors adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan allows the Board to
grant stock options from time to time to employees, officers and directors of
the Company and consultants to the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who
are key employees of the Company. Vesting provisions are determined by the
Board at the time options are granted. As originally adopted, the total number
of shares of Common Stock sub- ject to options under the 1996 Plan was not to
exceed 1,000,000, subject to adjustment in the event of certain recapitali-
zations, reorganizations and similar transactions. The option price cannot be
less than the fair market value of a share on the date the option is granted
and it must be satisfied by the payment of cash.
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<PAGE>
The Board of Directors may amend the 1996 Plan at any time, provided
that the Board may not amend the 1996 Plan to materially increase the number
of shares available under the 1996 Plan, materially increase the benefits
accruing to Participants under the 1996 Plan, or materially change the
eligible class of employees without shareholder approval.
OUTSTANDING OPTIONS UNDER THE PLAN
On December 26, 1996, the Company's Board of Directors granted options
to purchase an aggregate of 112,000 shares of Common Stock at $2.00 per share
under the 1996 Plan. The options are fully vested and expire three years after
the date of grant. Included in these options are non-qualified options to
purchase 100,000 shares granted to Rebecca Krueger, Chief Operations Officer
of the Company.
On March 4, 1997, the Company issued non-qualified options, under the
1996 Plan, to purchase 50,000 shares of Common Stock to an outside consultant
at $2.25 per share which was equal to the fair market value on the date of
grant. The options are exercisable for three years from the date of grant.
On May 19, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 158,000 shares of Common Stock at $3.00 per share
under the 1996 Plan. The options vest over various periods up to three years
and expire three years after the date of grant. Included in these options are
options granted to the following officers of the Company: Rebecca Krueger to
purchase 10,000 shares of Common Stock; Michael Kitchen to purchase 15,000
shares of Common Stock; and Nicole Perry to purchase 25,000 shares of Common
Stock.
On June 9, 1997, the Company's Board of Directors granted options to an
employee to purchase 20,000 shares of Common Stock at $3.31 per share under
the 1996 plan. The options are fully vested and expire three years after the
date of grant.
On June 12, 1997, the Company's Board of Directors granted options to an
employee to purchase 8,000 shares of Common Stock at $3.56 per share under the
1996 Plan. The options vest over a period of one year and expire seven years
after the date of grant.
On August 27, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 42,500 shares of Common Stock at $2.875 per share to
four employees. These options vest immediately and expire three years after
the date of grant. Included in these options are options granted to Rebecca
Krueger, an Officer, to purchase 12,500 shares of Common Stock.
OTHER OUTSTANDING OPTIONS NOT UNDER THE PLAN
On June 1, 1996, the Company granted a non-plan option to an employee to
purchase 50,000 shares of Common Stock at $1.25 per share which was equal to
the fair market value on the date of grant. The option is exercisable for
three years from the date of grant.
On June 21, 1996, the Company granted non-plan options to two stock
brokers to purchase 20,000 shares of Common Stock at $1.25 per share which was
equal to the fair market value on the date of grant. The options are
exercisable for three years from the date of grant.
On August 1, 1996, the Company granted non-plan options to ten employees
to purchase an aggregate of 95,000 shares of Common Stock at $1.75 per share
which was equal to the fair market value on the date of grant. These options
are exercisable for three years from the date of grant.
-22-
<PAGE>
On October 24, 1996, the Company granted non-plan options to two
employees to purchase an aggregate of 40,000 shares of Common Stock at $2.25
per share which was equal to the fair market value on the date of grant.
These options are exercisable for three years from the date of grant.
On December 5, 1996, the Company issued non-plan options to two
shareholders of Daily Rehabilitation Institute, Inc. in connection with the
acquisition of that company. The options are to purchase an aggregate of
30,000 shares of Common Stock at $2.25 per share which was equal to the fair
market value on the date of grant. Of the 30,000 options, 15,000 options
expire on December 15, 1999 and 15,000 expire on December 31, 2000.
On December 26, 1996, the Company issued non-plan options to purchase
200,000 shares of Common Stock to David V. Hall at $2.00 per share which was
equal to the fair market value on the date of grant. Mr. Hall then
transferred these options to his two adult children who are also employees of
the Company. The options are exercisable for three years from the date of
grant.
401(k) PLAN
The Company maintains a 401(k) employee retirement and savings program
(the "401(k) Plan") for its employees. Under the 401(k) Plan, an employee may
con- tribute up to 15% of his or her gross annual earnings, subject to a
statutory maximum, for investment in one or more funds identified under the
Plan. The Com- pany may in the future, with the approval of the Board of
Directors, make matching contributions to participants in the 401(k) Plan.
During the year ended May 31, 1996, the Company made no matching contributions
to the 401(k) Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of October 17, 1997, each person
known by the Company to be the beneficial owner of five percent or more of the
Company's Common Stock, all Directors and Executive Officers individually and
all Directors and Executive Officers of the Company as a group. Except as
noted, each person has sole voting and investment power with respect to the
shares shown.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OWNERSHIP OF CLASS
- ---------------- -------------------- ----------
<S> <C> <C>
David V. Hall 4,413,150<FN1> 33.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Robert J. Babine 978,000<FN2> 7.3%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Chris Brogdon 130,000<FN3> 1.0%
c/o Retirement Care Associates,
Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
-23-
<PAGE>
Mark P. Clein -0- --
3990 Old Town Avenue
San Diego, CA 92110
Timothy M. Graven -0- --
168 Totem Road
Louisville, KY 40207
Rebecca H. Krueger 126,500<FN4> 0.9%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Michael J. Kitchen 70,420<FN5> 0.5%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Nicole D. Perry 12,500<FN6> 0.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Retirement Care Associates, Inc. 3,661,000<FN7> 27.4%
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
All Executive Officers and 5,730,570 42.3%
Directors as a Group
(8 Persons)
_________________
<FN>
<FN1>
Includes 4,403,150 shares held directly by Mr. Hall and 10,000 shares held by
his wife as custodian for two minor children.
<FN2>
Includes 962,000 shares held directly by Mr. Babine and 16,000 shares held by
two of his children who share his home.
<FN3>
Includes 85,000 shares held directly by Mr. Brogdon, 25,000 shares held by his
wife, and 20,000 shares held by a daughter. Does not include the shares held
by Retirement Care Associates, Inc., of which Mr. Brogdon is President,
Director and a principal shareholder.
<FN4>
Includes 4,000 shares held directly by Mrs. Krueger and 122,500 shares
underlying stock options held by her which are exercisable within 60 days.
<FN5>
Includes 5,420 shares held directly by Mr. Kitchen and 65,000 shares
underlying stock options held by him which are exercisable within 60 days.
<FN6>
Represents 12,500 shares underlying stock options held by Ms. Perry which are
exercisable within 60 days.
<FN7>
Retirement Care Associates, Inc. ("Retirement Care") is a publicly-held
corporation of which Chris Brogdon is President, Director and a principal
shareholder; Edward E. Lane is Secretary, Director and a principal
shareholder; Darrell C. Tucker is a Director and a President of a subsidiary;
and Michael P.
-24-
<PAGE>
Traba and Julian S. Daley are Directors. In addition, Connie Brogdon, the
wife of Chris Brogdon, is a principal shareholder of Retirement Care. The
following sets forth the approximate percentage ownership beneficially held by
such persons in Retirement Care:
Chris Brogdon 19.4%
Edward E. Lane 17.6%
Darrell C. Tucker 4.5%
Julian S. Daley 0.3%
Harlan Mathews 0.1%
Connie Brogdon 19.4%
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the acquisition of In-House Rehab, Inc. in September
1995, certain persons who were then Officers and Directors of the Company
agreed to the cancellation of indebtedness owed to them by the Company as
follows:
NAME AMOUNT OF DEBT CANCELED
---------------- -----------------------
Albert L. Blum $226,655
Theodore Jackson 176,915
Fred B. Blum 18,367
Mark Jackson 177,315
--------
Total $599,252
The indebtedness to these persons was a result of advances made for working
capital and for debt service payments made for which the person was a personal
guarantor, including interest accrued thereon.
At May 31, 1997, the Company had contracts to provide physical, speech
and occupational therapists to approximately 71 nursing homes of which 36 are
either owned, operated or managed by Retirement Care Associates,
Inc.("Retirement Care"), a principal shareholder of the Company. During the
year ended May 31, 1996, the Company billed approximately $5,129,000 in fees
under agreements with Retirement Care. During the year ended May 31, 1997,
the Company billed approximately $8,900,000 in fees under these agreements.
As of May 31, 1997, there were approximately $4,513,000 in accounts receivable
relating to such services outstanding.
As of May 31, 1997, Retirement Care owed the Company approximately
$58,600 in connection with its original purchase during the fiscal year ended
May 31, 1995, of shares of stock of In-House Rehab, Inc. which shares were
subsequently exchanged for shares of the Company's Common Stock. This stock
subscription receivable was paid in full on September 9, 1997.
In February 1997, Retirement Care announced that it had entered into a
merger agreement with Sun Healthcare. See ITEM 1 - DESCRIPTION OF BUSINESS,
for additional information concerning this matter.
David V. Hall and Robert J. Babine, Officers, Directors and principal
shareholders of the Company personally guaranteed a $1,207,000 line of credit
to the Company. As of May 31, 1996, $600,000 had been borrowed under this
line of credit. Subsequently, the bank released these persons from their
guarantees.
-25-
<PAGE>
As of May 31, 1997, David V. Hall, an Officer, Director and principal
shareholder of the Company, owed the Company $18,000 for advances made to
him. In addition, as of May 31, 1997, Hallmark Communications, a company of
which Mr. Hall is the majority owner, owed the Company $11,000 for advances
made to it by the Company.
On December 26, 1996, the Company's Board of Directors granted non-
qualified options to purchase 100,000 shares of Common Stock at $2.00 per
share to Rebecca Krueger, the Company's Chief Operating Officer, under the
Company's 1996 Stock Option Plan. The options are fully vested and expire
three years after the date of grant. On May 19, 1997, the Company's Board of
Directors granted incentive stock options to purchase 10,000 shares of Common
Stock at $3.00 per share to Rebecca Krueger and on August 27, 1997, she was
granted additional options to purchase 12,500 shares at $2.875 per share.
These options are fully vested and expire three years after the date of grant.
On March 1, 1996 and October 24, 1996, the Company's Board of Directors
granted non-qualified options to purchase 20,000 and 30,000 respectively,
shares of Common Stock at $1.75 and $2.25 per share, respectively, to Michael
Kitchen, the Company's Vice President, Secretary and General Counsel. The
options are fully vested and expire three years after the date of grant. On
May 19, 1997, the Company's Board of Directors granted incentive stock options
to purchase 15,000 shares of Common Stock at $3.00 per share to Michael
Kitchen under the Company's 1996 Stock Option Plan. The options are fully
vested and expire three years after the date of grant.
On May 19, 1997, the Company's Board of Directors granted incentive
stock options to purchase 25,000 shares of common stock at $3.00 per share to
Nicole Perry, the Company's Vice President of Finance. The options vest over
one year and expire three years after the date of grant.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed as part of this Report:
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3.1 Articles of Incorporation, Incorporated by reference to
as amended Exhibit 3.1 to Registrant's
Registration Statement on
Form 10SB
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to Registrant's
Registration Statement on
Form 10SB
10.1 1996 Stock Option Plan Incorporated by reference to
Exhibit 10.1 to Registrant's
Registration Statement on
Form 10SB
10.2 Employment Agreement with Incorporated by reference to
David V. Hall Exhibit 10.2 to Registrant's
Registration Statement on
Form 10SB
-26-
<PAGE>
10.3 Employment Agreement with Filed herewith electronically
Robert J. Babine
10.4 Lease Agreement on Office Incorporated by reference to
Space Exhibit 10.4 to Registrant's
Registration Statement on
Form 10SB
10.5 Contracts for Therapy Filed herewith electronically
Program Services with
Affiliates
10.6 Loan Agreement with Great Incorporated by reference to
Financial Bank and related Exhibit 10.6 to Registrant's
Security Agreement and Registration Statement on
Promissory Note Form 10SB
10.7 Credit Facility Agreement with Filed herewith electronically
Great Financial Bank and
related Security Agreement and
Promissory Note
10.8 Employment Agreement with Filed herewith electronically
Rebecca Krueger
10.9 Employment Agreement with Filed herewith electronically
Michael Kitchen
10.10 Employment Agreement with Filed herewith electronically
Nicole Perry
10.11 Promissory Note from Filed herewith electronically
Retirement Care Associates,
Inc. and related Guaranty
Agreement and Security
Agreement
21 Subsidiaries of the Filed herewith electronically
Registrant
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
last quarter of the period covered by this Report.
-27-
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
In-House Rehab Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of In-House Rehab
Corporation and Subsidiaries as of May 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of In-House Rehab Corporation and Subsidiaries as of May 31, 1997 and 1996 and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Strothman & Company PSC
STROTHMAN & COMPANY PSC
Louisville, Kentucky
October 28, 1997
F-1
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1996
ASSETS 1997 1996
Current assets:
Accounts receivable - trade, less allowance
for doubtful accounts of $75,000
and $50,000 in 1997 and 1996,
respectively $ 2,736,132 $ 1,459,333
Accounts receivable - trade - related party 4,548,493 1,629,722
Due from private placement trustee -- 225,000
Other current assets 15,057 20,067
Total current assets 7,299,682 3,334,122
Equipment, at cost 265,556 77,389
Less accumulated depreciation 48,660 13,867
216,896 63,522
Intangible assets, net of accumulated
amortization of $209,600 and $46,400
in 1997 and 1996, respectively 353,974 139,201
Deferred tax asset 123,402 31,986
Other assets 3,375 1,321
$ 7,997,329 $ 3,570,152
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,542,102 $ 725,000
Accounts payable 553,564 314,557
Accrued expenses 502,046 276,329
Checks issued in excess of cash on deposit 121,900 207,589
Income taxes 30,169 89,100
Deferred tax liability 19,630 9,298
Total current liabilities 4,769,411 1,621,873
Stockholders' equity:
Preferred stock, $10 par value;
10,000,000 shares
authorized; no shares issued - -
Common stock, no par value;
20,000,000 shares authorized;
13,344,215 and 13,405,715 shares
issued and outstanding
at May 31, 1997 and 1996, respectively 1,886,584 1,700,585
Subordinated convertible common stock,
no par value; 1,200,000 shares authorized;
no shares issued - -
Common stock subscriptions receivable (58,577) (54,785)
Retained earnings 1,399,911 302,479
3,227,918 1,948,279
$ 7,997,329 $ 3,570,152
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the years ended May 31, 1997 and 1996
1997 1996
------------ -----------
Revenues:
Contract services $ 6,705,634 $ 1,493,563
Contract services - related party 8,932,219 5,129,847
------------ -----------
15,637,853 6,623,410
Operating costs:
Salaries, wages and benefits 8,020,135 3,312,682
Contract therapists 2,777,537 1,229,340
Rental expense 210,133 86,544
Provision for doubtful accounts 30,621 50,000
Depreciation 33,826 9,930
Amortization 163,175 52,800
Other expense 88,402 -
------------ -----------
11,323,829 4,741,296
------------ -----------
Gross profit 4,314,024 1,882,114
Selling, general and administrative expenses 2,330,255 1,179,206
Income from operations 1,983,769 702,908
Interest expense 159,292 65,533
Income before income taxes 1,824,477 637,375
Provision for income taxes 727,045 243,112
Net income $ 1,097,432 394,263
Net income per common share $ .08 $ .04
----------- -----------
Weighted average number of
common shares outstanding 13,668,829 11,196,429
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1997 and 1996
Subordinated
Convertible
Preferred Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
------- ------- ---------- ---------- ------ ------
Balance at
May 31, 1995 - - 10,460,000 $ 408,875 - -
Acquisition of the
Company 1,845,715 (29,364)
Issuance of stock in
conjunction with the
Private Placement 1,100,000 1,321,074
Deferred compensation
amortization
Receipt of stock
subscription payments
Accrued interest
Net income
------- ------- ---------- ---------- ------ ------
Balances at
May 31, 1996 - - 13,405,715 1,700,585 - -
Issuance of stock in
conjunction with the
Private Placement 200,000 185,999
Stock received in
connection with
termination of
employee (261,500)
Accrued interest
Net Income
------- ------- ---------- ---------- ------ ------
Balances at
May 31, 1997 - - 13,344,215 $1,886,584 - -
------- ------- ---------- ---------- ------ ------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1997 and 1996
(Continued)
Common
Stock Deferred Retained
Subscriptions Compensation Earnings
Receivable Costs (Deficit) Total
------------- ------------ --------- -----------
Balance at
May 31, 1995 $ (59,035) $ (6,400) $(91,784) $ 251,656
Acquisition of the
Company (29,364)
Issuance of stock in
conjunction with the
Private Placement 1,321,074
Deferred compensation
amortization 6,400 6,400
Receipt of stock
subscription payments 7,500 7,500
Accrued interest (3,250) (3,250)
Net income 394,263 394,263
------------- ------------ --------- ----------
Balances at
May 31, 1996 (54,785) - 302,479 1,948,279
Issuance of stock in
conjunction with the
Private Placement 185,999
Stock received in
connection with
termination of
employee -
Accrued Interest (3,792) (3,792)
Net Income 1,097,432 1,097,432
------------- ------------ --------- ----------
Balances at
May 31, 1997 $ (58,577) - $1,399,911 $3,227,918
------------- ------------ ---------- ----------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended May 31, 1997 and 1996
1997 1996
Cash flows from operating activities: ----------- ------------
Net income $ 1,097,432 $ 394,263
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 33,826 9,930
Amortization 163,175 52,800
Allowance for doubtful accounts 25,000 50,000
Deferred income taxes (81,084) (23,988)
Change in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (3,995,570) (2,145,881)
Interest receivable (3,792) (3,250)
Other current assets 5,010 (5,194)
Other assets (130,002) 366
Accounts payable 239,007 142,376
Accrued expenses 225,717 179,838
Income taxes (58,931) 86,600
----------- ------------
Net cash used in operating
activities (2,480,212) (1,262,140)
----------- ------------
Cash flows from investing activities:
Purchase of equipment (187,200) (62,745)
Acquisition of businesses (250,000) -
Purchase of Total Rehab South, Inc. - (510,601)
----------- ------------
Net cash used in investing
activities (437,200) (573,346)
----------- ------------
Cash flows from financing activities:
Issuance of common stock 185,999 1,291,710
Proceeds from stock subscriptions receivable - 7,500
Issuance of short-term borrowings 6,633,770 1,625,000
Repayments of short-term borrowings (3,816,668) (1,400,000)
Checks issued in excess of cash on deposit (85,689) 207,589
----------- -----------
Net cash provided by financing
activities $ 2,917,412 $ 1,731,799
----------- ------------
Decrease in cash and equivalents - (103,687)
Beginning cash balance - $ 103,687
----------- ------------
Ending cash balance - -
----------- ------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
for the years ended May 31, 1997 and 1996
1997 1996
Supplemental disclosures: ----------- ----------
Cash paid for interest $ 129,522 $ 65,414
----------- ----------
Cash paid for income taxes $ 867,060 $ 180,500
----------- ----------
Supplemental schedule of noncash investing
and financing activities:
Assumption of short-term borrowings
in connection with acquisitions $ 144,228 $ -
----------- ----------
Issuance of short-term borrowings $ - $ 500,000
----------- ----------
Issuance of common stock $ - $ 225,000
----------- ----------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Perennial Development Corporation (PDC or the Company) was formed under the
laws of the State of Colorado in May 1985. Effective December 9, 1996, PDC
changed its name to In-House Rehab Corporation. The Company is engaged in
providing, on a contract basis, physical, speech and occupational therapy
personnel to long-term care providers.
