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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10SB/A
AMENDMENT NO. 1
General Form for Registration of Securities
of Small Business Issuers
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
IN-HOUSE REHAB CORPORATION
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(Name of Small Business Issuer in its Charter)
COLORADO 84-0987697
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
325 WEST MAIN STREET, SUITE 1400B, LOUISVILLE, KENTUCKY 40202
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(Address of Principal Executive Offices, Including Zip Code)
(502) 568-8963
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(Issuer's Telephone Number)
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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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.
In November 1995, IHR formed a wholly-owned subsidiary named In House
Staffing, Inc. ("IHS"), a Kentucky corporation, established for the purpose of
providing services in recruiting rehabilitation therapists for the Company and
its customers as well as other health care providers. IHS was merged into IHR
on June 1, 1996.
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 are the rights of TRS under contracts it held
to provide therapists to 28 facilities. TRS was merged into IHR on June 1,
1996.
All references to the "Company" herein refers to the Company and its
subsidiaries, unless the context otherwise requires.
Effective September 1, 1996, the Company acquired all of the stock of
Regal Health Care, Inc. ("RHC"), a Clearwater, Florida based provider of
psych/social services to nursing homes and long-term care facilities in North
Carolina.
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"), an Indianapolis, Indiana based provider of respiratory
therapy services to nursing home and long-term care facilities in Indiana. On
that same date, the Company also acquired all of the stock of Daily
Rehabilitation Institute, Inc. ("DRI"), a Jacksonville, Florida based
outpatient rehabilitation agency.
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. The acquisition would be in the form of a stock
purchase, with the Company acquiring 100% of the stock of QCR in exchange for
a combination of cash and Common Stock of the Company with a total value of $6
million. The transaction is contingent upon the results of a formal audit of
QCR's financial statements, discovery associated with due diligence and the
Company obtaining financing to fund the acquisition. The closing of this
transaction would also be subject to the execution of a definitive agreement
which would contain various representations and warranties of each party and
which would require the approval of the directors of each company.
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 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
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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 four 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.
LEVEL THREE - In addition to the above, a closer working
relationship is established with the faculty and student population by
sponsoring awards and assisting with the students' clinical training.
LEVEL FOUR - As an extension of level three involvement, the
Company will also provide clinical internships which provide students with
hands-on training at one or more of its facilities.
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.
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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 fixed
monthly 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.
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.
At February 28, 1997, the Company had Contracts for Therapy Program
Services with 71 nursing homes in the southeastern United States; 31 of these
facilities are either owned, operated or managed by Retirement Care
Associates, Inc.("Retirement Care"), a principal shareholder of 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), the Company's
operations could be materially and adversely affected.
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. As a result it is anticipated that if the merger is completed at
least some, and possibly all of these contracts will be terminated on as
little as 60 days'
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notice. During the nine months ended February 28, 1997, contracts with
Retirement Care facilities represented approximately $6,175,704 in revenue to
the Company.
ACQUISITION OF ASSETS OF TOTAL REHAB SOUTH
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 that the Company purchased 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 and a related
non-competition agreement was $1,010,601 and $185,601, respectively.
In connection with this acquisition, the therapists employed by TRS
became employees of the Company.
The Company believes that contracts acquired from TRS represent annual
revenues of over $4,000,000. Based on accounting records obtained from TRS,
during the year ended December 31, 1995, TRS had approximately $2,251,000 in
revenue from operations, and the direct expenses related to such revenue was
approximately $1,860,000. The gross profit of approximately $391,000 is
before selling, general and administrative, income tax, and other expenses.
Under the Company's management, this segment of the business generated
revenues of $2,487,950 and a gross profit of $924,832 during the six months
ended November 30, 1996.
ACQUISITION OF STOCK OF REGAL HEALTH CARE
The Company acquired all of the stock of Regal Health Care, Inc. ("RHC")
on September 1, 1996, 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 with annualized
revenues of $96,000 and pre-tax earnings of $17,000. The Company has now
added psych/social services to the rehabilitation services it currently
offers.