On September 29, 1995, the Company acquired all of the outstanding stock of
In-House Rehab, Inc. (IHR), incorporated in Kentucky on September 21, 1994, in
exchange for 10,460,000 shares of the Company's authorized, but unissued,
common stock which represents 85% of the Company's common stock outstanding.
Such shares were issued to the former stockholders of IHR. The stock exchange
between IHR and the Company was accounted for as a capital transaction similar
to a reverse acquisition except that no goodwill was recorded. As a result,
IHR is deemed to be the acquirer for accounting purposes and is the accounting
survivor and reporting successor. Also, there was a change in control of the
Company, whereby all of the Company's officers and directors resigned, and new
officers and directors selected by IHR were elected. The historical results
of operations presented for the period May 31, 1995 through September 29, 1995
reflect the activities of IHR using IHR's historical cost basis. The capital
structure of IHR has been retroactively restated in the accompanying
consolidated financial statements and notes thereto to reflect the number of
shares received from the Company. Pro forma information is not presented
since the transaction is not a business combination.
2. ACQUISITIONS
On March 1, 1996, IHR acquired substantially all of the assets and liabilities
of Total Rehab South, Inc. (TRS), a Georgia corporation, in a transaction
accounted for as a purchase. TRS is based in Tampa, Florida and engaged in a
business similar to IHR. IHR purchased TRS's net assets of $1,237,442,
including a noncompete agreement in the amount of $412,442, for $1,010,601
(including acquisition costs of $10,601). The purchase price comprised
$510,601 in cash and a note payable in the amount of $500,000 due in four
monthly installments of $125,000. The excess of the fair value of the net
assets acquired over the purchase price referred to as "negative goodwill,"
aggregated $237,442. In accordance with the provisions of APB Opinion No. 16,
Business Combinations, the negative goodwill has been offset against the
noncompete agreement. The following is a summary of the allocation of the
purchase price:
Accounts receivable $ 900,000
Noncompete agreement 185,601
Less liabilities assumed (75,000)
----------
Purchase price $1,010,601
The results of operations of TRS have been included in the consolidated
results of operations of the Company from the date of acquisition. TRS was
merged into IHR on May 31, 1996.
The following table presents unaudited pro forma results of operations data as
if the acquisition of TRS described above had occurred on June 1, 1995.
Revenue $9,325,553
Net income 220,622
Net income per share .02
F-8
<PAGE>
The pro forma information includes adjustments for amortization of the
noncompete agreement and interest expense that would have been incurred to
finance the purchase with related income tax effects. The pro forma financial
information is not necessarily indicative of the results of operations as they
would have been had the transactions been effected on the assumed dates.
Effective September 1, 1996, the Company acquired all of the stock of Regal
Health Care, Inc. (RHC) for $1.00. RHC is a Clearwater, Florida based
provider of psych/social services to nursing homes and long-term care
facilities in North Carolina. Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000. This
new area of service is now being offered in addition to the core group of
rehabilitation services offered by the Company.
Effective December 1, 1996, the Company acquired all of the stock of RT Group
Inc. (RTG) in exchange for $150,000 in cash. RTG is an Indianapolis, Indiana
based provider of respiratory care to nursing homes and long-term care
facilities in Indiana. Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000. The
Company is now offering respiratory therapy services along with rehabilitation
and psych/social services in facilities under contract.
Effective December 1, 1996, the Company acquired all of the stock of Daily
Rehabilitation Institute, Inc. (DRI) in exchange for $1.00 and an option to
purchase 30,000 shares of the Company's Common Stock at $2.25 per share. DRI
is a Jacksonville, Florida based provider of outpatient rehab services in a
clinic setting. Upon acquisition, DRI had assets totaling approximately
$116,000 and liabilities totaling approximately $124,000.
Effective January 1, 1997, the Company acquired nine contracts to provide
therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. (TSI) in exchange for $100,000 in cash which included $10,000
for a noncompete agreement. TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.
In August 1997, the Company entered into a letter of intent to acquire Gateway
Rehab, Inc. (GRI). GRI provides therapy services in Illinois and Indiana.
The Company is presently conducting a due diligence review of GRI. The
proposed acquisition is contingent on the completion of this review and the
negotiation of a definitive agreement. Under the terms of the letter of
intent, the acquisition would be accomplished through a stock for stock
exchange.
On September 30, 1997, the Company acquired the assets of Rehab & Therapy
Center of Naples, Inc. (RTCN), an operator of a comprehensive outpatient
rehabilitation facility in southern Florida. This acquisition was made in
exchange for $20,000 in cash and 2,857 shares of the Company's common stock.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated 1997 financial statements
include the accounts of the Company, its wholly owned subsidiary, IHR, and
IHR s wholly owned subsidiaries, RHC, RTG and DRI. The consolidated 1996
financial statements include the accounts of the Company, its wholly-owned
subsidiary, IHR, and IHR s wholly-owned subsidiaries, IHS and TRS. All
significant intercompany accounts and transactions have been eliminated.
F-9
<PAGE>
RECLASSIFICATIONS: Certain amounts in the fiscal 1996 consolidated financial
statements have been reclassified to conform with the fiscal 1997
presentation.
CASH AND EQUIVALENTS: Cash and equivalents includes highly liquid investments
with an original maturity of three months or less. The cash management system
provides for daily investment of available balances and the funding of
outstanding checks when presented for payment. Outstanding but unpresented
checks totaled $121,900 and $207,589 at May 31, 1997 and 1996, respectively.
Upon presentation for payment, they will be funded through available cash
balances or the revolving credit/demand loan agreement.
DEPRECIATION: Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.
EXCESS COST OF NET ASSETS ACQUIRED: Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred taxes have been
recorded to the extent of the difference between the fair value and the tax
basis of the assets acquired and liabilities assumed. The excess of the
purchase price over the fair value of the net assets acquired, including the
recognition of applicable deferred taxes, is amortized on a straight line
basis over a period of 20 to 40 years. The Company performs an annual
assessment of the recoverability of goodwill based on estimated future cash
flows.
AMORTIZATION OF NONCOMPETE AGREEMENTS: The noncompete agreements are
amortized over a period of one to two years on a straight-line basis.
NET INCOME PER COMMON SHARE: Net income per common share have been computed
by dividing net income by the weighted average number of common shares
outstanding during the year, giving effect to stock options and warrants.
STOCK-BASED COMPENSATION: The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
during fiscal year 1997, electing to continue accounting for its employee
stock options under the provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," accompanied by a
disclosure, if considered material, of the pro forma effects on net income and
net income per share had the expense provisions of the new accounting
principle been applied.
RECENTLY ISSUED ACCOUNTING STANDARDS: The Company will adopt SFAS No. 128,
"Earnings Per Share" for the year ended May 31, 1998 including interim
periods. This accounting pronouncement requires the disclosure of basic and
diluted earnings per share. The Company believes that, upon adoption, diluted
earnings per share will approximate earnings per share as previously reported.
Because the concept of basic earnings per share does not include the impact of
common stock equivalents, such as stock options, basic earnings per share will
be higher than diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The provisions of SFAS No. 130 will
be effective for fiscal years beginning after December 15, 1997 and will not
have a material impact on the Company's financial statements.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
F-10
<PAGE>
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. MAJOR CUSTOMER
Approximately $8,932,000 and $5,129,800 or 57% and 77% of all revenue for the
year ended May 31, 1997 and 1996, respectively, and approximately $4,519,000
and $1,528,000 or 61% and 49% of the balance of accounts receivable at May 31,
1997 and 1996, respectively, related to one customer who is a stockholder and
related party of the Company, Retirement Care Associates, Inc. (RCA). The
Company had Contracts for Therapy Program Services with 38 and 26 facilities
either owned, operated or managed by RCA at May 31, 1997 and 1996,
respectively.
RCA has announced that it has entered into a Merger Agreement (Merger) with
Sun Healthcare Group, Inc. (Sun) pursuant to which RCA would be merged into a
subsidiary of Sun. Sun currently has a subsidiary which provides
rehabilitation services similar to those services offered by the Company. The
Company is currently working with Sun on a transition schedule for the
transition of the RCA facilities that are serviced by IHR to Sun. The
transition period is tentatively scheduled to begin approximately thirty (30)
days after the issuance of the proxy relating to the Merger and will conclude
approximately ninety (90) days thereafter. Contingent upon the completion of
the Merger, Sun has agreed to pay IHR each respective facility's accounts
receivable balance in full on the date of each facility's transition to Sun.
RCA has issued its financial statements for the year ended June 30, 1997 which
includes an unqualified opinion from its auditors. In the footnotes to the
aforementioned financial statements, it states that RCA "has experienced a
significant net operating loss and at the same time a decline in liquidity,
resulting from the operating loss and a heightened level of investment in new
facilities." It also states that "closing of the Merger of the Company with
Sun...will provide access to additional sources of liquidity..." and outlines
RCA management's plan if the Sun Merger does not take place. In RCA's June
30, 1997 Form 10-K, it states that RCA and Sun "have filed with the Securities
and Exchange Commission, on a confidential basis, a preliminary proxy
statement with respect to the Merger..." and it is "anticipated to occur in
the fourth quarter of calendar year 1997." For further information, see RCA's
Form 10-K and other SEC filings.
RCA continues to be a major customer of the Company. A delay in regular
periodic payments of accounts receivable from RCA, for any reason, could have
a significantly unfavorable effect on the Company's cash flow from operations.
The Company has been increasing the number of contracts it has with long-term
care facilities operated by entities other than RCA and does not anticipate
that a loss of the RCA service contract revenues will have a significantly
unfavorable effect on the Company's operations.
In addition to the above, the Company had stock subscriptions receivable of
$58,577 and $54,785 at May 31, 1997 and 1996, respectively, from RCA. Such
subscriptions receivable bore interest at 6.5-8.5% per annum and were paid in
full on September 9, 1997.
5. SHORT-TERM BORROWINGS
On June 23, 1995, the Company entered into a revolving line of credit
agreement with a bank which provided for advances up to $500,000, subject to a
borrowing base formula. On February 20, 1996 and March 15, 1996, the
agreement was amended
F-11
<PAGE>
to increase the line by $500,000 for a total line of credit of $1,500,000. As
of May 31, 1996, advances up to $900,000 were available. Borrowings bore
interest at the prime rate plus 0.50% to 2.50% payable monthly, based upon the
Company's leverage ratio. The revolving line of credit was collateralized by
substantially all of the Company's assets. At May 31, 1996, approximately
$1,207,000 of the revolving credit line was guaranteed by certain of the
stockholders. All borrowings were due on demand. Borrowings as of May 31,
1996 were $600,000. Additionally, the final installment of $125,000 on the
note payable to TRS (see Note 2) was outstanding as of May 31, 1996.
On October 29, 1996, the Company terminated its existing $1,500,000 revolving
line of credit agreement and established a new revolving line of credit
agreement with another banking institution. The new revolving line of credit
agreement provided for advances up to $2,500,000, subject to a borrowing base
formula. Borrowings bear interest at the prime rate plus .25% payable
monthly, based upon the Company's leverage ratio. On March 3, 1997, this new
facility was amended to increase the line by $2,000,000 for a total line of
credit of $4,500,000. The evolving line of credit is collateralized by
substantially all of the Company's assets and is due on demand. This
revolving line of credit terminated on October 2, 1997, at which time the
Company obtained an extension to January 2, 1998. Borrowings as of May 31,
1997 are $3,525,000. The amount available under the borrowing base formula at
May 31, 1997 was $361,000. The interest rate at May 31, 1997 was 8.75%.
6. ACCRUED EXPENSES
Accrued expenses at May 31 consist of the following:
1997 1996
--------- ---------
Compensation $ 446,336 $ 187,094
Taxes (other than taxes on income) 26,423 24,155
Other 29,285 65,080
--------- ---------
$ 502,046 $ 276,329
--------- ---------
7. INCOME TAXES
The provision for income taxes on earnings at May 31 consists of the
following:
1997 1996
Current payable: --------- ---------
Federal $ 643,541 $ 231,296
State 164,588 35,804
--------- ---------
Total currently payable 808,129 267,100
Deferred:
Federal (64,570) (20,754)
State (16,514) (3,234)
--------- ---------
Total deferred (81,084) (23,988)
--------- ---------
Total provision $ 727,045 $ 243,112
--------- ---------
Deferred taxes are recognized for the future tax consequences of temporary
differences between the amounts reported in the Company's financial statements
and the tax basis of its assets and liabilities. Primary differences giving
rise to the Company's deferred tax assets and liabilities are as follows:
F-12
<PAGE>
1997 1996
--------------------- ---------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
Noncompete agreements $ 81,162 $ 16,889
Accrued vacation 40,531 15,097
Depreciation $ 18,551 $ 9,298
Amortization 1,709 1,079
--------- -------- --------- -------
Total deferred taxes $ 123,402 $ 19,630 $ 31,986 $ 9,298
--------- -------- --------- -------
Based on the Company's prior earnings and the sufficiency of income available
to be utilized in the carryback years, it is more likely than not that the net
deferred tax assets for 1997 and 1996 will be realized. Therefore, no
valuation allowance has been established to reduce deferred tax assets for
1997 and 1996.
Reconciliation of the federal statutory rate and the effective income tax rate
at May 31 follows:
1997 1996
----- -----
Federal statutory rate 34.0% 34.0%
State income taxes,
net of federal income tax benefit 5.2 3.3
Other 0.6 0.9
---- ----
Effective income tax rate 39.8% 38.2%
8. COMMITMENTS AND CONTINGENCIES
The Company rents office space, certain office equipment and vehicles under
operating leases expiring at various dates through January 2002. These leases
generally include one or more renewal options. Approximate future minimum
rentals on all noncancelable operating leases in effect at May 31, 1997 are as
follows:
1998 $163,937
1999 125,869
2000 94,431
2001 91,228
2002 57,996
Lease expense was approximately $107,000 and $69,000 for the years ended May
31, 1997 and 1996, respectively.
The Company is subject to litigation and claims in the ordinary course of
business. Management believes none of these matters would have a material
adverse effect on the financial condition or results of operations of the
Company.
9. COMMON STOCK AND STOCK WARRANTS
On March 12, 1996, the Company offered 2,000,000 shares of no par value common
stock in a Private Placement. As of May 31, 1996, the Company had issued
1,100,000 shares of the no par value common stock for net proceeds of
approximately $1,321,000. The net proceeds included a stock receivable from
the Private Placement Trustee at May 31, 1996 of $225,000 which was collected in
June 1996. As of May 31, 1997, the Company had issued an additional 200,000
shares
F-13
<PAGE>
of the no par value common stock for net proceeds of approximately $186,000.
Proceeds from the Private Placement continue to be used for future expansion.
Investors who purchased at least eight units (each unit consists of 20,000
shares costing $25,000) also received warrants to purchase 20,000 shares of
common stock for each unit purchased. The warrants are exercisable at $2.50
per share and will expire three years from the date of the Private Placement,
March 12, 1999. In conjunction with the Private Placement 520,000 warrants
have been issued as of May 31, 1997.
10. STOCK OPTIONS
In October 1996, the Company's Board of Directors adopted the Company's 1996
Stock Option Plan (the 1996 Plan). The 1996 Plan allows the Board to grant
stock options from time to time to employees, officers and directors of the
Company and consultants to the Company. The Board has the power to determine
at the time the option is granted whether the option will be an Incentive
Stock Option (an option which qualifies under Section 422 of the Internal
Revenue Code of 1986) or an option which is not an Incentive Stock Option.
However, Incentive Stock Options will only be granted to persons who are key
employees of the Company.
Vesting provisions are determined by the Board at the time options are
granted. The total number of shares of Common Stock subject to options under
the 1996 Plan
is not to exceed 1,000,000. During the year ended May 31, 1997, the Company
granted 320,000 1996 Plan options and 439,000 non-plan options as follows:
Weighted
1996 Non-1996 Average
Plan Plan Exercise
Shares Shares Price
------- -------- --------
Outstanding at May 31, 1996 - - -
Granted 320,000 439,000 $ 1.84
Exercised - - -
Canceled - (29,000) 1.75
------- ------- --------
Outstanding at May 31, 1997 320,000 410,000 $ 1.84
------- ------- --------
These options are exercisable for a period of three to five years from the
date of grant. The option price equaled the market price of a share at the
date the options were granted. As of May 31, 1997, no options have been
exercised and the weighted average remaining contractual life for the
outstanding options is 2.5 years. There were 679,500 options which were
exercisable at May 31, 1997, with a weighted average exercise price of $2.11.
The Company's common stock has been quoted on the OTC Bulletin Board since
December 1995 and the Company's Board of Directors have based their
determination of the fair market value of the common stock on the closing bid
quotations on the OTC Bulletin Board.
As permitted by SFAS No. 123, the Company follows the provisions of APB
Opinion No. 25 and related Interpretations in accounting for its stock option
grants. Compensation cost has not been recognized for options issued under
the plan. If compensation cost had been determined based on the fair value of
the awards at the grant date, net income and earnings per common share would
have been $941,963 and $.07, respectively.
F-14
<PAGE>
The weighted average fair value of options was $.42 as of May 31, 1997. Fair
value estimates were determined using the Black-Scholes valuation method,
using an expected term ranging from one and one half years to two and one half
years, a risk-free interest rate ranging from 5.60% 6.08%, and stock price
volatility of 32.85%. The expected turnover was not considered as forfeitures
will be considered in future calculations as they occur.
11. MULTI-EMPLOYER 401(k) PLAN
IHR is one of four companies that participate in a multi-employer 401(k) plan
which was created in 1996. All employees are eligible to participate on the
first day of the month following their date of hire. The Company made no
contributions to the plan during 1997 or 1996.
12. RELATED PARTY TRANSACTIONS
The Company provides services to a major customer who is a stockholder and a
related party. See Note 4 for further discussion.
Two stockholders, who are also employees of the Company, owe approximately
$18,000 and $50,000 in total to the Company for advances as of May 31, 1997
and 1996, respectively. Additionally, a company owned by a stockholder of the
Company owed approximately $11,000 and $51,000 for advances as of May 31, 1997
and 1996, respectively.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended,
-----------------------------------------------------------
Aug.31 Nov.30 Feb.28 May 31 Year
1997 -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $3,434,882 $3,595,669 $4,130,999 $4,476,303 $15,637,853
Gross profit 1,074,816 990,592 1,161,324 1,087,292 4,314,024
Net income 319,010 256,689 334,788 186,945 1,097,432
Net income
per share 0.02 0.02 0.02 0.02 0.08
Quarter Ended,
-----------------------------------------------------------
Aug.31 Nov.30 Feb.28 May 31 Year
1996 -----------------------------------------------------------
Net revenue $1,051,806 $1,194,837 $1,255,310 $3,121,457 $ 6,623,410
Gross profit 314,714 313,229 491,535 762,636 1,882,114
Net income 94,582 58,890 113,915 126,876 394,263
Net income
per share 0.01 0.01 0.01 0.01 0.04
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IN-HOUSE REHAB CORPORATION
Dated: October 28, 1997 By:/s/ David V. Hall
David V. Hall, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
company and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ David V. Hall President (Principal October 28, 1997
David V. Hall Executive Officer)
and Director
/s/ Robert J. Babine Chief Financial Officer, October 28, 1997
Robert J. Babine Treasurer (Principal
Financial and Accounting
Officer) and Director
/s/ Chris Brogdon Director October 28, 1997
Chris Brogdon
/s/ Mark P. Clein Director October 28, 1997
Mark P. Clein
/s/ Timothy M. Graven Director October 28, 1997
Timothy M. Graven
</TABLE>
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between In-House Rehab, Inc., a Kentucky corporation and wholly
owned subsidiary of In-House Rehab Corporation ("Corporation"), and Robert J.
Babine ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on February 1, 1997 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Vice President & Chief
Financial Officer, and Employee is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation as Chief Financial Officer and Vice
President, and Corporation agrees to employ and retain Employee in such
capacities. Employee shall devote a substantial portion of his business time,
energy, and skill to the affairs of the Corporation as Employee shall report
to the Corporation's President, and at all times during the term of this
Agreement shall have powers and duties at least commensurate with his position
as Vice President and Chief Financial Officer, as such duties are outlined in
Appendix A hereto.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform his duties in compliance with this
Agreement after written notice to the Employee by the Board of Directors
specifying such failure, provided that such "cause" shall have been found by a
majority vote of the members of the Board of Directors of the Corporation
other than Employee.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (I) constructive termination
as described in subsection 2.1.2, (ii) "Termination Upon a Change in Control,"
and (iii) termination by reason of Employee's death or disability as described
in Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a termination
of Employee's employment with Corporation following a "Change in Control."
2.1.5 "Change in Control" shall mean (I) the time that Corporation
first determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of thirty percent
(30%) or more of Corporation's outstanding securities.
2.2 Initial Term. The term of employment of Employee by Corporation shall
be for a period of three (3) years beginning with Effective Date, unless
terminated earlier pursuant to this Section. This Agreement, and the three
(3) year term hereof shall be deemed to have been renewed the first day of
each month after the effective date. At any time, Corporation and Employee
may by mutual written agreement extend or modify the term of Employee's
employment under the terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement and shall be
effected by written notification to Employee. Upon Termination For Cause,
Employee shall promptly be paid all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but
Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any
time upon giving written notice to Employee of such termination. Upon any
Termination Other Than For Cause, Employee shall promptly be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
awards granted to Employee under the Corporation's stock option plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.2, but no other compensation or
reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Directors of
Corporation, has failed to perform his duties under this Agreement on account
of illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder
by written notification to Employee and payment to Employee of all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of this Agreement,
but Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination
Upon a Change in Control, Employee shall immediately be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
any awards granted to Employee under Corporation's Stock Option Plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation agrees to pay to Employee a "Base Salary" for the twelve (12)
calendar months beginning the Effective Date at the rate of $120,000.00 per
annum payable in twenty-six equal, bi-weekly installments of $4615.38.
Employee's Base Salary shall be reviewed annually by the Compensation
Committee of the Board of Directors ("Compensation Committee"), and the Base
Salary for each year (or portion thereof) beginning January 1, 1998 shall be
determined by the Compensation Committee which shall authorize an increase in
Employee's Base Salary for such year in an amount which, at a minimum, shall
be equal to the cumulative cost-of-living increment on the Base Salary as
report in the "Consumer Price Index, Seattle, Washington, All Items,"
published by the U.S. Department of Labor (using January 1, 1997 as the base
date for computation).
3.2 Bonuses. Employee shall be eligible to receive a discretionary bonus
for each year (or portion thereof) during the term of this Agreement and any
extensions thereof, with the actual amount of any such bonus to be determined
in the sole discretion of the Board of Directors based upon its evaluation of
Employee's performance during such year, and in accordance with the Bonus
program adopted by the Board of Directors. All such bonuses shall be reviewed
annually by the Compensation Committee.
3.3 Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate in
such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, annual physical examinations, dental and medical
plans, personal catastrophe and disability insurance, financial planning,
retirement plans and supplementary executive retirement plans, if any. For
purposes of establishing the length of service under any benefit plans or
programs of Corporation, Employee's employment with the Corporation will be
deemed to have commenced on September 30, 1994.
3.3.2 Vacation. Employee shall be entitled to vacation during each
year during the term of this Agreement and any extensions thereof, prorated
for partial years, in accordance with the Corporations standard policy for
administrative personnel.
3.3.3 Life Insurance. For the term of this Agreement and any
extensions thereof, Corporation shall at its expense procure and keep in
effect term life insurance on the life of Employee payable to the Estate of
the Employee the minimum aggregate amount of Five Hundred Thousand
($500,000.00) dollars.
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance, payable monthly, equal to $7,500.00 per year.
3.3.5 Reimbursement for Expenses. During the term of this Agreement,
Corporation shall reimburse Employee for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by Employee in
connection with his duties under this Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for the
remaining portion of the Term of this Agreement. Employee shall continue to
accrue retirement benefits and shall continue to enjoy any benefits under any
plans of the Corporation in which Employee is a participant to the full extent
of Employee's rights under such plans, including any perquisites provided
under this Agreement, though the remaining term of this Agreement.
4.1.1 Purchase of Shares Held by Employee and Insurance Coverage. In
the event Employee's employment is terminated before September 30, 1998, in a
Termination Upon a Change in Control, the Corporation will also, be required
to, at the sole option of the Employee, redeem a minimum of twenty-five
percent (25%) of the Corporation stock, or any stock dividends thereof, owned
by the Employee as of the Effective Date, that are owned by the employee at
the date of severance. The price to be paid will be the market determined
value at the close of business at the date of severance. If a public market
has not been created, or is not in existence at the time of severance, then
the price to be paid shall be the most recent share price obtained in any
private offering of the Corporation shares of common stock. In the event
Employee's employment is terminated in a Termination Upon a Change in Control,
the Corporation will also provide family medical insurance consistent with
coverages extended to other employees until the Employee reaches the age of
sixty five (65). The requirement that the Corporation purchase family medical
insurance shall be excused during any period of subsequent employment where
the new employer provides equal or better coverage.
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination
Other Than for Cause, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for a
period equal to the remaining portion of the Term of this Agreement.
Employee may, in Employees sole discretion, by delivery of a notice to the
Corporation within thirty (30) days following a Termination Other Than for
Cause, elect to receive from Corporation a lump sum severance payment by
cashiers check equal to the present value of the flow of cash payments that
would otherwise be paid to Employee pursuant to this Section. Employee shall
be entitled to an accelerated vesting of any awards granted to Employee under
Corporation's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant.
4.2.1 Purchase of Shares Held by Employee and Insurance Coverage. In
the event Employee's employment is terminated before September 30, 1998, in a
Termination Other Than for Cause, the Corporation will also be required, at
the sole option of the Employee, to redeem a minimum of twenty-five percent
(25%) of the Corporation stock, or any stock dividends thereof, owned by the
Employee as of the Effective Date, that are owned by the employee at the date
of severance. The price to be paid will be the market determined value at the
close of business at the date of severance. If a public market has not been
created, or is not in existence at the time of severance, then the price to be
paid shall be the most recent share price obtained in any private offering of
the Corporation shares of common stock. In the event Employee's employment is
terminated in a Termination Other Than for Cause, the Corporation will also
provide family medical insurance consistent with coverages extended to other
employees until the Employee reaches the age of sixty five (65). The
requirement that the Corporation purchase family medical insurance shall be
excused during any period of subsequent employment where the new employer
provides equal or better coverage.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, Termination by Death, or
Termination by reason of Employee's disability pursuant to Section 2.6,
Employee or his estate shall not be paid any severance compensation.
Section 5. Outside Activities of Employee. Corporation acknowledges that
Employee has commitments and business activities not related to the
Corporation and that certain of these commitments and business affairs involve
activities in the long term care industry. There shall be no restriction on
Employee's ability to fulfill such commitments or engage in such business
activities, provided that during the term of Employee's employment under this
Agreement or for a period of six months after the termination of such
employment (other than a Termination Other Than For Cause or a Termination
Upon Change in Control) Employee shall not divert away from the Corporation,
for officers personal benefit, or for the benefit of an organization in which
officer has a material financial interest, any opportunity, arising during
such period to pursue such opportunities personally unless the Board of
Directors of the corporation have determined not to pursue such opportunity.
Section 6. Payment Obligations. Corporation's obligation to pay Employee
the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 7. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
Section 8. Withholdings. All compensation and benefits to Employee
hereunder
shall be reduced by all federal, state, local and other withholdings and
similar taxes and payments required by applicable law.
Section 9. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Kentucky Business Corporation Act or any successor provision thereof and
any other applicable state law, and shall pay Employee's expenses in defending
any civil or criminal action, suit, or proceeding in advance of the final
disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 10. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street, Suite 1400 B
Louisville, Ky. 40202
addressed to the Employee at:
14201 Willow Grove Circle
Louisville, Ky. 40245
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 11. Law Governing. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
Section 12. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 13. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 14. Agreement Binding. This Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 15. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
Section 16. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday,
Sunday, or a legal holiday, in which event the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday, in which event
the period shall run until the end of the next day thereafter which is not a
Saturday, Sunday, or legal holiday.
Section 17. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
Section 18. Arbitration. If at any time during the term of this Agreement
any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 19. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 20. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 21. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 22. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 23. Separate Counsel. The parties acknowledge that the Corporation
has been represented in this transaction by counsel, and that the Employee has
not been represented in this transaction by the Corporation's attorneys, and
the Employee has been advised that it is important for the Employee to seek
separate legal advise and representation in this matter.
Date:
In-House Rehab, Inc
a Kentucky Corporation
by:/s/ David Hall /s/ Robert J. Babine
David Hall, President Robert J. Babine, Individually
CONTRACT FOR THERAPY PROGRAM SERVICES
THIS AGREEMENT is made and entered into by and between IN-HOUSE REHAB, INC.,
as independent contractor, a Kentucky corporation (hereinafter referred to as
"In-House"), and West Wood Retirement Community (hereinafter referred to as
"Owner/Operator").
WHEREAS, In-House is in the business of providing rehabilitative therapy
services in health care facilities in the United States; and
WHEREAS, Owner is the operator of a nursing care facility located at West Wood
Retirement Community, 1001 Mar Walt Drive, Fort Walton Beach, Florida 32548
(such facility being referred to herein as the "Treatment Facility"); and
WHEREAS, In-House has agreed to provide therapists at the Treatment Facility,
and Owner has agreed to contract and pay for such services at the Treatment
Facility, all in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the promises and mutual covenants
contained herein, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following term shall
have the meanings assigned below:
(a)"Agreement" means this Contract For Therapy Services.
(b) "Commencement Date" means that date established as the
beginning of the term of this Agreement pursuant to Paragraph 6 hereof:
(c) "Owner/Operator" means West Wood Retirement Community.
(d) "In-House" means In-House Rehab, Inc., a Kentucky
corporation.
(e) "Therapy" means a comprehensive rehabilitation therapy
program consisting of the three disciplines of physical therapy,
speech-language pathology and occupational therapy.
(f) "Treatment Facility" means West Wood Retirement Community.
2. Nature of Commitment. In-House shall make qualified therapists
and non-therapist personnel available to Owner on an as-needed basis to
provide those services listed on Schedule A attached hereto (the "Services")
to Owner's patients at the Treatment Facility.
3. Specific Commitments of In-House
(a) Services from Therapists
In-House shall provide Services as ordered by physicians to
the Owner's patients who request that Services be provided by In-House,
through qualified therapists under the terms and conditions of this Agreement
and in accordance with any and all applicable requirements of federal and
state laws, rules and regulations.
(b) Training and Patient Care Conferences
The therapists provided by In-House under this Agreement for
the rendering of services in the Treatment Facility shall comply with the
Owner's patient care policies, shall participate in individual patient care
planning meetings for patients receiving therapy at the Treatment Facility and
shall participate in staff meetings and conferences for the purpose of
discussing policies and plans of treatment and general issues related to
therapy patient treatment matters. Therapists provided by In-House will also
participate in the Treatment Facility's in-service educational training
programs as reasonably requested.
(c) Statement of Qualifications
In-House shall submit to Owner a copy of each therapist's
license who is to provide Services to Owner's patient on behalf of In-House.
Owner shall have the right to reasonably disapprove of any individual who is
to render Services to Owner on behalf of In-House pursuant to this Agreement,
and In-House will have 30 days to replace that individual or resolve the
problem with Owner.
(d) Record Maintenance
In-House therapists shall provide and maintain documentation
for the individual patient charts of treatment, progress, and evaluations in
accordance with requirements of the Treatment Facility and of third party
reimbursement sources.
(f) Invoices
In-House shall submit to the Owner on a monthly basis an
invoice for all Services rendered during the month. Additionally, In-House
shall submit all other documentation necessary for an accurate and complete
billing by the Owner to third party reimbursement sources. Such invoices
shall include among other items: (a) the name(s) of the In-House therapist(s)
who provided the Service; (b) the name(s) of the patients to whom the
Services were rendered; and (c) the fees applicable to each Service and each
patient. The fees for the Services provided by In-House are set forth on
Schedules B, C, D and I attached hereto and made a part hereof.
4. Obligations of Owner
(a) Billing
Unless otherwise required by applicable federal and state
laws, rules or regulations, Owner shall be solely responsible for billing
patients and/or their respective governmental or other third party
reimbursement sources for Services provided to the patients of Owner by
In-House under this Agreement. Owner will be responsible for supplying
clerical personnel/services needed to complete third party billing support and
to prepare invoices to appropriate payors for Services provided.
(b) Space and Equipment
Owner shall be responsible for designating and setting aside
adequate work and storage areas for the provisions of In-House's therapy
services. These areas shall be located on the Treatment Facility's premises
and shall be adequate for In-House's therapists to provide the Services
required under this Agreement. The maintenance of the designated area
including storage space shall be the sole responsibility of Owner. The Owner
shall also be responsible for the provision and maintenance of standard
physical therapy equipment required within the designated area for the
provision of a coordinated, comprehensive therapy rehabilitation program.
(c) Record Maintenance
Owner shall have primary responsibility for maintaining all
patient records. Owner shall make available to In-House for review and
inspection individual patient treatment records necessary for the proper
evaluation, screening, treatment of, and provision of Services to such
patients. Owner shall be responsible for alerting In-House to any and all
federal, state, and local regulations pertaining to the confidentiality of
patient records. In-House agrees to be bound by such regulations.
5. Compensation
(a) Payments
In-House shall submit to Owner on a monthly basis invoices
for all Services rendered during the month and at fees outlined in Schedules
B, C, D and I. Owner shall remit to In-House payment in full for each invoice
submitted by In-House within ninety (90) days of the submission date of such
invoices. In the event Owner shall fail to make payment in full of any
invoice (other than amounts questioned or contested by the Owner is good
faith) within five (5) days of the date payment is due, the amount due
pursuant to such invoice (less and except any amounts questioned or contested
in good faith) will be increased by a late payment fee of two percent (2.0%)
of the amount due. In the event Owner shall question or contest in good faith
any amount stated to be due under an invoice submitted by In-House, Owner and
In-House agree to proceed diligently and in good faith to resolve any such
question or contest, and payment shall be due and payable immediately upon
such resolution. No notice of this late charge is required of In-House (other
than inclusion on In-House's invoice) and the late charge will be
automatically assessed if payment is not received by In-House on or before the
ninety-fifth (95th) day following submission date of invoice. Late charges
are not subject to provisions of paragraphs 5 (b) (c) or (d) of this
Agreement.
Owner hereby expressly agrees that the fee rates included in
Schedules B, C, D, and I represent market rates for such Services and such
market rates are consistent with Owners' investigation of market services and
rates.
(b) Support for Payments by Reimbursement Sources
In-House, at its own time and expense, shall be responsible
for defending third party payor source denials or disallowances of
reimbursement for units of therapy services rendered by In-House which are
based upon improper or incomplete medical records documentation of the
Services provided or determination by a third party payor that the units of
therapy services were medically unnecessary. In-House must provide the
necessary clinical therapy documentation to show that the units were
rendered. In the event Owner is denied units of therapy charges due to the
foregoing reasons, then In-House shall initiate action after facility
notification and receiving permission to contact the intermediary to correct
the cause for the denial as outlined in paragraphs 5(c) and 5(d) of this
Agreement.
6. Term. The term of this Agreement shall commence as of August 1,
1996 ("Commencement Date"), and shall continue for an initial term of five (5)
years thereafter, and shall be renewable for five (5) successive additional
terms of five (5) years each unless either party to this Agreement shall give
to the other at least sixty (60) days notice (prior to the expiration of the
existing term) of its election not to renew this Agreement for an additional
term, this Agreement shall be deemed to be automatically renewed.
Notwithstanding the foregoing, either party shall have the right
to terminate this Agreement upon sixty (60) days written notice to the other
party, with or without cause, in which event this contract shall terminate
pursuant to such notice, but such termination shall not impair the rights of
In-House to enforce the payment of sums due hereunder in proceedings at law or
in equity, nor the rights of either party to pursue remedies for subsequent
claims.
7. Authority of Owner. Anything to the contrary herein contained
notwithstanding, ultimate authority and power to establish, approve or
disapprove any policy, program, rule, regulation, procedure, legal action,
repair or addition, shall be vested in the Owner.
8. Default. Each of the following events or occurrences shall
constitute an Event of Default hereunder:
(a) The failure of the Owner to pay or reimburse to In-House all
sums required to be paid or reimbursed to In-House hereunder.
(b) Any representation or warranty made or contained in this
Agreement found to be untrue or misleading in any material respect.
(c) The nonperformance of, nonobservance of, breach of or
failure to execute the covenants, agreements, promises, warranties and
conditions made by or required of any party to this Agreement.
(d) The filing by or against any party to this Agreement of a
voluntary or involuntary petition in bankruptcy; or any party's adjudication
as a bankrupt or insolvent; or the filing by any party of any petition or
answer seeking or acquiescing to any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief for itself under any
present or future federal, state or other law or regulation relating to
bankruptcy, insolvency, receivership or other relief for debtors; or the
making by any party, endorser or guarantor of any general assignment for the
benefit of creditors; or the admission in writing by any party of its
inability to pay its debts generally as they become due; or the commission by
any party of any act of bankruptcy.