ACQUISITION OF STOCK OF RT GROUP
The Company acquired all of the stock of RT Group, Inc. ("RTG") on
December 1, 1996, 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 with
annualized revenues of $200,000. An accurate assessment of RTG's profit
potential cannot be made due to certain administrative functions performed by
a related company that were not charged to RTG. The Company will now offer
respiratory therapy services along with rehabilitation and psych/social
services in facilities under contract.
ACQUISITION OF STOCK OF DAILY REHAB
The Company acquired all of the stock of Daily Rehabilitation Institute,
Inc. ("DRI") on December 1, 1996, 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
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setting. Upon acquisition, DRI had assets totaling approximately $116,000 and
liabilities totaling approximately $124,000 with annualized revenue of $60,000
and a pre-tax loss of $10,000. The clinic is a Medicare certified facility
that the Company intends to market in the Florida based assisted living
community.
MARKETING
The Company's IHR subsidiary employs a Vice President of Marketing who,
together with the Company's President, actively solicits contracts from long-
term care providers. The Company anticipates that these efforts will result
in obtaining more contracts from non-affiliated companies.
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.
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
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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 is considering health care reform and balanced budget
proposals. Consideration is expected on measures which will control health
care costs. Legislative changes to slow the annual rate of growth of Medicare
and Medicaid are expected. Such changes may impact reimbursement for
rehabilitation.
Medicare reimburses the 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. General guidelines exist for evaluating
the reasonable cost of occupational therapy, speech-language pathology
services, respiratory therapy and psych/social services. When a nursing
facility contracts with a third party, such as the Company, for physical
therapy services, a standard rate system applies. This system is called
salary-equivalency. The physical 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 indicated it
intends to issue specific reimbursement guidelines for occupational therapy
and speech-language pathology services and to recalculate and update the
existing guidelines for physical therapy services. Proposed rules governing
such guidelines are expected for public comment in the second quarter of
calendar year 1997. Final rules are expected to be promulgated in the last
quarter of calendar year 1997.
Management believes that, when occupational therapy and speech-language
pathology services guidelines are established, HCFA will recalculate and
update the physical therapy salary-equivalency guidelines in consideration of
the substantial increases in salary and services standards since these
guidelines were last revised. Because the nature and magnitude of these
changes are not certain at this time, there are no assurances with respect to
the impact such changes may have on the Company. There can be no assurance
that future (i) legislation, either health care or budgetary, (ii) regulatory
changes or (iii) interpretations of regulations, will not have a material
adverse effect on the future operations of the Company.
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 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.
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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. Efforts to reform the nation's health care system could
induce additional changes. See "REIMBURSEMENT/GOVERNMENT PROGRAMS,"
previously discussed.
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 of or to induce 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 February 28, 1997, the Company had approximately 305 employees of
which 156 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
RESULTS OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO NINE MONTHS ENDED FEBRUARY 29,
1996
The Company generated $11,161,550 in gross revenue for the nine months
ended February 28, 1997 compared with $3,501,953 in the same period of the
prior year. The increase is almost entirely due to the addition of 47 new
service contracts. A very small portion of the change resulted from rate
adjustments.
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Operating expenses as a percentage of revenue for the nine months ended
February 28, 1997 were 71.2%. This compares with 68.0% for the same period of
the prior year. The increase is attributed to the addition of clinical
specialists hired to improve the quality of service and the amortization of
good will associated with the acquisition of Total Rehab South.
Selling, general and administrative expenses for the nine months ended
February 28, 1997 were 14.4% of revenue compared to 18.4% for the same period
of the prior year. The improvement resulted from increasing revenue at a
faster rate than the associated overhead. This trend is expected to continue.
Interest expense for the nine months ended February 28, 1997 was $91,794
versus $42,188 for the same period of 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 nine month periods ended February 28,
1997 and 1996 were 39.9% and 38.0%, respectively.