9. Remedies for Non-Financial Default. In the event either party to
this Agreement deems the other party to be in default under it obligations as
contained hereunder, other than a default described in paragraph 8(a) hereof,
then said party shall be required to provide notice of the alleged default to
the other party, which notice shall contain detailed specifications of such
default. Upon the receipt of such notice (which shall be deemed to have
occurred on the date the notice was mailed by postage pre-paid certified mail,
return receipt requested), the party being charged with the default shall have
a period of thirty (30) days in which to cure such default or to provide
appropriate assurances that the alleged default will be timely corrected. If
such default is not cured within such thirty (30) day period, then the party
alleging the default may terminate this Agreement, but such termination shall
not be deemed a waiver of such party's right to enforce the payment or sums
due hereunder or to seek other relief, either at law or in equity.
10. Remedies for Financial Default. In the event of a default by the
owner under paragraph 8(a) hereof, In-House shall be required to provide
notice of the default to the Owner. Upon the receipt of such notice (which
shall be deemed to have occurred on the date the notice was mailed by postage
pre-paid certified mail, return receipt requested), the Owner shall have a
period of ten (10) days in which to cure such default. If such default is not
cured within such ten (10) day period, then In-House may terminate this
Agreement, but such termination shall not be deemed a waiver of In-House's
rights to enforce the payment of sums due hereunder or to seek other relief,
either at law or in equity.
11. Insurance. In-House agrees, during the term of this Agreement, to
maintain the following insurance coverage:
(a) Commercial General Liability with limits of not less than
$1,000,000 per occurrence, $3,000,000 aggregate;
(b) Professional Malpractice Liability Insurance providing
coverage of all In-House personnel provided pursuant to the terms of this
Agreement with limits of not less that $1,000,000 per occurrence and
$3,000,000 aggregate;
(c) Worker's Compensation Insurance as regulated by the laws of
the State providing coverage in all In-House personnel provided pursuant to
the terms of this Agreement; and
(d) Automobile Liability Insurance with limits of not less than
$1,000,000 combined single limit.
In-House shall also be named as an additional insured on the
Treatment Facility's Medical Malpractice, Commercial General Liability and
Automobile Liability Insurance policies.
12. Indemnification: Hold Harmless
(a) Owner shall indemnify and hold In-House harmless from and
against all claims, demands, costs, expenses, liabilities and losses
(including reasonable attorneys' fees) which may result against In-House as a
consequence of any alleged malfeasance, neglect or medical malpractice caused
or alleged to be caused by Owner, its employees, agents, or contractors.
(b) In-House shall indemnify and hold Owner harmless from and
against all claims, demands, costs, expenses, liabilities and losses
(including reasonable attorneys' fees) which may result against Owner as a
consequence of any alleged malfeasance, neglect or medical malpractice or
other act or omission caused or alleged to be caused by In-House, its
employees, agents, or contractors.
13. Independent Contracting Parties. This Agreement is an independent
contract between Owner and In-House. Neither party shall be construed in any
manner whatsoever to be an employee or agent of the other, nor shall this
Agreement be construed as contract of employment, agency or joint venture. It
is further expressly understood that all personnel provided by In-House in
support of the therapy services shall not in any manner be construed to be
employees of or contractors to the Owner, but shall be employees of or
contracts
to In-House, which shall be solely responsible for the wages, salaries,
benefits, payroll taxes, insurance (including workers compensation and
professional liability insurance) and all other burdens of employment of such
employees or contractors.
14. Access to Records. Until the expiration of four (4) years after
the furnishing of Services pursuant to this Agreement, In-House agrees to make
available, upon request from the Secretary of Health and Human Services or the
U.S. Comptroller General or of any of their duly authorized representatives,
records of In-House that are necessary to verify the Services received by
Owner under this Agreement. In-House will also adhere to any state
requirements in this regard.
In any subcontract between In-House and any related organizations
or individual which is valued at or results in payment for services of
$10,000.000 or more over a twelve (12) month period, In-House will include
provisions that require the related organization to make available, upon
written request, to the Secretary of U.S. Department of Health and Human
Services, the U.S. Comptroller General or any other duly authorized
representatives, the subcontract and books, documents and records of the
related organization that are necessary to verify the nature and extent of
costs in connection with services under the subcontract.
15. Restrictive Covenant
(a) Owner Restrictive Covenant
(I) During the term of this Agreement and for a period of
twelve (12) months after the termination of this Agreement for any reason
whatsoever, Owner shall not, without the written consent of In-House, induce
or attempt to influence or attempt to influence any employee or contractor of
In-House to terminate his relationship with In-House. Notwithstanding the
foregoing,
Owner shall not be prohibited from rehiring any employee or
independent contractor who is in the employment of Owner at the
commencement of the term of this Agreement, but whose
employment is transferred to In-House during the term hereof.
(ii) Owner acknowledges that the restrictions contained in
subparagraph (i) of this paragraph in view of the nature of the business in
which In-House is engaged, are reasonable and necessary to protect the
legitimate interests of In-House, and that any violation thereof would result
in irreparable injuries to In-House violation thereof would result in
irreparable injuries to In-House and Owner therefore acknowledges that, in the
event of violation of any of these restrictions, In-House shall be entitled to
obtain from any court injunctive relief as well as damages and an equitable
accounting of all earnings, profits, and other benefits arising from such a
violation, which rights shall be cumulative and in addition to any other
rights or remedies to which In-House may be entitled.
(b) In-House Restrictive Covenant
(I) During the term of this Agreement and for a period of
twelve (12) months after the termination of this Agreement for any reason
whatsoever, In-House shall not, without the written consent of Owner, (A)
employee or contract with (a) any individual who is currently on the payroll
of the Owner at the time of termination, or (b) any entity in which any such
individual has an interest (as a principal, partner, director, officer, agent,
employee, consultant, contractor or otherwise); or (B) induce or attempt to
influence any employee of Owner to terminate his relationship with Owner.
Notwithstanding the foregoing, In-House shall not be prohibited from rehiring
any employee or independent contractor who is in the employment of In-House
at the commencement of the term of this Agreement, but whose employment is
transferred to Owner during the term hereof.
(ii) In-House acknowledges that the restrictions contained
in subparagraph (i) of this paragraph, in view of the nature of the business
in which Owner is engaged, are reasonable and necessary to protect the
legitimate interests of Owner, and that any violation thereof would result in
irreparable injuries to the Owner, and In-House therefore acknowledges that,
in the event of violation of any of these restrictions, Owner shall be
entitled to obtain from any court injunctive relief as well as damages and an
equitable accounting of all earnings profits, and other benefits arising from
such a violation, which rights shall be cumulative and in addition to any
other rights or remedies to which Owner may be entitled.
16. Miscellaneous
(a) Indulgences
Neither the failure nor any delay on the part of any party
to exercise any right, remedy, power, or privilege ("Right") under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any Right preclude any other or further exercise of the same or of
any occurrence be construed as a waiver of such Right with respect to any
other occurrence. No waiver shall be effective unless it is in writing and is
signed by the party asserted to have granted such waiver.
(b) Waiver of Provisions
None of the conditions or provisions of this Agreement shall
be held to have been waived by any act or knowledge of either party, its
agents or employees, but only by an instrument in writing, signed by an
officer of such party.
(c) Law Applicable
This Agreement and all questions relating to its validity,
terpretation, performance and enforcement, shall be governed by and construed
in accordance with the laws of the state of Florida notwithstanding any
conflict-of-laws provisions to the contrary.
(d) Notices
All notices, requests, demands, and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made, and received when personally delivered
or upon actual receipt of registered or certified mail, postage prepaid,
return receipt requested, address as set forth below:
(i) If to In-House:
In-House Rehab, Inc.
ATTN: Vice President/Operations
325 W. Main Street, Suite 1400 B
Louisville, KY 40202
(ii) If to Owner/Manager:
Capitol Care Management
ATTN: President
6000 Lake Forest Drive, Suite 225
Atlanta, Georgia 30328
Any such notice shall be deemed given as of the date of its
receipt at the address to which such notice is to be directed, regardless of
any other date that may appear.
Any party may change the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this paragraph for the giving of notice.
(e) Entire Agreement
This Agreement and the Schedules A, B, C, D and I hereto
contain the entire understanding between the parties hereto with respect to
the subject matter, and supersede all prior and contemporaneous agreements and
understandings, inducement or conditions, express or implied, oral or written.
Except as expressed herein, neither this Agreement nor the attached Schedules
A, B, C, D and I may be modified or amended other than by an agreement
delivered in writing to the address shown in this Agreement, and subsequently
signed by the authorized, official party to which such modification or
amendment is asserted.
(f) Number of Days
In computing the number of days for purposes of the
Agreement, all days shall be counted, including Saturdays, Sundays, and
holidays; provided, however, that if the final day of any time period falls on
a Saturday, Sunday, or holiday, then the final day shall be deemed to be the
next day which is not a Saturday, Sunday, or holiday.
(g) Schedules
All Schedules, Exhibits, and Addenda attached hereto are
hereby incorporated by reference into, and made a part of, this Agreement.
(h) Variations of Pronouns
All pronouns and all variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or persons or entity may require.
(i) Authorization for Agreement
The execution and performance of this Agreement by Owner and
In-House have been duly authorized by all necessary laws, resolutions, or
corporate action, and this Agreement constitutes the valid and enforceable
obligations of Owner and In-House in accordance with its terms.
(j) Attorney's Fees
In the event of litigation arising out of this Agreement,
the prevailing party shall be entitled to recover, in addition to the relief
granted, all costs incurred, including reasonable attorney's fees.
(k) Enforceability
Should any provisions of this Agreement be unenforceable as
between the parties, such unenforceability shall not affect the
enforceability of other provisions of this Agreement.
(m) Assignment
All terms, provisions and conditions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, successors, personal representatives and permitted assigns.
Any party may assign this Agreement only upon the prior written consent of the
other party (which consent shall not be unreasonably withheld), provided that:
(i) such assignment is in writing, duly executed by the
assignor and assignee;
(ii) assignee accepts in writing the assignment and assumes
this Agreement and the due performance of all of the assignor's obligations
hereunder; and
(iii) a duly executed and acknowledged counterpart of such
Assignment and Assumption Agreement is delivered to the other party.
In the event of such assignment, and upon compliance
with the foregoing conditions, this Agreement shall be binding upon and inure
to the benefit of such assignee, but the assignor shall not be released of its
obligations except by a release signed by the non-assigning party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement for
Services as outlined herein to be effective commencing August 1, 1996.
IN-HOUSE REHAB, INC.
By:_________________________________
Title:Vice President of Operations
Date:_______________________________
OWNER
By:_________________________________
Title:_______________________________
Date:_______________________________
<PAGE>
SCHEDULE A
SERVICES TO BE PROVIDED
In-House Rehab, Inc., agrees to furnish qualified personnel as required for
the provision of the following Services:
Occupational Therapy Services
Speech-Language Pathology Services
Non-Therapist Personnel Services
<PAGE>
SCHEDULE B
FEE SCHEDULE - SPEECH-LANGUAGE PATHOLOGY
Owner agrees to pay for speech-language pathology performed for patients at
Treatment Facility and such fees shall be based on units of Service as set
forth below:
Each unit of speech-language pathology at $24.00 per unit.
A unit of Service equals fifteen (15) minutes and represents the therapist's
time, including patient evaluations, patient therapy, preparation of and
planning for treatment and preparation of reports, active participation in
patient care conferences related to specific rehabilitation patients and
preparation of reports but exclusive of travel and personal time for which no
charge is made.
The schedule of fees set forth above may be changed by In-House at any time
upon not less than thirty (30) days written notice to Owner. Notice of such
increases will be submitted to Owner with an explanation for the increase, at
least 30 days prior to the scheduled effective date. Upon the Owner's written
agreement to the increase, the increase will be implemented on the scheduled
effective date.
<PAGE>
SCHEDULE C
FEE SCHEDULE - OCCUPATIONAL THERAPY
Owner agrees to pay for occupational therapy performed for patients at
Treatment Facility and such fees shall be based on units of Service as set
forth below:
Each unit of occupational therapy at $24.00 per unit.
A unit of Service equals fifteen (15) minutes and represents the therapist's
time, including patient evaluations, patient therapy, preparation of and
planning for treatment and preparation of reports, active participation in
patient care conferences related to specific rehabilitation patients and
preparation of reports but exclusive of travel and personal time for which no
charge is made.
The schedule of fees set forth above may be changed by In-House at any time
upon not less than thirty (30) days written notice to Owner. Notice of such
increases will be submitted to Owner with an explanation for the increase, at
least 30 days prior to the scheduled effective date. Upon the Owner's written
agreement to the increase, the increase will be implemented on the scheduled
effective date.
<PAGE>
SCHEDULE D
FEE SCHEDULE - PHYSICAL THERAPY
Per State Salary Equivalency Guidelines
<PAGE>
SCHEDULE I
COMPENSATION FOR STAFF MANAGEMENT
a) Nursing Center will remit to In-House a sum of $625 (Six hundred
twenty-five) per therapist, with a minimum of $1250 (One thousand two hundred
fifty) per month. This amount may be adjusted if the quantity of equipment,
therapists or other services provided should subsequently change.
b) A one time charge of $2500 will be payable in advance. This
payment is intended to defray cost of In-House conversion.
<PAGE>
ADDITIONAL CONTRACTS FOR THERAPY PROGRAM SERVICES
The Registrant has additional contracts for Therapy Program Services
with affiliates substantially identical to the foregoing. The material
details of such agreements which differ are as follows:
COMMENCE- SCHEDULE
MENT B AND C
DATE OF PER SCHEDULE D
NAME OF FACILITY LOCATION AGREEMENT UNIT RATE RATES
Arrowhead Nursing Jonesboro, GA 4/1/95 $24.00 None
Center
The Atrium Jacksonville, 7/1/96 $24.00 None
Nursing Home FL
Browns Nursing Statesboro, GA 9/1/96 $28.00 Salary
Home Equiva-
lency
Brunswick Nursing Brunswick, GA 4/1/95 $24.00 None
Center
Cedartown Health Cedartown, GA 1/1/96 $24.00 None
Care Center
Dearfield Nursing Columbus, GA 8/1/95 $24.00 None
Facility
Floyd Health Care Rome, GA 2/1/96 $24.00 None
Center
Friendship Health Cleveland, GA 5/1/96 $28.00 Salary
Care Center Equiva-
lency
Gardendale Nurs- Gardendale, AL 2/15/96 $24.00 None
ing Center
Gateway Health Cleveland, GA 5/1/96 $24.00 Salary
Care Center Equiva-
lency
Gold City Health Dahlonega, GA 5/1/96 $28.00 Salary
Care Center Equiva-
lency
Griffin Health Griffin, GA 4/1/95 $24.00 None
Care Center
Hartley Woods Macon, GA 3/1/97 $24.00 Salary
Health & Rehab Equiva-
lency
Marietta Nursing Marietta, GA 7/15/95 $24.00 None
Center
Midway Health Midway, GA 4/1/95
Care Center
Mountain View Clayton, GA 2/15/95 $24.00 None
Health Care Center
Palmyra Inter- Palmyra, TN 1/1/96 $28.00 Salary
mediate Care Equiva-
Center lency
Parkway Health & Memphis, TN 1/1/96 $24.00 None
Rehab
River Park Health Nashville, TN 10/1/95 $24.00 None
Care
Rome Health Rome, GA 4/1/95 $24.00 None
Care Center
Sea Breeze Health Mobile, AL 4/1/96 $24.00 None
Health Care Center
Springdale Conva- Atlanta, GA 4/1/95 $24.00 None
lescent Center of
Atlanta
Springdale Conva- Cartersville, 4/1/95 $24.00 None
lescent Center of GA
Bartow County
Sun Mountain Rome, GA 4/1/95 $24.00 None
Health Care Center
Twelve Oaks Riverdale, 4/1/95 $24.00 None
Health Care GA
University/Gaines- Gainesville, 2/3/97 $28.00 Salary
ville Health Care FL Equiva-
Center lency
GREAT FINANCIAL BANK
One Financial Square
Louisville, KY 40202-3322
March 3, 1997
Mr. Robert J. Babine
Treasurer and Chief Financial Officer
In-House Rehab, Inc.
325 West Main Street, Suite 1400B
Louisville, KY 40202
Dear Bob:
In accordance with recent discussions, Great Financial Bank, FSB ("Great
Financial") is pleased to confirm its willingness to make the following credit
facility or facilities (individually or collectively, the "Loan") available to
In-House Rehab, Inc., (the "Borrower") subject to the terms and conditions
described herein. While these and other specific items will be incorporated in
the loan documents and possibly a separate loan agreement (the "Agreement"), a
description of the most basic elements is summarized below for the purpose of
establishing a preliminary understanding as well as recording Great
Financial's willingness to extend the following Loan. This commitment (the
"Commitment") is subject to the Borrower's execution and delivery of such
documents, containing such terms and conditions, as Great Financial may
reasonably require (including the Agreement, the "Loan Documents"), and
consequently this Commitment is not meant to be all inclusive of the contents
of the Loan Documents.
Terms and Conditions:
Borrower: In-House Rehab, Inc. and/or Perennial Development Corporation
Credit Facility: Revolving Line of Credit
Amount: $4,500,000.00
Purpose: Working capital requirements of the Borrower
Maturity: October 2, 1997
Interest Rate: The Prime Rate of Great Financial plus 1/4 of 1%, which rate is
subject to change from time to time, as the Prime Rate changes
Repayment: Monthly payment of all accrued interest. The outstanding balance of
principal, accrued interest, fees, and charges due at maturity.
Collateral: A first priority lien on all business assets of the Borrower.
Guarantor: Perennial Development Corporation
Origination Fee: 1/4 of 1% on $2,000,000 (the increased principal amount of
the note).
Additional Terms and Conditions Precedent to Closing:
1. Execution of a Loan Agreement in form and substance acceptable to Great
Financial. In addition to such other customary or reasonably required terms
and conditions, the Loan Agreement shall contain such financial, negative and
affirmative covenants as are reasonably required by Great Financial.
2. Execution of a Borrowing Base Agreement, which among other terms and
conditions would limit draws under the line of credit to 75% of eligible
accounts receivable. The Borrower agrees to provide Great Financial a
Borrowing Base Certificate, within 20 days of the end of each calendar month.
The Borrower also agrees to provide GFB with a monthly listing and aging of
accounts receivable and a monthly listing and aging of accounts payable.
3. The Borrower agrees to provide Great Financial with monthly financial
statements, to include at a minimum, a balance sheet, an income statement, and
a statement of cash flows, prepared in accordance with GAAP, no later than 20
days after the end of each calendar month.
4. The Borrower agrees to provide Great Financial with a CPA Audited annual
financial statement with an Unqualified Opinion, prepared in accordance with
GAAP, no later than 120 days after the end of the company's year end.
5. Borrower represents, warrants, agrees and certifies that Borrower is in
compliance with, and will continue to comply with, all laws and regulations
applicable to its business and properties; that Borrower has adequate
insurance, with premiums paid, for its business and properties; that Borrower
has filed all taxes, federal, state, and local tax returns and paid all taxes,
charges, levies and assessments that are due; that Borrower will continue
business operations in substantially the same manner as at present; and that
borrowing under this credit facility does not violate or cause default under
any agreement to which Borrower is a party.
6. Borrower shall maintain or cause to be maintained at all times, with
financially sound and reputable insurers acceptable to Great Financial, such
hazard and liability insurance with respect to its properties, assets and
business, to such extent, against such hazards, in the amount of coverage and
with such deductibles as are commonly carried by prudent businesses similarly
situated. Such policies of insurance shall name Great Financial as an
additional insured and loss payee with respect to any and all of Borrower's
properties in which Great Financial has any interest and shall contain a
statement that such insurance may not be canceled or terminated without thirty
(30) days prior written notice to Great Financial. Upon closing of the credit
facilities and without written demand by Great Financial, Borrower shall
furnish to Great Financial full evidence of such insurance, and shall promptly
effect such additional insurance to protect against such additional risks and
in such amounts as Great Financial may reasonably request from time to time.
7. Evidence satisfactory to Great Financial that the Borrower has perfected in
Great Financial's favor, a security interest in all of the collateral
described in the loan documents, free and clear of other liens and
encumbrances.
8. Borrower agrees to maintain all depository accounts with Great Financial.
9. The Borrower shall pay the costs and expenses incurred by Great Financial
in negotiating, preparing, closing, and recording the loan documents,
including fees and expenses of Great Financial's counsel, if any, and costs
and expenses associated with any search(es) of the public records. All such
costs and expenses shall be paid at Closing; and if for whatever reason the
Loan does not close, the Borrower hereby agrees to pay to Great Financial on
demand any and all reasonable costs, fees and expenses incurred by Great
Financial.
10. The Borrower agrees to provide Great Financial with any other
documentation, in form acceptable to Great Financial, which Great Financial in
its sole discretion deems necessary for the credit facility.
11. The absence of material adverse change in the Borrower's financial
condition from the last financial statement delivered to Great Financial.
12. The absence of any event coming to the attention of Great Financial which
should have been disclosed to Great Financial and which has or could have a
material adverse effect on the Borrower and/or on the ability of the Borrower
to satisfy the terms and conditions of this Commitment and to repay the Credit
facility.
13. This commitment letter will serve as an amendment to the Loan Agreement
dated as of October 29, 1996 between Great Financial, the Borrower, and the
Guarantor; however, only to the extent that the date of the note and the
principal amount of the note have been changed herein. All other terms and
conditions of the Loan Agreement remain the same.
If this letter sets forth the general terms and conditions upon which you
would be willing to enter into the contemplated credit facility, please
deliver to me on or before the close of business on March 15, 1997, the
enclosed copy of this letter signed on behalf of the Borrower and the
Cosigners. If the signed copy is not received by Great Financial on or before
the close of business on March 15, 1997, this commitment shall expire and
become null and void.
I look forward to working with you. If you have any questions, or if I can be
of any assistance, please give me a call.
Sincerely,
/s/ Kenneth J. Bewick
First Vice President
AGREED AND ACCEPTED:
PERENNIAL DEVELOPMENT CORPORATION
By: /s/ Robert J. Babine
Robert J. Babine
Treasurer and Chief Financial Officer
Date: 3-5-97
IN-HOUSE REHAB, INC.
By: /s/ Robert J. Babine
Robert J. Babine
Treasurer and Chief Financial Officer
Date: 3-5-97
<PAGE>
SECURITY AGREEMENT
Account Number ------------------
This is a Security Agreement dated March 3, 1997 between IN-HOUSE REHAB,
INC. ("Debtor") of 325 West Main Street, Suite 1400B, Louisville, KY 40222,
and GREAT FINANCIAL BANK, FSB ("Secured Party"), One Financial Square,
Louisville, Kentucky 40202.
1. Grant of Security Interest. Debtor hereby grants to Secured Party
a security interest in all of Debtor's right, title and interest in and to the
following described property, in any and all additions and accessions thereto
and replacements thereof and in the proceeds, both cash and non-cash, of any
sale or other disposition of that property, all of which are collectively
referred to as the "Collateral".
(a) All inventory of the Debtor, now owned or hereafter acquired; (b)
all Accounts, accounts receivable and Chattel Paper of the Debtor, now
existing or hereafter arising, including but not limited to all rights to
payment for services rendered, whether or not earned by performance; (c) all
Equipment and Machinery (including but not limited to Mobile Goods) of the
Debtor and all replacements thereof and accessions thereto, whether or not the
same are or may become Fixtures; (d) all negotiable Documents of Title; (e)
all General Intangibles of the Debtor; (f) all Goods, Instruments, Documents,
policies and certificates of insurance, proceeds of insurance, securities, tax
refunds, letters of credit and credit devises, Deposit Accounts, cash and
other property owned by the Debtor or in which Debtor has an interest whether
or not now or hereafter in the possession of the Secured Party of a Bailee or
regardless of whether the Secured Party may now or hereafter control
possession by documents of title or otherwise; and (g) all other personal
property and Goods of the Debtor, regardless of how classified, including but
not limited to all office supplies, furniture, office, store and trade
fixtures and leasehold improvements, patents, trademarks and copyrights.
As used herein, the terms "Inventory," "Accounts," "Chattel Paper,"
"Mobile Goods," "Fixtures," "Documents," "Equipment," "General Intangibles,"
"Instruments," "Goods," "Deposit Accounts," and "Bailee" shall have the
meaning given to them in Kentucky Revised Statutes Chapter 355.
2. Obligations Secured. The security interest created herein secures
payment and performance of all liabilities and obligations of the Debtor to
the Secured Party of every kind and character, now existing or hereafter
incurred, whether direct or indirect, absolute or contingent, joint or
several, however owned, held or acquired by the Secured Party. IT BEING THE
EXPRESS INTENTION OF THE DEBTOR BY THE EXECUTION AND DELIVERY OF THIS SECURITY
AGREEMENT TO SECURE ALL LIABILITIES AND OBLIGATIONS OF THE DEBTOR TO, AND ALL
FINANCIAL ACCOMMODATIONS BY, THE SECURED PARTY, TO OR FOR THE BENEFIT OF THE
DEBTOR, INCLUDING BUT NOT LIMITED TO LOANS, LINES OF CREDIT, HONORED
OVERDRAFTS, GUARANTIES OF THE OBLIGATIONS OF THIRD PARTIES AND DISCOUNTS.
Without limiting the generality of the foregoing, the security interest
created hereby secures payment and performance of:
If Checked Here [X] all indebtedness of the debtor evidenced by the promissory
note in the principal amount of $4,500,000.00, dated March 3, 1997, all
obligations contained therein, and any amendments, replacements, and
substitutions therefor or extensions thereof;
If Checked Here [ ] arising out of that certain letter of credit agreement
dated , 19 , between the Debtor and the Secured Party;
If Checked Here [ ] arising out of that certain Guaranty Agreement dated
, 19 , guarantying certain Guarantied Obligations, as therein
defined, of to Secured Party;
3. Representations and Warranties. To induce Secured Party to enter
into this Security Agreement, Debtor represents, warrants and covenants as
follows:
(a) If Debtor is a corporation, then it is duly organized and validly
existing under the laws of the state of its incorporation, and it has full
power and authority to enter into this Security Agreement; and the execution,
delivery and performance of this Security Agreement have been duly authorized.
(b) If Debtor is a partnership, then it has full power and authority
to enter into this Security Agreement; and the execution, delivery and
performance of this Security Agreement have been duly authorized by all of the
partners of this partnership.
(c) If Debtor is an individual, then he has full power and authority
to enter into this Security Agreement.
(d) This Security Agreement has been duly entered into and delivered
and constitutes a legal, valid and binding obligation of Debtor enforceable in
accordance with its terms.
(e) Debtor has good and marketable title to the Collateral, and the
Collateral is not subject to any lien, charge, encumbrance, claim or security
interest, or any pending or threatened legal proceeding, except the following:
(f) The Collateral will be kept at the following location: -----------
If no address is here given, then the Collateral will be kept at the address
first above given for Debtor. Debtor will not permit the Collateral to be
kept or stored at any location other than that shown without the prior written
consent of Secured Party.
(g) If Debtor is a corporation, its registered office, as set forth in
its most recent filing with the Kentucky Secretary of State which officially
designates its current registered office is 3200 Providian Tower, Louisville,
KY 40202; if Debtor is an individual, general partnership, limited
partnership, cooperative association, business trust, credit union or other
organization (as defined in KRS 355.1-201) its principal place of business and
residence is . The Debtor's chief executive
office is located at 9505 Williamsburg Plaza, Louisville, KY 40222 . Debtor
will immediately notify Secured Party in writing of any change in the location
of Debtor's registered office, principal place of business, residence or chief
executive office.
(h) All financial statements, certificates or other information
concerning Debtor's financial condition, or concerning the Collateral, has
been in all respects accurate, true and correct.
(i) The Collateral is intended for use primarily for (check one) [X]
Business Use or [ ] Consumer Use, and (check one) [ ] is or [X] is not being
acquired with the proceeds of one of the obligations secured by this Security
Agreement. If the Collateral is being acquired with the proceeds of one of
the obligations secured in this Security Agreement, Secured Party may disburse
directly to the seller of the Collateral.
(j) During the past five (5) years, Debtor has conducted business
under no trade name or assumed business name other than its real name and the
following: .
4. Insurance. Debtor, at its own expense, shall insure the
Collateral against fire, theft and casualty damage in the amount not less than
the outstanding balance of the obligation secured by this Security Agreement.
Such insurance shall be satisfactory to Secured Party as to form and amount.
Debtor has the right to choose the agent and insurer from which such insurance
is obtained, except that Secured Party may, for reasonable cause, refuse to
accept an insurer offered by Debtor. Such insurance shall name Secured Party
as an insured to the extent of its interest, and shall afford to Secured Party
such additional protection to insure against such additional risks or hazards
as Secured Party may request from time to time. Such insurance shall provide
that the insurance provided thereunder cannot be cancelled without 14 days
prior written notice to Secured Party. Debtor shall provide Secured Party
with evidence satisfactory to it of Debtor's due compliance with this
paragraph. Debtor hereby assigns to Secured Party all sums which become
payable under any insurance covering the Collateral including without
limitation, returned or unearned premiums and dividends, and appoints Secured
Party as attorney for Debtor in obtaining, adjusting, settling, compromising
and cancelling such insurance and endorsing any drafts drawn to Debtor
pursuant to such insurance.
5. Receivables - Special Provisions
(a) If any event of default hereunder occurs, the Secured Party shall
have, in addition to the rights set forth elsewhere in this Security
Agreement, the right to notify debtors obligated on any or all Accounts,
accounts receivable or Chattel Paper of the Debtor ("Receivables") to make
payments directly to the Secured Party, and to apply the whole or any part of
such payments against the obligations secured by this Security Agreement, the
order and method of such application being in the sole discretion of the
Secured Party. Until the Secured Party notifies debtors to make payments
directly to the Secured Party, Debtor shall continue to collect payments of
the Receivables. If any event of default has occurred and is continuing,
Debtor shall not use the proceeds from payments on any of the Receivable to
satisfy any indebtedness to any person other than the Secured Party. If
Debtor collects payments on any of the Receivables after an event of default
has occurred and while it is continuing, or if Debtor receives any payments
after notice has been given to make payments directly to Secured Party, Debtor
shall hold the proceeds received from that collection in trust for the Secured
Party and shall turn over such proceeds to the Secured Party immediately in
the identical form received. In the event of such payment, the Secured Party
shall credit the proceeds as payment of the obligations secured by this
Security Agreement first to interest, then to principal. Any credit given to
Debtor for proceeds in form other than cash shall be conditional upon final
payment of the items, and if any item is not paid the amount of any credit
given for it shall be charged to Debtor whether or not the item is returned,
and such amount shall be a part of the obligations secured by this Security
Agreement.
(b) Debtor shall have no power to, and shall not, waive, compromise or
discount any Receivables without the prior written consent of the Secured
Party.
(c) If the Secured Party deems itself insecure and upon notification
to Debtor, the Debtor shall immediately deliver to the Secured Party any
Receivables evidenced by a promissory note, trade acceptance, Chattel Paper or
other instrument, appropriately endorsed to the Secured Party's order. Debtor
authorizes the Secured Party to endorse same on Debtor's behalf. Debtor
hereby waives presentment, demand, notice of dishonor, protest and notice of
protest and all other notices with respect thereto.
(d) The Debtor hereby irrevocably constitutes the Secured Party as
Debtor's agent and attorney-in-fact to (a) proceed against debtors obligated
on Receivables in Debtor's name or in the Secured Party's name, and (b) sign
and endorse all checks, drafts and other instruments in payment of
Receivables, and (c) perform all such other acts with respect to Receivables
as the Secured Party may in its discretion deem necessary to effectuate the
security intended to be granted in this Security Agreement.
THE ADDITIONAL PROVISIONS PRINTED ON ANY ADDITIONAL PAGE SHALL FORM A
PART OF THIS AGREEMENT AND ARE HEREBY INCORPORATED BY REFERENCE.
6. Obligations Regarding Collateral. Debtor shall keep and maintain
the Collateral in good condition and repair and under adequate condition of
storage to prevent its deterioration or depreciation in value. Debtor shall
keep the Collateral free and clear of liens and shall declare and pay all
assessments, charges or taxes. If Debtor fails to pay such assessments,
charges or taxes Secured Party may, but is not obligated to, pay them, and
such payment shall be deemed conclusive evidence of the legality or validity
of such assessments, charges or taxes. If Debtor fails to provide insurance
pursuant to paragraph 4 of this Security Agreement, Secured Party may, but is
not obligated to, pay for insurance. Debtor shall promptly reimburse Secured
Party for any payments made pursuant to this paragraph, and until
reimbursement, such payments shall be a part of the obligations secured by
this Security Agreement.
7. Use and Inspection of Collateral. Debtor shall not use the
Collateral or the proceeds of any loans secured by the Collateral in violation
of any federal or state statute, or local ordinance, and Secured Party shall
have the right to inspect the Collateral at the premises of Debtor or wherever
the Collateral may be located.
8. Default. At the option of Secured Party and without necessity for
demand or notice, the happening of any of the following events shall
constitute an event of default hereunder:
(a) Failure of Debtor to pay when due any obligation secured by this
Security Agreement, or any installment on any such obligation;
(b) Failure of Debtor to keep or perform any of the terms or
provisions of this Security Agreement, or of any note or other evidence of any
obligations secured by this Security Agreement;
(c) Any warranty, representation or statement made herein or otherwise
furnished to Secured Party by or on behalf of Debtor proves to be false in any
material respect;
(d) Loss, theft, damage, destruction or encumbrance of the Collateral,
or any part thereof, or the making of a levy, seizure or attachment thereof or
thereon;
(e) The sale or other disposition of the Collateral or any interest
therein without the prior written consent of Secured Party;
(f) The Collateral should become the subject matter of litigation
which might, in the opinion of Secured Party, result in substantial impairment
or loss of the security intended to be provided by this Security Agreement;
(g) Any of the following by or to Debtor or to any guarantor or
endorser of any obligation secured by this Security Agreement: Death (if an
individual); unless steps are taken within 60 days thereafter to reasonably
satisfy the Secured Party that the Note will be paid and when due, any failure
in business; any general assignment for the benefit of creditors; the filing
of any petition for relief under the provisions of the Bankruptcy Act, or for
relief under any insolvency law, either voluntarily or involuntarily;
dissolution, termination of existence, or appointment of a receiver of any
part of the property of Debtor;
(h) Secured Party should deem itself insecure, or Secured Party in
good faith believes that the prospect for payment of any obligation secured by
this Security Agreement, or any installment on any such obligation has been
impaired;
(i) If Debtor is a corporation, any event should occur (including
without limitation, transfer, sale or other disposition of shares of Debtor by
the shareholders on the date of this Security Agreement, or the issuance by
Debtor of shares of Debtor to persons not shareholders of Debtor on the date
of this Security Agreement) which would cause fifty percent or more of the
then outstanding shares of Debtor to be owned by persons other than one of the
shareholders of Debtor on the date of this Security Agreement, without Debtor
having first received the prior written consent of Secured Party;
(j) Debtor or any guarantor or endorser of any obligation secured by
this Security Agreement should default in any obligation to or agreement with
any person or entity by which Debtor or such guarantor or endorser or any of
their properties are bound;
(k) Debtor or any officer, director, agent, tenant or employee of the
Debtor is charged, indicted, or convicted of any criminal offense by the
federal or any state government which, in the sole and reasonable exercise of
the Secured Party's discretion, shall place any of the Collateral at risk of
forfeiture to the federal or any state government.
9. Remedies. Upon any event of default under this Security
Agreement, Secured Party may at its option declare any and all obligations
secured by this Security Agreement immediately due and payable; and, in
addition to exercising all other rights or remedies proceed to exercise with
respect to the Collateral all rights, options and remedies of a secured party
upon default as provided for under the Uniform Commercial Code. The rights of
Secured Party upon default shall include, without limitation, the following:
(a) The right to the immediate possession of the Collateral without
requirement of notice or demand, or of legal process. In exercising this
right, Secured Party may enter into the premises of Debtor, without
requirement of any legal process and Secured Party may pursue the Collateral
wherever it may be found. After retaking possession, Secured Party shall be
entitled to sell the Collateral at public or private sale, in accordance with
the requirements of the Uniform Commercial Code, or other law regulating such
sale.
(b) The right to recover the reasonable expenses of preparing the
Collateral for sale, and for selling the Collateral, and other like expenses,
together with court costs and reasonable attorney fees incurred in realizing
upon the Collateral or enforcing any provision of this Security Agreement.
(c) The right to require Debtor to assemble the Collateral and make it
available to Secured Party at a place to be designated by Secured Party which
is reasonable and convenient to both parties.
(d) The right to require Debtor to store the Collateral, at its own
costs and risk, on behalf of Secured Party after Secured Party has retaken
possession of Collateral. Such storage shall be in such manner as to prevent
any deterioration of the Collateral, and shall be for a reasonable time
pending the sale or other disposition of the Collateral.
(e) The right to proceed by appropriate legal process to enforce any
provisions of this Security Agreement or in aid of the execution of any power
of sale, or for foreclosure of the security interest of Secured Party, or for
the sale of the Collateral under the judgment or decree of any court.
10. Remedies Cumulative. The rights and remedies of Secured Party in
this Security Agreement shall be deemed to be cumulative, and any exercise of
any rights or remedies by Secured Party shall not be deemed to be an election
of that right or remedy, to the exclusion of any other right or remedy.