The factors discussed above have resulted in earnings of $910,487 for
the nine months ended February 28, 1997 compared with $267,387 during the same
period of 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
$6,623,410 as compared to $335,404 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 $65,533. 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 $394,263 during the year ended May 31, 1996, as compared to a loss of
$(91,784) during the prior period.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1997, the Company had working capital of
approximately $2,497,125 as compared to working capital of approximately
$485,079 at February 28, 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 February 28, 1997, the Company had 71
rehabilitation service contracts compared with 24 on February 29, 1996.
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Net cash used in operating activities totaled $1,687,588 for the nine
months ended February 28, 1997. This compares with $1,007,431 for the same
period of 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 $370,455 toward investing activities during the nine
month period compared with $34,504 in the same period last 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
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 nine months ended
February 24, 1997 was $2,105,761 compared with $1,007,500 for the same period
last 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 $1,295,000
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 $1,765,000 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 February 28, 1997, the Company had a $2.5 million line of credit
under which $2,400,000 had been borrowed. In March 1997, the line of credit
was increased to $4.5 million. This line of credit together with cash flows
from operations are expected to be sufficient to meet the Company's cash
requirements for the remainder of the current fiscal year for its current
level of operations.
In April 1997, the Company announced that it had entered into a letter
agreement to acquire Quality Care and Rehab, Inc., a therapy services
provider, in exchange for a combination of cash and Common Stock with a total
value of $6 million. The cash portion of this proposed acquisition of
approximately $1 to $1.8 million would require additional funding. The
Company intends to raise such funds through the sale of equity or debt
financing. There can be no assurance that the Company will be able to obtain
such financing on acceptable terms.
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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.
ITEM 3. 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 Main Street, Louisville, Kentucky 40202. The base rent is $7,067.71
per month and is fixed for the five year period.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 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 4,665,150<FN1> 35.0%
9505 Williamsburg Plaza
Louisville, Kentucky 40222
Robert J. Babine 1,038,000<FN2> 7.8%
9505 Williamsburg Plaza
Louisville, Kentucky 40222
Chris Brogdon 130,000<FN3> 1.0%
c/o Retirement Care Associates,
Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
Rebecca H. Krueger 104,000<FN4> 0.8%
9505 Williamsburg Plaza
Louisville, KY 40222
-12-
<PAGE>
Retirement Care Associates, Inc. 3,661,000<FN5> 27.4%
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
All Executive Officers and 5,938,150 44.2%
Directors as a Group
(4 Persons)
_________________
<FN>
<FN1>
Includes 4,655,150 shares held directly by Mr. Hall and 10,000 shares held by
his wife as custodian for two minor children.
<FN2>
Includes 1,022,000 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 100,000 shares
underlying a stock option held by her.
<FN5>
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. 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 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
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, Secretary,
Treasurer and a Director
Chris Brogdon 47 Director
Rebecca H. Krueger 41 Chief Operations Officer
-13-
There is no family relationship between any Director or Executive
Officer of the Company.
The Company has no nominating, compensation or audit committees.
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, SECRETARY, 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 retail salesman. Mr. Brogdon
attended Georgia State University in Atlanta, Georgia. Since March 1987, Mr.
Brogdon has been Secretary/Treasurer of Winter
-14-
<PAGE>
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.
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.
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.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President for the fiscal year ended May 31,
1996, and the period of September 21, 1994 through May 31, 1995. No other
executive officer's total salary exceeded $100,000 during such periods.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
AWARDS PAYOUTS
------------------ -------
SECURI-
ANNUAL COMPENSATION TIES
-------------------------------- UNDERLY-
OTHER RE- ING 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, 1996 $69,200 $100,522 $14,654 -0- -0- -0- 3,881
President <FN1> <FN2>
1995 $ -0- $ -0- $ 1,946
<FN3>
- ---------------
-15-
<PAGE>
<FN>
<FN1>
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.
<FN2>
Represents the premium paid for a term life insurance policy provided for Mr.
Hall's benefit.
<FN3>
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.
</FN>
</TABLE>
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.
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.
Rebecca Krueger, Chief Operations Officer, will receive an annual salary
of $90,000 and a bonus to be determined by the Board of Directors. She is
also entitled to a car allowance of $400 per month and the Company's standard
benefit package. She also received 100,000 stock options exercisable at a
price of $2.00 per share over a three year period.
DIRECTOR COMPENSATION
Directors of the Company do not receive any fees for their services in
such capacity. However, each Director is 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
-16-
<PAGE>
adjustment in the event of certain recapitalizations, 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.
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.
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.
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 1, 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. The options expire on November 15, 1999.
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
-17-
<PAGE>
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 7. 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 February 28, 1997, the Company had contracts to provide physical,
speech and occupational therapists to approximately 71 nursing homes of which
31 are either owned, operated or managed by Retirement Care Associates, Inc.,
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 Associates, Inc. During the nine months ended February 28,
1997, the Company billed approximately $6,175,704 in fees under these
agreements. As of February 28, 1997, there were approximately $3,227,846 in
accounts receivable relating to such services outstanding.
As of February 28, 1997, Retirement Care Associates, Inc. owed the
Company approximately $57,200 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.
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.
As of May 31, 1996, David V. Hall, an Officer, Director and principal
shareholder of the Company, owed the Company $43,000 for advances made to
him. As of January 27, 1997, Mr. Hall had retired all but $16,221 of his
obligations to the Company. In addition, as of May 31, 1996, Hallmark
Communications, a company of which Mr. Hall is the majority owner, owed the
Company $51,000 for advances made to it by the Company. As of January 27,
1997, Hallmark Communications owed the Company approximately $24,600.
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.
-18-
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES.
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
20,000,000 shares of Common Stock, no par value. Each record holder of Common
Stock is entitled to one vote for each share held on all matters promptly
submitted to the stockholders for their vote. Cumulative voting for the
election of directors is not permitted by the Articles of Incorporation.
Holders of outstanding shares of Common Stock are entitled to such divi-
dends as may be declared from time to time by the Board of Directors out of
legally available funds; and, in the event of liquidation, dissolution or
winding up of the affairs of the Company, holders are entitled to receive,
ratably, the net assets of the Company available to stockholders after
distribution is made to the preferred stockholders, if any, who are given
preferred rights upon liqui-
dation.Holders of outstanding shares of Common Stock are, and all unissued
shares when offered and sold will be, duly authorized, validly issued, fully
paid, and nonassessable. To the extent that additional shares of the Company's
Common Stock are issued, the relative interests of the existing stockholders
may be diluted.
WARRANTS
During 1996, the Company issued Warrants to purchase an aggregate of
520,000 shares of Common Stock to certain investors in a private offering.
The Warrants are exercisable at $2.50 per share and will expire on March 11,
1999.
OPTIONS
The Company has issued a number of options to employees and others which
are described herein in ITEM 6 - EXECUTIVE COMPENSATION.
PREFERRED STOCK AND SUBORDINATED CONVERTIBLE COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
10,000,000 shares of Preferred Stock, $10.00 par value. The Board of
Directors of the Company is authorized to issue the Preferred Stock from time
to time in series and is further authorized to establish such series, to fix
and determine the variations in the relative rights and preferences as between
series, to fix voting rights, if any, for each series, and to allow for the
conversion of Preferred Stock into Common Stock. At present, no Preferred
Stock is issued or outstanding or contemplated to be issued.
The Company's Articles of Incorporation also authorize the issuance of
1,200,000 shares of Subordinated Convertible Common Stock, no par value. No
such shares are presently outstanding, and the Company has no intentions of
issuing any such shares.
DIVIDENDS
No dividends have been paid by the Company on any of its securities in
the past and such dividends are not contemplated in the foreseeable future.
Dividends will be dependent directly on earnings of the Company, financial
needs, and other similar unpredictable factors and will be declared solely at
the discretion of the Board of Directors.
-19-
<PAGE>
REPORTS TO INVESTORS
The Company intends to provide holders of its securities with annual
reports containing financial statements. The Company also will issue
quarterly or other interim reports to its stockholders as it deems
appropriate.