11. No Waivers. Any forbearance, failure or delay by Secured Party in
the exercise of any right, power or remedy hereunder shall not be deemed to be
a waiver of any such right, power or remedy and any single or partial exercise
of any right, power or remedy, shall not preclude the further exercise
thereof. Every right, power and remedy of Secured Party shall continue in
full force and effect until such right, power or remedy is specifically waived
by an instrument in writing executed by Secured Party.
12. Notice. Any requirement of the Uniform Commercial Code of
reasonable notice, whether to Debtor or to any other party, shall be met if
such notice is mailed, postage prepaid, to Debtor, or as the case may be, to
such other party to whom notice is required, at the address shown for each of
them respectively on the records of Secured Party at least five days before
the time of sale, disposition or other event or thing giving rise to the
requirement of notice.
13. Severability. Any provision of this Security Agreement prohibited
by any law applicable to this Security Agreement shall be ineffective to the
extent of such prohibition without invalidating or affecting in any manner the
remaining provisions of this Security Agreement. If any part, term or
provision of this Security Agreement is held by any court to be illegal, or in
conflict with any law applicable to this Security Agreement, the rights and
obligations of the parties shall be construed and enforced as if this Security
Agreement did not contain that particular part, term or provision.
14. Headings. The headings in this Security Agreement have been
included for ease of reference only, and shall not be considered in the
construction or interpretation of this Security Agreement.
15. Benefit. This Security Agreement shall inure to the benefit of
Secured Party and its successors and assigns, and all obligations of Debtor
shall bind its heirs, executors or administrators, and its successors and
assigns. If these is more than one Debtor, their obligations hereunder shall
be joint and several.
16. Filing of Copies. A carbon copy, photocopy or other reproduction
of (a) this Security Agreement, or (b) any financing statement covering all or
part of the Collateral, is sufficient as a financing statement.
17. This agreement shall be governed by the laws of the Commonwealth
of Kentucky to the extent allowed by the Uniform Commercial Code.
IN WITNESS WHEREOF, Debtor and Secured Party have signed this Security
Agreement on 3-5 , 19 97 .
Debtor: IN-HOUSE REHAB, INC.
By: /s/ Robert J. Babine
Robert J. Babine, Treasurer and Chief Financial Officer
GREAT FINANCIAL BANK, FSB
By: /s/ Kenneth J. Bewick
Kenneth J. Bewick, First Vice President
----------------------------------
Account key (for internal use only)
<PAGE>
PROMISSORY NOTE
Revolving Credit Loan
$4,500,000.00 March 3, 1997
Louisville, Kentucky
For value received the undersigned Maker(s), (individually or
collectively, the "Maker"), promises to pay to the order of Great Financial
Bank, FSB (the "Lender"), at its home office in Louisville, Kentucky, the
principal sum of FOUR MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS,
together with interest on the principal of this note from time to time
outstanding at an annual rate set forth below.
1. INTEREST RATE. The principal balance of this note outstanding at any
time shall bear interest as is checked below from the date of this note first
set forth above until paid in full at a rate equal to the following:
1.1 [ ] Fixed Rate: % per annum.
1.1 [ X ] Variable Rate: A variable rate per annum which is equal to
the sum of the "Prime Rate" charged by the Lender, from time to time in
effect, plus 1/4 of 1 percentage points, provided, however, if checked
here [ ], the annual interest rate shall not be less than % nor shall it
exceed %. As used in this note, "Prime Rate" means the annual rate set
by the Lender from time to time to establish the annual interest rate
applicable to extensions of credit by the Lender which bear interest related
to the Lender's Prime Rate. The Prime Rate is not necessarily the Lender's
best or lowest rate of interest. The Lender's Prime Rate shall be posted at
all times in the offices of the Commercial Lending Division at the Lender's
home office in Louisville, Kentucky. The interest rate of this note shall be
adjusted from time to time on the same day on which the Prime Rate is changed
by the Lender. As of the date of this note the Prime Rate is 8.25% and the
annual interest rate of this note is 8.50%.
1.2 Interest Accrual. All interest on this note shall be computed on
the basis of the actual number of days elapsed over an assumed year of 360
days, or
if checked here [ ], over a year of 365 days, or
if checked here [ ], over an assumed year of 360 days with 30 day
months.
2. REPAYMENT TERMS. This note is a revolving credit note under which
advances may be made by the Bank from time to time under the terms and
conditions set forth in this note. Amounts once borrowed and repaid may be
reborrowed in accordance with the terms and conditions set forth in this note.
All accrued interest shall be paid, until this note has been paid in
full, beginning on April 2, 1997 and continuing on the same successive day
every: [ X ] month; [ ] three (3) months; [ ] other (insert frequency):
. The outstanding balance of principal, accrued interest, charges and fees
shall be due and payable in full on October 2, 1997 (the "Maturity Date").
If checked here [ X ], advances made under this note are subject to the
terms of a Borrowing Base Agreement dated Marcy 3, 1997, which governs
conditions and circumstances under which advances may be made under this note.
If checked here [ ], the Borrower shall be required to maintain a zero
balance outstanding under this note for a period of days during the
term of this note.
Time shall be of the essence in making all payments of principal and/or
interest due under this note.
3. LATE CHARGE. If the Maker fails to pay any installment of principal
and/or interest due hereunder within fifteen (15) days after the payment first
became due and payable, the Maker shall pay the Lender a "late charge" equal
to the greater of (i) five percent (5%) of each such overdue payment, or
(ii) $25.00 each. If not sooner paid, all late charges shall be payable on
the Maturity Date.
4. UNPAID INTEREST; DEFAULT RATE. At the discretion of the Lender,
interest not paid within 14 days of its due date will be added to the
outstanding principal balance of this note and will bear interest at the rate
indicated on the front of this note. Notwithstanding any other provision in
this note to the contrary, upon maturity, whether by acceleration or
otherwise, at the discretion of the Lender, the principal balance of this note
shall bear interest thereafter until paid in full at 3 percentage points in
excess of the interest rate of this note. Acceleration of maturity occurs if
the Lender exercises its option to deem this note immediately due and payable.
5. APPLICATION OF PAYMENTS. Payments shall be applied first to accrued but
unpaid interest, then to the principal balance outstanding, and then to any
late fee or charge outstanding under this note.
6. COLLATERAL SECURITY. To secure payment of this note, any renewals or
extensions thereof, and all other existing and future indebtedness (direct or
contingent) of the Maker to the Lender, the Lender has been given the property
described below, or the property described in any instruments described below,
or a lien on such property, and any additions to or substitutions for the
same, as well as all property which now or hereafter is listed under any
separate security agreement, instrument or document as directly or indirectly
securing this note, and also all money and other property held by the Lender
on deposit, in safekeeping or otherwise for the account of or to the credit of
the Maker:
All Business Assets of IN-HOUSE REHAB, INC., as evidenced in the Security
Agreement dated as of March 3, 1997.
7. DEFAULT; REMEDIES. In the event (i) the Maker fails to make any payment
when due under this note or under any other notes or obligations of the Maker
to the Lender, or (ii) the Maker or any endorser or guarantor of this note
shall be adjudged a bankrupt, or file a petition in bankruptcy, or have a
petition filed against them, or (iii) the Maker or any endorser or guarantor
of this note shall, in the sole opinion of the Lender, experience a material
adverse change in its, his or her financial condition, or (iv) a writ or order
of attachment or garnishment shall be issued or made against any property of
the Maker or any endorser or guarantor of this note, or (v) of dissolution,
termination of existence, or material change in the ownership of the Maker of
any endorser or guarantor of this note, or (vi) the Maker or any endorser or
guarantor of this note fails to provide financial statements or other
financial information on a timely basis when reasonably requested by the
Lender, or (vii) the Bank in good faith deems itself insecure with respect to
repayment of this note, or in good faith believes that the prospect of payment
is impaired, or (viii) of the death of any Maker or any endorser or guarantor
of this note, or (ix) the Maker or any endorser or Guarantor of this Note
shall default under or breach this Note, any other note, loan agreement,
warranty or other agreement with Lender, then in any such case, (a) the Lender
may terminate any obligation of the Lender to make further advances under this
note, and (b) the entire unpaid principal balance of and all accrued interest
on this note and/or all liabilities of the Maker to the Lender shall be
considered to be in default and, at the Lender's option, forthwith become due
and payable without demand or notice, and the Lender may sell at public or
private sale any or all of the property securing this note, or substitutes
therefor or additions thereto, and if such sale be public, the Lender may
purchase such property or any part thereof. The proceeds of any sale made
hereunder, after deducting any expense incident to said sale, together with
the cost of handling said property, may be applied by the Lender, as it shall
deem proper, to any one or more or all of the liabilities of the Maker to the
Lender, whether such liabilities are due or not, and the balance of said
proceeds, if any, shall be returned to the Maker.
If any Maker is a corporation, partnership, limited partnership, limited
liability company or any other type of business entity, the happening of any
of the following events without the Lender's prior written consent shall
render this note in default and, at the option of the Lender, immediately due
and payable without demand or notice: (1) a merger or consolidation of the
Maker or any subsidiary of the Maker with or into any corporation or other
legal entity, or a merger or consolidation of one or more other such entities
with or into the Maker; (2) the sale, lease, transfer or other disposition of
all or any substantial part of the assets of the Maker, whether now owned or
hereafter acquired; (3) an acquisition by the Maker of all or substantially
all of the assets or outstanding capital stock of any other business entity;
or (4) any one or more transfers, sales or other dispositions of shares of any
class of stock of the Maker by shareholders on the date of this note, or the
issuance by Maker on one or more occasions of shares of any class of stock of
the Maker to persons not shareholders of the Maker on the date of this note,
which in the aggregate would cause 50% or more of the then outstanding shares
of such class of stock to be owned by persons other than one of the
shareholders of the Maker on the date of this note.
Failure of the holder of this note to exercise any of its rights and
remedies shall not constitute a waiver of any provision of this note, or of
any security agreement, instrument or document (including without limitation
any guaranty) securing Maker's obligations under this note, or of any such
holder's rights and remedies, nor shall it prevent the holder from exercising
any rights or remedies with respect to the subsequent happening of the same or
similar occurrences. All remedies of the holder hereof shall be cumulative to
the greatest extent permitted by law.
8. SEVERABILITY. If at any time any provision of this note shall be
determined to be illegal, invalid or unenforceable, the rights and obligations
of the parties shall be construed and enforced with that provision limited so
as to make it enforceable to the greatest extent allowed by law or, if it is
totally unenforceable, as if this note did not contain that particular
provision.
9. GOVERNING LAW. This note has been delivered in, and shall be governed
by and construed in accordance with the laws of the Commonwealth of Kentucky.
10. ATTORNEYS FEES; COSTS OF COLLECTIONS. If there is any default under
this note, and this note is placed in the hands of an attorney who is not a
salaried employee of the Lender for collection, or is collected through any
court, including any bankruptcy court, the Maker promises to pay to the holder
hereof such court costs and reasonable attorney's fees as are incurred by the
holder.
11. MISCELLANEOUS. The Borrower agrees that payments received on this note
by check, draft or other non-cash item shall not be deemed to be made until
the Lender has received final payment of the check, draft or non-cash item
from the financial institution that it is drawn upon.
All parties to this instrument, whether makers, sureties, guarantors,
endorsers, accommodation parties or otherwise, shall be jointly and severally
bound, and jointly and severally waive presentment, demand, notice of
dishonor, protest, notice of protest, notice of nonpayment or nonacceptance
and any other notice and all due diligence or promptness that may otherwise be
required by law. The holder of this instrument may, from time to time and in
one or more instances, with or without notice to any party, and without
affecting the obligations of any maker, surety, guarantor, endorser,
accommodation party or any other party to this note (1) renew this note or
extend the time for payment of principal or interest from time to time, (2)
release or discharge any one or more parties liable on this note, (3) suspend
the right to enforce this note with respect to any persons, (4) change,
exchange, or release any property in which the Lender has any interest
securing this note, (5) justifiably or otherwise, impair any collateral
securing this note or suspend or release the right to enforce against any such
collateral, and (6) at any time it deems it necessary or proper, call for and
accept, as additional security, the signature or signatures of additional
parties, or a security interest in property of any kind, or both.
If checked here [ ], this note is a renewal of that certain promissory
note dated in the principal amount of $
.
If checked here [ X ], this note is issued pursuant to the terms of a
certain letter or loan agreement dated as of October 29, 1996, and as amended
March 3, 1997, to which both the Maker and the Lender (with the possible
addition of other parties) are parties (the "Agreement"), and this note is
subject to the terms and conditions of said Agreement.
This note was executed as of and is effective as of the date set forth
above, but was actually executed on the date(s) set forth below.
IF MORE THAN ONE PERSON SHALL SIGN THIS NOTE, THE OBLIGATION OF ALL SUCH
PERSONS SHALL BE JOINT AND SEVERAL AND ANY REFERENCE IN THIS NOTE TO THE
"MAKER" SHALL REFER TO EACH ONE SEPARATELY AS WELL AS TO ALL.
IN-HOUSE REHAB, INC.
by: /s/ Robert J. Babine
Robert J. Babine,
Treasurer and Chief Financial Officer
Date: 3-5-97
Reviewed:
(officer initials)
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this date
by and between In-House Rehab Corporation, a Colorado corporation
("Corporation"), and Rebecca Krueger ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on January 1, 1997 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Chief Operating Officer, and
Employee is willing to accept such employment by Corporation, on the terms and
subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation, and its wholly owned subsidiary, In-House
Rehab, Inc., as Chief Operating Officer and Corporation agrees to employ and
retain Employee in such capacity. Employee shall devote a substantial portion
of her business time, energy, and skill to the affairs of the Corporation as
Employee shall report to the Corporation's President and Chief Executive Officer
and at all times during the term of this Agreement shall have powers and duties
at least commensurate with her position as Chief Operating Officer.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms shall
have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Corporation or
by reason of Employee's willful material breach of this Agreement which has
resulted in material injury to Corporation, or continuance of failure by the
Employee to perform her duties in compliance with this Agreement after written
notice to the Employee by the President specifying such failure.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a Termination
for Cause) and shall include constructive termination of Employee's employment
by reason of material breach of this Agreement by Corporation, such constructive
termination to be effective upon notice from Employee to Corporation of such
constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constrictive termination as
described in subsection 2.1.2., (ii) "Termination Upon a Change in Control," and
(iii) termination by reason of Employee's death or disability as described in
Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a termination by
Employee of Employee's employment with Corporation within 120 days following a
"Change in Control."
2.1.5 "Change in Control" shall mean (i) the time that Corporation first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange
Act")) have acquired direct or indirect beneficial ownership (within the meaning
of Rule 13d-3 under the Exchange Act) of twenty percent (20%) or more of
Corporation's outstanding securities.
2.2 Initial Term. The term of employment of Employee by Corporation shall be
for a period of one (1) year beginning with Effective Date, unless terminated
earlier pursuant to this Section. This Agreement, and the one (1) year term
hereof shall be deemed to have been renewed the first day of each month after
the
effective date. At any time, Corporation and Employee may by mutual written
agreement extend or modify the term of Employee's employment under the terms of
this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement after written
notification to Employee pursuant to Section 2.9 hereof. Upon Termination For
Cause, Employee shall promptly be paid all accrued salary, bonus compensation to
the extent earned, vested deferred compensation (other than pension play or
profit sharing plan benefits which will be paid in accordance with the
applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with her duties hereunder, all to the date of termination, but
Employee shall not be paid any other compensation or reimbursement of any kind,
including without limitation, severance compensation
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any time
upon written notice to Employee of such termination in accordance with Section
2.9 hereof. Upon any Termination Other Than For Cause, Employee shall promptly
be paid all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Corporation in which Employee is a participant to the full
extent of Employee's rights under such plans (including accelerated vesting, if
any, of awards granted to Employee under the Corporation's stock option plan),
accrued vacation pay and any appropriate business expenses incurred by Employee
in connection with her duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.2, but no other compensation or
reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the President or officer
acting in her place, has failed to perform her duties under this Agreement on
account of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder by
written notification to Employee and payment to Employee of all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans, accrued vacation pay and any appropriate business expenses incurred
by Employee in connection with her duties hereunder, all to the date of
termination, with the exception of medical and dental benefits which shall
continue through the expiration of this Agreement, but Employee shall not be
paid
any other compensation or reimbursement of any kind, including without
limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this Agreement,
Employee's employment shall be deemed to have terminated as of the last day of
the month during which her death occurs and Corporation shall promptly pay to
her
estate or such beneficiaries as Employee may from time to time designate all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with her duties hereunder,
all to the date of termination. The Employee's estate shall not be paid any
other compensation, including without limitation, severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan),
any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with her duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans (including accelerated vesting, if any, of any awards granted to
Employee under Corporation's Stock Option Plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with her duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.1, but no other compensation or reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation, through its subsidiary, In-House Rehab, Inc., agrees to pay to
Employee a "Base Salary" at the rate of $103,500.00 per annum payable in twenty-
six equal, bi-weekly installments of $3,980.77. Employee's Base Salary shall be
reviewed annually by the Compensation Committee of the Board of Directors
("Compensation Committee"), and the Base Salary for each year (or portion
thereof) beginning January 1, 1998 shall be determined by the Compensation
Committee which shall authorize an increase in Employee's Base Salary for such
year in an amount which, at a minimum, shall be equal to the cumulative cost-of-
living increment on the Base Salary as reported in the "Consumer Price Index,
Seattle, Washington, All Items," published by the U.S. Department of Labor
(using
January 1, 1996 as the base date for computation).
3.2 Bonuses. Employee shall be eligible to receive bonuses for each year (or
portion thereof) during the term of this Agreement and any extensions thereof,
in accordance with the executive bonus plan adopted by the Corporation.
3.3 Additional Benefits. During the term of this Agreement, Employee shall be
entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate in
such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option Plan,
profit sharing plans, annual physical examinations, dental and medical plans,
and
disability insurance. For purposes of establishing the length of service under
any benefit plans or programs of Corporation, Employee's employment with the
Corporation will be deemed to have commenced on June 20, 1996.
3.3.2 Vacation. Employee shall be entitled to two (2) weeks of vacation
during each year during the term of this Agreement and any extensions thereof,
prorated for partial years.
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance in the amount of $450.00 per monh after taxes. In addition, the
Employee shall have the option to purchase the vehicle leased by the Employee at
the expiration of the initial lease term.
3.3.5 Reimbursement for Expenses. During the term of this Agreement,
Corporation shall reimburse Employee for reasonable and properly documented out-
of-pocket business and/or entertainment expenses incurred by Employee in
connection with her duties under this Agreement.
3.3.6. Maintenance of Licenses. During the term of this Agreement,
Corporation shall pay/reimburse Employee for any and all fees, dues, continuing
education programs, or other amounts to satisfy other obligations in connection
with maintaining any professional license that Employee has as of the effective
date hereof, or that employee obtains incident to Employment and with consent of
the Corporation.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee shall be paid as severance compensation her Base
Salary (at the rate payable at the time of such termination), for a period of
one
(1) year, however, if Employee is employed by a new employer during such period,
the severance compensation payable to Employee during such period will be
reduced
by the amount of compensation that Employee actually receives from the new
employer. However, Employee is under no obligation to mitigate the amount owed
Employee pursuant to this Section by seeking other employment or otherwise.