TRANSFER AGENT
American Securities Transfer, Inc., 938 Quail Street, No. 101, Lakewood,
Colorado 80215, serves as the transfer agent for the Common Stock of the
Company.
-20-
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER 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
---------------
PERIOD HIGH LOW
------ ---- -----
Quarter ended February 29, 1996 $1.25 $0.50
Quarter ended May 31, 1996 $1.75 $1.00
Quarter ended August 31, 1996 $2.25 $1.75
Quarter ended November 30, 1996 $2.25 $2.25
Quarter ended February 28, 1997 $2.25 $2.00
As of April 21, 1997, there were approximately 337 record holders of the
Company's Common Stock. Based on securities position listings, the Company
believes that there are approximately a total of 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.
ITEM 2. 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 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company has had no disagreements with accountants on accounting and
financial disclosure. The Company changed accountants from Cordovano &
Company, P.C. to Coopers & Lybrand L.L.P. in 1995.
In September 1995, the Company engaged Coopers & Lybrand L.L.P. as its
independent accountants for the Company's fiscal year ended May 31, 1996.
Also in September 1995, Cordovano & Company, P.C. were dismissed as the
Company's
-21-
<PAGE>
independent accountants. Cordovano & Company, P.C.'s report on the financial
statements for the fiscal years ended May 31, 1995 and 1994, contained no
adverse opinion or disclaimer of opinion, nor was it qualified as to audit
scope or accounting principles. However, Cordovano & Company, P.C.'s report
dated July 31, 1995, included a paragraph raising concerns as to the Company's
ability to continue as a going concern. At that time the Company had not yet
acquired In-House Rehab, Inc., and had no significant opeations. The
Company's Board of Directors made the decision to engage Coopers & Lybrand
L.L.P. The Company has no audit or similar committee.
In connection with the prior audit for the fiscal years ended May 31,
1995 and 1994, and during the interim period from May 31, 1995 to September
1995, there were no disagreements with Cordovano & Company, P.C. on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
The Company did not consult with Cordovano & Company, P.C. with regard
to any matter concerning the application of accounting principles to any
specific transactions, either completed or proposed, or the type of audit
opinion that might be rendered with respect to the Company's financial
statements.
The Company has requested that Cordovano & Company, P.C. review this
disclosure and that firm has been given an opportunity to furnish the Company
with a letter addressed to the Commission containing any new information,
clarification of the Company's expression of its views, or the respect in
which it does not agree with the statements made by the Company herein. Such
letter is filed as an exhibit hereto.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During its past three fiscal years, the Company issued securities which
were not registered under the Securities Act of 1933, as amended (the "Act"),
as follows:
On September 29, 1995, the Registrant issued a total of 10,460,000
shares of its common stock to the following four shareholders of In-House
Rehab, Inc., a Kentucky corporation ("IHR") in exchange for their shares of
IHR, on a pro rata basis, in connection with the Company's acquisition of IHR:
SHARES OF COMMON
NAME STOCK ISSUED
---- ----------------
David V. Hall 4,968,500
Robert J. Babine 1,046,000
Terry K. Minton 784,500
Retirement Care Associates, Inc. 3,661,000
----------
Total 10,460,000
David V. Hall and Robert J. Babine are presently Officers and Directors
of the Company, and Terry K. Minton served as an Officer of the Company after
this transaction. Retirement Care Associates, Inc. is a publicly-held
corporation of which Chris Brogdon, a Director of the Company, is President,
Director and a principal shareholder. In connection with this offering, the
Company relied on Section 4(2) of the Securities Act of 1933, as amended. The
shares were offered for investment only and not for the purpose of resale or
distribution, and the transfer thereof was appropriately restricted by the
Registrant.
-22-
<PAGE>
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
--------
$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 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Colorado law, the Company's Articles of Incorporation
provide that the Company will indemnify its directors and officers against
expenses and liabilities they incur to defend, settle, or satisfy any civil or
criminal action brought against them on account of their being or having been
Company directors or officers unless, in any such action, they are adjudged to
have acted with gross negligence or willful misconduct. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in that Act and is, therefore,
unenforceable.