Employee shall also be entitled to an accelerated vesting of any awards granted
to Employee under the Corporation's Stock Option Plan to the extent provided in
the stock option agreement entered into at the time of grant. Employee shall
continue to accrue retirement benefits and shall continue to enjoy any benefits
under any plans of the Corporation in which Employee is a participant to the
full
extent of Employee's rights under such plans, including any perquisites provided
under this Agreement, for the same period of time, and in direct proportion to
the amount of severance received under the terms of this Section; provided,
however, that the benefits under any such plans of the Corporation in which
Employee is a participant, including any such perquisites, shall cease upon re-
employment by a new employer.
4.2 Severance Compensation in the Event of a Termination Other Than for Cause.
In the event Employee's employment is terminated in a Termination Other Than for
Cause, Employee shall be paid as severance compensation her Base Salary (at the
rate payable at the time of such termination), for a period of twelve (12)
months, however, that if Employee is employed by a new employer during such
period, the severance compensation payable to Employee during such period will
be reduced by the amount of compensation that Employee actually receives from
the
new employer, Employee is under no obligation to mitigate the amount owed to the
officer pursuant to this Section by seeking employment or otherwise. Employee
shall be entitled to an accelerated vesting of any awards granted to Employee
under Corporation's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's
disability pursuant to Section 2.6, Employee or her estate shall not be paid any
severance compensation.
Section 7. Payment Obligations. Corporation's obligation to pay Employee
the
compensation and to make the arrangements provided herein shall be
unconditional,
and Employee shall have no obligation whatsoever to mitigate damages hereunder.
If litigation after a Change in Control shall be brought to enforce or interpret
any provision contained herein, Corporation, to the extent permitted by
applicable law and the Corporations' Articles of Incorporation and Bylaws,
hereby
indemnifies Employee for Employee's reasonable attorneys' fees and disbursements
incurred in such litigation.
Section 8. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and
treated as confidential both during and after the term of this Agreement, except
as may be permitted in writing by Corporation's Board of Directors or as such
information is within the public domain or comes within the public domain
without
any breach of this Agreement.
Section 9. Withholdings. All compensation and benefits to Employee
hereunder
shall be reduced by all federal, state, local and other withholdings and similar
taxes and payments required by applicable law.
Section 10. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of Incorporation
and Bylaws, Corporation shall indemnify Employee at all times during and after
the term of this Agreement to the maximum extent permitted under Kentucky
Business Corporation Act or any successor provision thereof and any other
applicable state law, and shall pay Employee's expenses in defending any civil
or criminal action, suit, or proceeding in advance of the final disposition of
such action, suit or proceeding, to the maximum extent permitted under such
applicable state laws.
Section 11. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
12414 Covered Bridge Road
Sellersburg, Indiana 47172
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section.
Section 12. Law Governing. This Agreement shall be governed by and
construed in
accordance with the laws of the Commonwealth of Kentucky.
Section 13. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 14. Entire Agreement. This Agreement contains the entire
understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
Section 15. Agreement Binding. This Agreement shall be binding upon the
heirs,
executors, administrators, successors and assigns of the parties hereto.
Section 16. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
Section 17. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday, Sunday,
or a legal holiday, in which event the period shall begin to run on the next day
which is not a Saturday, Sunday, or legal holiday, in which event the period
shall run until the end of the next day thereafter which is not a Saturday,
Sunday, or legal holiday.
Section 18. Pronouns and Plurals. All pronouns and any variations thereof
shall
be deemed to refer to the masculine, feminine, neuter, singular, or plural as
the
identity of the person or persons may require.
Section 19. Arbitration. If at any time during the term of this Agreement
any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered by
the arbiter may be entered in any court having jurisdiction thereof.
Section 20. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 21. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 22. Parties in Interest. Nothing herein shall be construed to be to
the
benefit of any third party, nor is it intended that any provision shall be for
the benefit of any third party.
Section 23. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 24. Separate Counsel. The parties acknowledge that the Corporation
has
been represented in this transaction by outside counsel, and that the Employee
has not been represented in this transaction by the Corporation's attorneys, and
the Employee has been advised that it is important for the Employee to seek
separate legal advise and representation in this matter.
Date:
In-House Rehab Corporation
a Colorado Corporation
by: /s/ David V. Hall
David V. Hall, President
/s/ Rebecca Krueger
Rebecca Krueger, Personally
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this date
by and between In-House Rehab, Inc., a wholly owned subsidiary of In-House Rehab
Corporation, a Colorado corporation ("Corporation"), and Michael Kitchen
("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on January 1, 1997 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Vice President and Chief
Legal
Counsel, and Employee is willing to accept such employment by Corporation, on
the
terms and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation, and its wholly owned subsidiary, In-House
Rehab, Inc., as Vice President and Chief Legal Counsel and Corporation agrees to
employ and retain Employee in such capacity. Employee shall devote a
substantial
portion of his business time, energy, and skill to the affairs of the
Corporation
as Employee shall report to the Corporation's President and Chief Executive
Officer and at all times during the term of this Agreement shall have powers and
duties at least commensurate with his position as Vice President and Chief Legal
Counsel.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall
have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Corporation or
by reason of Employee's willful material breach of this Agreement which has
resulted in material injury to Corporation, or continuance of failure by the
Employee to perform his duties in compliance with this Agreement after written
notice to the Employee by the President specifying such failure.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a Termination
for Cause) and shall include constructive termination of Employee's employment
by reason of material breach of this Agreement by Corporation, such constructive
termination to be effective upon notice from Employee to Corporation of such
constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (I) constrictive termination as
described in subsection 2.1.2., (ii) "Termination Upon a Change in Control," and
(iii) termination by reason of Employee's death or disability as described in
Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a termination
by
Employee of Employee's employment with Corporation within 120 days following a
"Change in Control."
2.1.5 "Change in Control" shall mean (I) the time that Corporation
first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange
Act")) have acquired direct or indirect beneficial ownership (within the meaning
of Rule 13d-3 under the Exchange Act) of twenty percent (20%) or more of
Corporation's outstanding securities.
2.2 Initial Term. The term of employment of Employee by Corporation shall
be
for a period of one (1) year beginning with Effective Date, unless terminated
earlier pursuant to this Section. This Agreement, and the one (1) year term
hereof shall be deemed to have been renewed the first day of each month after
the
effective date. At any time, Corporation and Employee may by mutual written
agreement extend or modify the term of Employee's employment under the terms of
this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement after written
notification to Employee pursuant to Section 2.9 hereof. Upon Termination For
Cause, Employee shall promptly be paid all accrued salary, bonus compensation to
the extent earned, vested deferred compensation (other than pension play or
profit sharing plan benefits which will be paid in accordance with the
applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but
Employee shall not be paid any other compensation or reimbursement of any kind,
including without limitation, severance compensation
2.4 Termination Other Than For Cause. Notwithstanding anything else in
this
Agreement, Corporation may effect a Termination Other Than For Cause at any time
upon written notice to Employee of such termination in accordance with Section
2.9 hereof. Upon any Termination Other Than For Cause, Employee shall promptly
be paid all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Corporation in which Employee is a participant to the full
extent of Employee's rights under such plans (including accelerated vesting, if
any, of awards granted to Employee under the Corporation's stock option plan),
accrued vacation pay and any appropriate business expenses incurred by Employee
in connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.2, but no other compensation or
reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the President or officer
acting in his place, has failed to perform his duties under this Agreement on
account of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder by
written notification to Employee and payment to Employee of all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans, accrued vacation pay and any appropriate business expenses incurred
by Employee in connection with his duties hereunder, all to the date of
termination, with the exception of medical and dental benefits which shall
continue through the expiration of this Agreement, but Employee shall not be
paid
any other compensation or reimbursement of any kind, including without
limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement,
Employee's employment shall be deemed to have terminated as of the last day of
the month during which his death occurs and Corporation shall promptly pay to
his
estate or such beneficiaries as Employee may from time to time designate all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination. The Employee's estate shall not be paid any
other compensation, including without limitation, severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan),
any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination
Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans (including accelerated vesting, if any, of any awards granted to
Employee under Corporation's Stock Option Plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.1, but no other compensation or reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation, through its subsidiary, In-House Rehab, Inc., agrees to pay to
Employee a "Base Salary" at the rate of $93,375.00 per annum payable in
twenty-six equal, bi-weekly installments of $3,591.35. Employee's Base Salary
shall be
reviewed annually by the Compensation Committee of the Board of Directors
("Compensation Committee"), and the Base Salary for each year (or portion
thereof) beginning January 1, 1998 shall be determined by the Compensation
Committee which shall authorize an increase in Employee's Base Salary for such
year in an amount which, at a minimum, shall be equal to the cumulative cost-
of-living increment on the Base Salary as reported in the "Consumer Price Index,
Seattle, Washington, All Items," published by the U.S. Department of Labor
(using
January 1, 1997 as the base date for computation). 3.2 Bonuses. Employee shall
be eligible to receive bonuses for each year (or portion thereof) during the
term
of this Agreement and any extensions thereof, in accordance with the executive
bonus plan adopted by the Corporation.
3.3 Additional Benefits. During the term of this Agreement, Employee
shall be
entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate in
such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option Plan,
profit sharing plans, annual physical examinations, dental and medical plans,
and
disability insurance. For purposes of establishing the length of service under
any benefit plans or programs of Corporation, Employee's employment with the
Corporation will be deemed to have commenced on October 1, 1996.
3.3.2 Vacation. Employee shall be entitled to two (2) weeks of
vacation
during each year during the term of this Agreement and any extensions thereof,
prorated for partial years.
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance in the amount of $400.00 per month after taxes.
3.3.5 Reimbursement for Expenses. During the term of this Agreement,
Corporation shall reimburse Employee for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by Employee in
connection with his duties under this Agreement.
3.3.6. Maintenance of Licenses. During the term of this Agreement,
Corporation shall pay/reimburse Employee for any and all fees, dues, continuing
education programs, or other amounts to satisfy other obligations in connection
with maintaining in good standing with the Kentucky, Indiana and American Bar
associations.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee shall be paid as severance compensation his Base
Salary (at the rate payable at the time of such termination), for a period of
one
(1) year, however, if Employee is employed by a new employer during such period,
the severance compensation payable to Employee during such period will be
reduced
by the amount of compensation that Employee actually receives from the new
employer. However, Employee is under no obligation to mitigate the amount owed
Employee pursuant to this Section by seeking other employment or otherwise.
Employee shall also be entitled to an accelerated vesting of any awards granted
to Employee under the Corporation's Stock Option Plan to the extent provided in
the stock option agreement entered into at the time of grant. Employee shall
continue to accrue retirement benefits and shall continue to enjoy any benefits
under any plans of the Corporation in which Employee is a participant to the
full
extent of Employee's rights under such plans, including any perquisites provided
under this Agreement, for the same period, and in direct proportion to the
Severance received hereunder; provided, however, that the benefits under any
such
plans of the Corporation in which Employee is a participant, including any such
perquisites, shall cease upon re-employment by a new employer.
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause.
In the event Employee's employment is terminated in a Termination Other Than for
Cause, Employee shall be paid as severance compensation his Base Salary (at the
rate payable at the time of such termination), for a period of twelve (12)
months, however, that if Employee is employed by a new employer during such
period, the severance compensation payable to Employee during such period will
be reduced by the amount of compensation that Employee actually receives
from the
new employer, officer is under no obligation to mitigate the amount owed to the
officer pursuant to this Section by seeking employment or other Employee shall
be entitled to an accelerated vesting of any awards granted to Employee under
Corporation's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's
disability pursuant to Section 2.6, Employee or his estate shall not be paid any
severance compensation.
Section 5. Outside Activities of Employee. Corporation acknowledges that
Employee has commitments and business activities not related to the
Corporation.
There shall be no restriction on Employee's ability to fulfill such commitments
or engage in such business activities. However, for activities other than those
required for the maintenance of professional licensees, Employee shall conduct
such activities on the Employees own time.
Section 6. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional,
and Employee shall have no obligation whatsoever to mitigate damages hereunder.
If litigation after a Change in Control shall be brought to enforce or interpret
any provision contained herein, Corporation, to the extent permitted by
applicable law and the Corporations' Articles of Incorporation and Bylaws,
hereby
indemnifies Employee for Employee's reasonable attorneys' fees and disbursements
incurred in such litigation.
Section 7. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and
treated as confidential both during and after the term of this Agreement, except
as may be permitted in writing by Corporation's Board of Directors or as such
information is within the public domain or comes within the public domain
without
any breach of this Agreement.
Section 8. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and similar
taxes and payments required by applicable law.
Section 9. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of Incorporation
and Bylaws, Corporation shall indemnify Employee at all times during and after
the term of this Agreement to the maximum extent permitted under Kentucky
Business Corporation Act or any successor provision thereof and any other
applicable state law, and shall pay Employee's expenses in defending any civil
or criminal action, suit, or proceeding in advance of the final disposition of
such action, suit or proceeding, to the maximum extent permitted under such
applicable state laws.
Section 10. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
8503 Nottingham Parkway
Louisville, Kentucky 40222
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section.
Section 11. Law Governing. This Agreement shall be governed by and
construed in
accordance with the laws of the Commonwealth of Kentucky.
Section 12. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 13. Entire Agreement. This Agreement contains the entire
understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
Section 14. Agreement Binding. This Agreement shall be binding upon the
heirs,
executors, administrators, successors and assigns of the parties hereto.
Section 15. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
Section 16. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday, Sunday,
or a legal holiday, in which event the period shall begin to run on the next day
which is not a Saturday, Sunday, or legal holiday, in which event the period
shall run until the end of the next day thereafter which is not a Saturday,
Sunday, or legal holiday.
Section 17. Pronouns and Plurals. All pronouns and any variations thereof
shall
be deemed to refer to the masculine, feminine, neuter, singular, or plural as
the
identity of the person or persons may require.
Section 18. Arbitration. If at any time during the term of this Agreement any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered by
the arbiter may be entered in any court having jurisdiction thereof.
Section 19. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 20. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 21. Parties in Interest. Nothing herein shall be construed to be
to the
benefit of any third party, nor is it intended that any provision shall be for
the benefit of any third party.
Section 22. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 23. Separate Counsel. The parties acknowledge that the Corporation
has
been represented in this transaction by outside counsel, and that the Employee
has not been represented in this transaction by the Corporation's attorneys, and
the Employee has been advised that it is important for the Employee to seek
separate legal advise and representation in this matter.
Date:
In-House Rehab Corporation
a Colorado Corporation
by:/s/ David V. Hall
David V. Hall, President
/s/ Michael J. Kitchen
Michael J. Kitchen, Personally
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this date
by and between In-House Rehab Corporation, a Colorado corporation
("Corporation"), and Nicole Perry ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on June 9, 1997 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Vice President Corporate
Finance, and Employee is willing to accept such employment by Corporation, on
the
terms and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation, as Vice President Corporate Finance and
Corporation agrees to employ and retain Employee in such capacity. Employee
shall devote a substantial portion of her business time, energy, and skill to
the
affairs of the Corporation as Employee shall report to the Corporation's Chief
Financial Officer and at all times during the term of this Agreement shall have
powers and duties at least commensurate with her position as Vice President
Corporate Finance.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall
have the following meanings:
2.1.1 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (I) "Termination Upon a Change
in Control," and (ii) termination by reason of Employee's death as described in
Section 2.4.
2.1.2 "Termination Upon a Change in Control" shall mean a
termination by
Employee of Employee's employment with Corporation within 120 days preceding or
following a "Change in Control."
2.1.3 "Change in Control" shall mean (I) the time that Corporation
first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange
Act")) have acquired direct or indirect beneficial ownership (within the meaning
of Rule 13d-3 under the Exchange Act) of twenty percent (20%) or more of
Corporation's outstanding securities.
2.2 Initial Term. The term of employment of Employee by Corporation shall
be
for a period of one (1) year beginning with Effective Date, unless terminated
earlier pursuant to this Agreement. At any time, Corporation and Employee may
by mutual written agreement extend or modify the term of Employee's employment
under the terms of this Agreement.
2.3 Termination. Termination may be effected by Corporation at any time
during
the term of this Agreement after written notification to Employee pursuant to
Section 2.7 hereof. Upon Termination, Employee shall promptly be paid all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension play or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with her duties hereunder,
all to the date of termination, but Employee shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation
2.4 Death. In the event of Employee's death during the term of this
Agreement,
Employee's employment shall be deemed to have terminated as of the last day of
the month during which her death occurs and Corporation shall promptly pay to
her
estate or such beneficiaries as Employee may from time to time designate all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with her duties hereunder,
all to the date of termination. The Employee's estate shall not be paid any
other compensation, including without limitation, severance compensation.
2.5 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan),
any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with her duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.6 Termination Upon a Change in Control. In the event of a Termination
Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans (including accelerated vesting, if any, of any awards granted to
Employee under Corporation's Stock Option Plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with her duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.1, but no other compensation or reimbursement of any kind.
2.7 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation, through its subsidiary, In-House Rehab, Inc., agrees to pay to
Employee a "Base Salary" at the rate of $72,500.00 per annum payable in
twenty-six equal, bi-weekly installments of $2,788.46. Employee's Base
Salary shall be
reviewed annually by the Compensation Committee of the Board of Directors
("Compensation Committee"), and the Base Salary for each year (or portion
thereof) beginning January 1, 1998 shall be determined by the Compensation
Committee. In addition, the employee shall receive 25,000 options to purchase
common stock of the Corporation at the bid price in accordance with Corporations
stock option plan. Said Options will remain in effect for a period of three (3)
years, 12,500 will vest immediately, and the remainder will vest after one year
from the date hereof.
3.2 Bonuses. Employee shall be eligible to receive bonuses for each year
(or
portion thereof) during the term of this Agreement and any extensions thereof,
in accordance with the executive bonus plan adopted by the Corporation. The
target bonus shall be seventeen and one-half percent (17.5%).
3.3 Additional Benefits. During the term of this Agreement, Employee
shall be
entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate in
such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option Plan,
profit sharing plans, dental and medical plans, and disability insurance. For
purposes of establishing the length of service under any benefit plans or
programs of Corporation, Employee's employment with the Corporation will be
deemed to have commenced on June 9, 1997.
3.3.2 Vacation. Employee shall be entitled to vacation in
accordance with
the Corporation s policy, but shall be entitled to a minimum of three (3) weeks
vacation anytime after being employed by the Corporation for three (3) years.
3.3.4 Automobile/Parking Allowance. For the term of this agreement
and
any extensions thereof the corporation shall provide officer with an automobile
allowance in the amount of $350.00 per month after taxes, and shall be issued a
parking space near the Corporation s premises upon availability, or, in the
alternative, given a parking allowance in the amount of $50.00 per month.