Pursuant to the provisions of the Colorado Business Corporation Act, the
Company's Articles of Incorporation exclude personal liability for its
directors for monetary damages based upon any violation of their fiduciary
duties as directors, except as to liability for any breach of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, acts in violation of Section
7-108-403 of the Colorado Business Corporation Act, or any transactions from
which a director receives an improper personal benefit.
-23-
<PAGE>
PART F/S
FINANCIAL STATEMENTS. The following financial statements are filed as
part of this Registration Statement:
PAGE(S)
-------
IN-HOUSE REHAB CORPORATION
Unaudited Consolidated Balance Sheet as of February 28, 1997... F-1
Unaudited Consolidated Statement of Income for the nine months
ended February 28, 1997 and 1996............................... F-2
Unaudited Consolidated Statement of Cash Flows for the nine
months ended February 28, 1997 and 1996........................ F-3
Notes to Unaudited Consolidated Financial Statements........... F-5
Report of Independent Accountants.............................. F-8
Consolidated Balance Sheets as of May 31, 1996 and 1995........ F-9
Consolidated Statement of Operations for the year ended
May 31, 1996, and the period from September 21, 1994
(inception) through May 31, 1995............................... F-10
Consolidated Statements of Stockholders' Equity for the
year ended May 31, 1996, and the period from September 21,
1994 (inception) through May 31, 1995.......................... F-11
Consolidated Statement of Cash Flows for the year ended
May 31, 1996, and the period from September 21, 1994
(inception) through May 31, 1995............................... F-12
Notes to Consolidated Financial Statements..................... F-14
TOTAL REHAB SOUTH, INC.
Interim Balance Sheet at February 29, 1996..................... F-20
Interim Statements of Operations for the two-month periods
ended February 28, 1995 and February 29, 1996.................. F-21
Interim Statements of Cash Flows for the two-month periods
ended February 28, 1995 and February 29, 1996.................. F-22
Notes to Interim Financial Statements.......................... F-23
Report of Independent Certified Public Accountants............. F-24
Balance Sheet at December 31, 1995............................. F-25
Statement of Operations for the year ended December 31, 1995... F-26
Statement of Stockholders' Deficit for the year ended
December 31, 1995.............................................. F-27
-24-
<PAGE>
Statement of Cash Flows for the year ended December 31, 1995... F-28
Notes to Financial Statements.................................. F-29
PRO FORMA FINANCIAL INFORMATION
Pro Forma Financial Data....................................... F-31
Pro Forma Condensed Consolidated Statement of Operations
for the year ended May 31, 1996 (Unaudited).................... F-32
-25-
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS AND ITEM 2. DESCRIPTION OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3.1 Articles of Incorporation, Included with initial filing
as amended
3.2 Bylaws Included with initial filing
10.1 1996 Stock Option Plan Included with initial filing
10.2 Employment Agreement with Included with initial filing
David V. Hall
10.3 Employment Agreement with Included with initial filing
Robert J. Babine
10.4 Lease Agreement on Office Included with initial filing
Space
10.5 Contracts for Therapy Included with initial filing
Program Services with
Affiliates
10.6 Loan Agreement with Great Included with initial filing
Financial Bank and related
Security Agreement and
Promissory Note
16 Letter from Cordovano & Included with initial filing
Company, P.C.
21 Subsidiaries of the Small Included with initial filing
Business Issuer
27.1 Financial Data Schedule - Included with initial filing
November 30, 1996
27.2 Financial Data Schedule - Included with initial filing
May 31, 1996
27.3 Financial Data Schedule - Filed herewith electronically
February 28, 1997
-26-
<PAGE>IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
February 28, 1997
(Unaudited)
ASSETS
Current assets:
Cash and equivalents --
Accounts receivable, less allowance for
doubtful accounts of $50,000 $5,870,180
Other current assets 57,196
----------
Total current assets 5,927,376
----------
Equipment, at cost 197,844
Less accumulated depreciation (26,979)
----------
170,865
Covenant not to compete, net of accumulated
amortization of $200,601 38,184
Deferred tax asset 31,986
Other assets 306,562
----------
$6,474,973
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $2,537,849
Bank overdraft 59,195
Accounts payable 472,743
Accrued expenses 353,560
Deferred tax liability 9,298
----------
Total current liabilities 3,432,645
Stockholders' equity:
Common stock 1,886,584
Common stock subscription receivable (57,222)
Retained earnings 1,212,966
----------
3,042,328
----------
$6,474,973
The accompanying notes are an integral part of this statement.
F-1
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended February 28, 1997 and 1996
(Unaudited)
1997 1996
----------- -----------
Revenues $11,161,550 $ 3,501,953
----------- -----------
Operating costs:
Salaries, wages and benefits 5,690,630 1,584,715
Contract therapists 1,948,524 733,108
Rental expense 98,097 55,131
Provision for doubtful accounts 2,764 -
Other direct expense 35,631
Depreciation 13,112 3,121
Amortization 156,730 6,400
----------- -----------
Total 7,946,488 2,382,475
Gross profit 3,216,062 1,119,478
Selling, general and ad-
ministrative expenses 1,609,781 645,903
Income from operations 1,606,281 473,575
Interest expense 91,794 42,188
Income before taxes 1,514,487 431,387
Provision for income taxes 604,000 164,000
Net income $ 910,487 $ 267,387
----------- -----------
Net income per common and common
equivalent share $ 0.07 $ 0.02
Weighted average number of common and
common equivalent shares outstanding 13,637,632 11,501,173
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended February 28, 1997 and 1996
(Unaudited)
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 910,487 $ 267,387
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation 13,112 3,121
Amortization 156,730 6,400
Increase (decrease) in cash, net
of effect of acquisition, resulting
from changes in:
Accounts receivable (2,556,125) (1,553,241)
Interest receivable (2,437) (2,437)
Other current assets (37,129) (1,421)
Other assets (110,954) (1,650)
Accounts payable (49,403) 33,181
Accrued expenses 77,231 136,229
Income taxes (89,100) 105,000
----------- -----------
Net cash used in operating activities (1,687,588) (1,007,431)
Cash flows from investing activities:
Purchase of equipment (120,455) (34,504)
Acquisition of two minor subsidiaries (250,000)
----------- -----------
Net cash used in investing activities (370,455) (34,504)
Cash flows from financing activities:
Issuance of common stock 185,999 -
Proceeds from stock subscription
receivable - 7,500
Issuance of short-term borrowings 4,623,770 1,125,000
Repayments of short-term borrowings (2,810,921) (125,000)
Bank overdraft 59,195 -
----------- -----------
Net cash provided by financing
activities $ 2,058,043 1,007,500
----------- -----------
(Decrease) increase in cash
and equivalents - (34,435)
Beginning cash balance - 103,687
----------- -----------
Ending cash balance - $ 69,252
F-3
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended February 28, 1997 and 1996
(Unaudited)
(Continued)
1997 1996
----------- -----------
Supplemental disclosure:
Cash paid for interest $ 57,137 $ 25,784
Cash paid for income taxes $ 694,492 $ 59,000
Supplemental schedule of noncash
financing activities:
Issuance of short-term borrowings
in connection with the purchase
of Total Rehab South, Inc. $ 500,000
Acquisition of two minor subsidiaries $ 144,228
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
Effective December 9, 1996 Perennial Development Corporation changed its name
to In-House Rehab Corporation (the Company).
The accompanying interim financial statements are presented in accordance with
the requirements of Form 10-SB and consequently do not include all of the
disclosures normally required by generally accepted accounting principles or
those normally made in the Company's annual financial statements. Accordingly,
the reader of these interim financial statements should refer to the Company's
annual financial statements for the year ended May 31, 1996, included
elsewhere herein, for additional information.