3.3.5 Reimbursement for Expenses. Corporation shall reimburse
Employee for
reasonable and properly documented out-of-pocket business and/or entertainment
expenses incurred by Employee in connection with her duties under this
Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee shall be paid as severance compensation her Base
Salary (at the rate payable at the time of such termination), for a period of
six
(6) months, however, if Employee is employed by a new employer during such
period, the severance compensation payable to Employee during such period will
be reduced by the amount of compensation that Employee actually receives from
the
new employer. Employee shall also be entitled to an accelerated vesting of any
awards granted to Employee under the Corporation's Stock Option Plan to the
extent provided in the stock option agreement entered into at the time of
grant.
Employee shall continue to accrue retirement benefits and shall continue to
enjoy
any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, including
any perquisites provided under this Agreement, for the same period, and in
direct
proportion to the Severance received hereunder; provided, however, that the
benefits under any such plans of the Corporation in which Employee is a
participant, including any such perquisites, shall cease upon re-employment by
a new employer.
4.2 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, or other termination of Employment, Employee or her
estate
shall not be paid any severance compensation.
Section 5. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional,
and Employee shall have no obligation whatsoever to mitigate damages hereunder.
If litigation after a Change in Control shall be brought to enforce or interpret
any provision contained herein, Corporation, to the extent permitted by
applicable law and the Corporations' Articles of Incorporation and Bylaws,
hereby
indemnifies Employee for Employee's reasonable attorneys' fees and disbursements
incurred in such litigation.
Section 6. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be
kept and
treated as confidential both during and after the term of this Agreement, except
as may be permitted in writing by Corporation's Board of Directors or as such
information is within the public domain or comes within the public domain
without
any breach of this Agreement.
Section 7. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and similar
taxes and payments required by applicable law.
Section 8. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of Incorporation
and Bylaws, Corporation shall indemnify Employee at all times during and after
the term of this Agreement to the maximum extent permitted under Kentucky
Business Corporation Act or any successor provision thereof and any other
applicable state law, and shall pay Employee's expenses in defending any civil
or criminal action, suit, or proceeding in advance of the final disposition of
such action, suit or proceeding, to the maximum extent permitted under such
applicable state laws.
Section 9. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section.
Section 10. Law Governing. this Agreement shall be governed by and construed
in
accordance with the laws of the Commonwealth of Kentucky.
Section 11. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 12. Entire Agreement. this Agreement contains the entire
understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
Section 13. Agreement Binding. this Agreement shall be binding upon the
heirs,
executors, administrators, successors and assigns of the parties hereto.
Section 14. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
Section 15. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday, Sunday,
or a legal holiday, in which event the period shall begin to run on the next day
which is not a Saturday, Sunday, or legal holiday, in which event the period
shall run until the end of the next day thereafter which is not a Saturday,
Sunday, or legal holiday.
Section 16. Pronouns and Plurals. All pronouns and any variations thereof
shall
be deemed to refer to the masculine, feminine, neuter, singular, or plural as
the
identity of the person or persons may require.
Section 17. Arbitration. If at any time during the term of this Agreement any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered by
the arbiter may be entered in any court having jurisdiction thereof.
Section 18. Presumption. this Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 19. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 20. Parties in Interest. Nothing herein shall be construed to be to
the
benefit of any third party, nor is it intended that any provision shall be for
the benefit of any third party.
Section 21. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 22. Separate Counsel. The parties acknowledge that the Corporation
has
been represented in this transaction by outside counsel, and that the Employee
has not been represented in this transaction by the Corporation's attorneys, and
the Employee has been advised that it is important for the Employee to seek
separate legal advise and representation in this matter.
Date:
In-House Rehab Corporation
a Colorado Corporation
by:/s/ Robert J. Babine
Robert J. Babine, CFO
/s/ Nicole Perry
Nicole Perry, Personally
PROMISSORY NOTE
September ____, 1997
Atlanta, Georgia
Retirement Care Associates, Inc. ("RCA") hereby promises to pay to the order of
In-House Rehab, Inc. at 325 West Main Street, Suite 1400B, Louisville, Kentucky
40202, UPON DEMAND, an amount equal to the trade receivables owed to In-House
Rehab, Inc. by Retirement Care Associates, Inc. that are past due, being One
Million Dollars ($1,000,000) as of the date hereof, and any amounts that are or
become past due after the date hereof. It is expressly understood that only
trade receivables owed by RCA to In-House Rehab, Inc. that are over ninety (90)
days old are considered past due.
RCA shall pay upon demand any and all expenses, including reasonable attorney's
fees' actually incurred by Holder without suit or action in attempting to
collect
funds due under this Note. In the event an action is instituted to enforce or
interpret any of the terms of this Note including but not limited to any action
or participation by RCA in, or in connection with, a case or proceeding under
the
Bankruptcy Code or any successor statute, the prevailing party shall be entitled
to recover all expenses reasonably incurred at, before and after trial, on
appeal, and on review whether or not taxable as costs, including, without
limitation, attorney fees, witness fees (expert and otherwise), deposition
costs,
copying charges and other expenses.
RCA hereby waives presentment, dishonor, notice of dishonor, and protest. RCA
consents to, and Holder is hereby expressly authorized to make, without notice,
any and all renewals, extensions, modifications, or waivers of the terms of
payment of any sum or sums due hereunder, or under any documents or instruments
relating to or securing this Note. Any such action taken by Holder shall not
discharge the liability of RCA hereunder.
This Note has been delivered in the State of Georgia and it is the express
desire
of the parties that all rights, obligations and duties that arise hereunder
shall
be governed and construed in accordance with the laws of Georgia.
- ------------------------------------
Retirement Care Associates, Inc. By:
Chris Brogdon, President
<PAGE>
SECURITY AGREEMENT
This Stock Pledge and Security Agreement ("Agreement") is entered into as of
this
the ___th day of September, 1997, by and between Chris Brogdon ("Brogdon"), and
In-House Rehab, Inc. ("In-House").
WHEREAS, Retirement Care Associates, Inc.("RCA") has executed a Promissory Note
("Note") in favor of In-House equal to the trade receivables owed to In-House
Rehab, Inc. by RCA that are past due, being One Million Dollars ($1,000,000) as
of the date hereof, and any amounts that are or become past due after September
___, 1997, and pursuant to a Guaranty Agreement between Brogdon and In-House
dated of even date herewith (the "Guaranty"), Brogdon has personally guaranteed
RCA's performance under the Note; and
WHEREAS, In-House desires to obtain additional security for performance of
Brogdon's obligations under the Guaranty");
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by Brogdon, Brogdon
and In-House hereby agrees as follows:
Section 1. Creation of Security Interest.
In order to secure the payment of any and all amounts which may be or become due
under the Guaranty, Brogdon hereby grants a security interest to In-House in
shares of Retirement Care Associates, Inc. common stock owned and held by
Brogdon, together with all dividends and distributions paid or payable on such
stock and all proceeds of the foregoing. Brogdon agrees to tender to In-House
all
stock certificates representing shares of Retirement Care Associates, Inc.
common
stock that are held by Brogdon together with a stock transfer power in blank
with
respect to such certificates and agrees that In-House may hold in its possession
and place the following legend on said certificates:
LIEN
THIS CERTIFICATE, AND THE SHARES OF STOCK REPRESENTED HEREBY, SHALL BE SUBJECT
TO ALL CLAIMS, DEMANDS, AND DEBTS OWING TO IN-HOUSE REHAB, INC. BY THE HOLDER
HEREOF AND ALSO SUBJECT TO ALL CONTRACTS AND AGREEMENTS OF THE HOLDER HEREOF,
MADE WITH OR ON BEHALF OF IN-HOUSE REHAB, INC. WITH REFERENCE TO THE SHARE OF
STOCK REPRESENTED HEREBY PROVIDED THE IDENTITY OF SUCH CONTRACTS OR AGREEMENTS
OR COPIES THEREOF WITH IN-HOUSE REHAB, INC. SHALL HAVE BEEN STAMPED OR WRITTEN
ON THIS CERTIFICATE.
CLAIMS, DEMANDS, AND DEBTS OWING TO IN-HOUSE REHAB, INC. BY THE HOLDER
HEREOF TO WHICH THIS CERTIFICATE IS SUBJECT TO.
GUARANTY AGREEMENT DATED SEPTEMBER ___, 1997
SECURITY AGREEMENT DATED SEPTEMBER ___, 1997
Section 2. Default Provisions.
2.1. Default. The occurrence of one or more of the following events shall
constitute a default by Brogdon under the terms of this agreement.
a. If payment is not received by In-House within ten (10) business days of
demand
for payment on the Guaranty.
b. The entry of a decree or order by a court having jurisdiction in the premises
adjudging Brogdon and/or RCA a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of Brogdon and/or RCA under the federal Bankruptcy Act or any
other applicable federal or state law, or appointing a receiver, liquidator,
assignee or trustee of Brogdon and/or RCA, or any substantial part of their
property.
c. The institution by Brogdon and/or RCA of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to institution of bankruptcy or
insolvency proceedings against either of them, or the filing by it of a petition
or answer or consent seeking reorganization or relief under the federal
Bankruptcy Act or any other applicable federal or state law, or the consent by
either of them to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee or trustee, or of any substantial part of either
of their property, or the making by either of them of an assignment for the
benefit of creditors or the admission by either of them in writing of their
inability to pay debts generally as they become due, or the taking of action by
Brogdon and/or RCA in furtherance of any such action
2.2. Possession of Collateral. In the event that Brogdon and/or RCA is in
Default
for the purposes of this Agreement, In-House, at its sole discretion, shall have
the option to demand the immediate conveyance of Retirement Care Associates,
Inc.
common stock secured hereunder to In-House or its assigns by Brogdon. The number
of Shares to be conveyed in the event of default shall be equal to the
outstanding obligation on the Note, divided by the bid price for Retirement Care
Associates, Inc. common stock on the day of default, and the Note shall then be
satisfied in full. This Agreement shall be terminated and all liens released and
collateral returned to Brogdon upon satisfaction of the Note.
2.3. Non-Exclusive Remedies. The remedies set forth herein shall not be the
exclusive remedies of In-House. In the event of a failure by Brogdon to pay the
amounts owed to In-House under the terms of the Guaranty, In-House shall have
the
right to pursue any and all remedies available, including those available to a
secured party under the Uniform Commercial Code of Georgia, and shall in no way
be limited to the remedies set forth in this Agreement.
Section 3. Specific Performance. In the event of a failure by Brogdon to abide
by the terms of this Agreement, Brogdon acknowledges that In-House is without
adequate remedy at law. Therefore, it is mutually agreed that any action
required
to be taken by this agreement may be compelled through injunctive proceedings.
Furthermore, Brogdon agrees to cooperate with In-House to, at no cost to
Brogdon,
prepare and file any documents necessary to perfect the security interest
created
hereby.
Section 4. Representations and Warranties
Brogdon hereby represents to In-House that:
4.1 Brogdon is the registered and absolute beneficial owner of the shares of
Retirement Care Associates, Inc. secured hereby ("secured shares") free and
clear
from all liens and security interests, charges, equities, and encumbrances as of
the date hereof except for the liens and security interests created by this
Agreement. It is specifically understood by the parties hereto that any lien on
the secured shares are subject to any proxy entered into by and between Brogdon
and Sun Healthcare Group, Inc.
4.2 Brogdon has the right to enter into this Agreement, the execution and
performance of which will not, either immediately, or with notice and/or passage
of time, conflict with or constitute a breach under any agreement to which
Brogdon is a party, or result in the creation or imposition of any encumbrance
upon the secured shares except as granted hereby.
Section 5. Compliance with Securities Laws. If In-House decides to compel
Brogdon
to convey any or all of the secured shares to In-House as provided herein and
if,
in the opinion of counsel for In-House, it is reasonably necessary to comply
with
the provisions of any securities laws, Brogdon agrees without costs or expense
to Brogdon to prepare or have prepared, execute, and deliver all such documents
and to do or cause to be done all other such acts and things as may be
reasonably
necessary.
Section 6. Notices. Any notices due under this Agreement shall be sent to
In-House at: 325 West Main Street, Suite 1400B
Louisville, Kentucky 40202
Attn: General Counsel
And to Brogdon at:
6000 Lake Forrest Drive
Suite 200
Atlanta, Georgia 30328
Section 7. Governing Law. The laws of the State of Georgia shall govern the
construction of this agreement and the rights, remedies, and duties of the
parties hereunder.
Section 8. Successors and Assigns. This Agreement shall bind Brogdon and In-
House
and their successors, assigns, and legal representatives, and shall inure to the
benefit of In-House and Brogdon, and their successors and assigns.
Section 9. Captions. The Captions and headings of the sections hereof shall be
ignored in interpreting the provisions of this Agreement.
Section 10. Presumption. This Agreement or any section hereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 11. Savings Clause. If this Agreement, or the application of any
provision to any entity or circumstance shall be held invalid, the remainder of
this Agreement, or the application of such other provisions to entities or
circumstances other than those as to which it is held invalid, shall not be
affected thereby.
Dated: September_, 1997
- -------------------------------------
Chris Brogdon
In-House Rehab Inc.,
By:
- -------------------------------------
David V. Hall, President
<PAGE>
GUARANTY AGREEMENT
WHEREAS, on September__, 1997, Retirement Care Associates, Inc.("RCA") executed
a Promissory Note ("Note") in favor of In-House Rehab, Inc. ("In-House") equal
to the trade receivables owed to In-House Rehab, Inc. by RCA that are past due,
being One Million Dollars ($1,000,000) as of the date hereof, and any amounts
that are or become past due after September __, 1997, and
WHEREAS, In-House desires to obtain additional security for the payment of such
Note and receivables;
N0W THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by the parties
hereto,
it is agreed as follows:
Section 1. Chris Brogdon ("Guarantor") for himself, and for his heirs, and
assigns, hereby unconditionally and jointly and severally guarantees to In-
House,
its successors and assigns, including each and every holder or owner of the
Note,
the prompt payment when due of all obligations owed by RCA on the Note including
but not limited to all expenses, including reasonable attorney's fees, actually
incurred by Holder without suit or action in attempting to collect funds due
under the Note.
Section 2. In order to secure the obligations created by the Note and under the
terms of this Agreement, Guarantor agrees to enter into a Security Agreement
whereby shares of common stock in RCA held by Guarantor are subjected to a lien
and security interest to the extent of the obligations of RCA and Guarantor.
Section 3. In-House shall have the right of immediate recourse against
Guarantor
for full and immediate payment of the obligations guaranteed at any time after
the obligations, or any part thereof, have not been paid in full according to
the
tenor and under the terms of the instrument governing such obligations, whether
on demand as per the terms of the Note, or if accelerated by reason of default.
Section 4. In the event of a default under the terms of the Note by RCA, or if
RCA does not satisfy the obligations as per the terms of the Note, under the
terms of this Agreement In-House shall have an immediate right of recourse
against Guarantor, individually and severally from RCA for payment of the
obligations in full.
Section 5. The liability of the Guarantor shall be absolute and unconditional,
and nothing whatever except full payment to In-House of all of the obligations
guaranteed by Guarantor hereunder shall operate to discharge Guarantor's
liabilities. Accordingly, Guarantor unconditionally and irrevocably waives each
and every defense which, under principles of guaranty or suretyship law, would
otherwise operate to impair or diminish the liability of Guarantor. Without
limiting the generality of the foregoing, Guarantor agrees that none of the
following shall diminish or impair the liability of Guarantor in any respect
(all
of which may be done without prior notice to Guarantor of any kind):
(a) Any extension, modification, indulgence, compromise, settlement, or
variation
of the terms of any of the obligations, or of any agreement entered into with
Guarantor or any other person liable for any part of the obligations on the
Note,
the Security Agreement, or this Agreement;
(b) The voluntary or involuntary discharge or release of any of the obligations
guaranteed hereby, or of any person liable therefor, by reason of bankruptcy or
insolvency laws or otherwise,
(c) The acceptance or release, with or without substitution, by In-House of any
collateral security or other guaranty, or collateral security for such other
guaranty, or any settlement, compromise, or extension with respect to any
collateral security, other guaranty, or collateral security for such other
guaranty,
(d) The creation of any new obligations covered by this guaranty or renewal,
modification or extension hereof;
(e) Any set-offs or counterclaims against In-House which would otherwise impair
In-House's rights against Guarantor hereunder.
Section 6. Specific Performance. In the event of a failure by Brogdon to abide
by the terms of this Agreement, Brogdon acknowledges that In-House is without
adequate remedy at law. Therefore, it is mutually agreed that any action
required to be taken by this agreement may be compelled through injunctive
proceedings.
Section 7. Notices. Any notices due under this Agreement shall be sent to
In-House at:
325 West Main Street,
Suite 1400B
Louisville, Kentucky 40202
Attn: General Counsel
And to Brogdon at:
6000 Lake Forrest Drive
Suite 200
Atlanta, Georgia 30328
Section 8. Governing Law. The laws of the State of Georgia shall govern the
construction of this agreement and the rights, remedies, and duties of the
parties hereunder.
Section 9. Successors and Assigns. This Agreement shall bind Brogdon and In-
House
and their successors, assigns, and legal representatives, and shall inure to the
benefit of In-House and Brogdon, and their successors and assigns.
Section 10. Captions. The Captions and headings of the sections hereof shall be
ignored in interpreting the provisions of this Agreement.
Section 11. Presumption. This Agreement or any section hereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 12. Savings Clause. If this Agreement, or the application of any
provision to any entity or circumstance shall be held invalid, the remainder of
this Agreement, or the application of such other provisions to entities or
circumstances other than those as to which it is held invalid, shall not be
affected thereby,
Dated: September 16, 1997
- -----------------------------------
Chris Brogdon
-2-
In-House Rehab Inc., By:
- -----------------------------------
David V. Hall, President
SUBSIDIARIES OF THE REGISTRANT
Other Names
State of Incorporation used in
Name or Organization Business
- ------------------------------- ---------------------- -----------
In-House Rehab, Inc. Kentucky None
Daily Rehabilitation Florida None
Institute of Ponte Vedra, Inc.
In-House Medical Resources, Inc. Kentucky None
RT Group, Inc. Indiana None
In-House Rehab Partners, LLC Kentucky None
Rehab Tools, Inc. Delaware None
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheets and statements of operations found on pages F-2 and F-3 of the Company's
Form 10-KSB for the fiscal year ended May 31, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> $ 7,359,625
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,324,682
<PP&E> 264,589
<DEPRECIATION> 47,693
<TOTAL-ASSETS> 7,997,329
<CURRENT-LIABILITIES> 4,769,411
<BONDS> 0
0
0
<COMMON> 1,886,584
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,997,329
<SALES> 15,637,853
<TOTAL-REVENUES> 15,637,853
<CGS> 11,323,829
<TOTAL-COSTS> 11,323,829
<OTHER-EXPENSES> 2,330,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159,292
<INCOME-PRETAX> 1,824,477
<INCOME-TAX> 727,045
<INCOME-CONTINUING> 1,097,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,097,432
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