The accompanying financial statements have been prepared in accordance with
the Company's customary accounting practices and have not been audited. All
sub- idiaries are included. In management's opinion, all adjustments (which
are of a normal recurring nature) necessary for a fair presentation of the
results of op- rations for the nine-month periods ended February 28, 1997 and
1996 have been made.
2. MAJOR CUSTOMER
At February 28, 1997, the Company had Contracts for Therapy Program Services
with 71 nursing homes in the southeastern United States; 31 of these
facilities are either owned, operated or managed by Retirement Care
Associates, Inc.("Retirement Care"), a principal shareholder of 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), the Company's
operations could be materially and adversely affected.
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.
As a result it is anticipated that if the merger is completed at least some,
and possibly all of these contracts will be terminated on as little as 60
days' notice. During the nine months ended February 28, 1997, contracts with
Retirement Care facilities represented approximately $6,175,704 in revenue to
the Company.
3. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Net income per common and common equivalent share is based upon the actual
weighted average number of common shares outstanding during each period plus
the assumed exercise of dilutive stock options as follows:
F-5
<PAGE>
Nine Months Ended Februry 28,
1997 1996
----------- -----------
Actual weighted average number of common
shares outstanding during the period 13,536,735 11,501,173
Common stock equivalents:
Dilutive effect of stock options
using the "Treasury Stock Method" 81,591 -
Dilutive effect of stock warrants
using the "Treasury Stock Method" 19,306 -
----------- -----------
Totals 13,637,632 11,501,173
4. SHORT TERM BORROWINGS:
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 pro- vides 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. The revolving line of credit
is collateralized by 75% of eligible receivables. All borrowings are due on
demand. Borrowings as of February 28, 1997 are $2,400,000 (see Note 8).
5. STOCKHOLDERS' EQUITY:
The changes in stockholders' equity for the nine months ended February 28,
1997 follows:
Common Stock
Common Subscriptions Retained
Stock Receivable Earnings Total
---------- ------------- ---------- ----------
Balances at May 31, 1996 $1,700,585 $(54,785) $ 302,479 $1,948,279
Issuance of stock in
conjunction with the
private placement 185,999 185,999
Accrued interest (2,437) (2,437)
Net income 910,487 910,487
---------- ------------- ---------- ----------
Balances at February 28, 1997 $1,886,584 $(57,222) $1,212,966 $3,042,328
6. 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
Com- pany 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 Com- pany. 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
F-6
<PAGE>
1996 Plan is not to exceed 1,000,000. At February 28, 1997, there were options
to purchase 112,000 shares at $2.00 per share outstanding under the 1996 Plan.
During the nine-month period ended February 28, 1997, the Company granted
439,000 non-1996 Plan options as follows:
70,000 at 1.25
99,000 at 1.75
70,000 at 2.25
200,000 at 2.00
-------
439,000
These options are exercisable for a period of three to four 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 February 28, 1997, no options have been
exercised.
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.
7. NEW ACCOUNTING STANDARD:
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.
8. SUBSEQUENT EVENTS:
On March 3, 1997, the Company amended its revolving line of credit agreement
with its banking institution to increase the line by $2,000,000 for a total
line of credit of $4,500,000. Borrowings bear interest at the prime rate plus
.25% payable monthly. The revolving credit line is collateralized by 75% of
eligible receivables. All borrowings are due on demand.
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. The acquisition would be in the form of a stock
purchase, with the Company acquiring 100% of the stock of QCR in exchange for
a combination of cash and Common Stock of the Company with a total value of $6
million. The transaction is contingent upon the results of a formal audit of
QCR's financial statements, discovery associated with due diligence and the
Company obtaining financing to fund the acquisition. The closing of this
transaction would also be subject to the execution of a definitive agreement
which would contain various representations and warranties of each party and
which would require the approval of the directors of each company.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
In-House Rehab Corporation
(formerly Perennial Development Corporation)
We have audited the accompanying consolidated balance sheet of In-House Rehab
Corporation (formerly Perennial Development Corporation) (see fourth paragraph
below) and Subsidiaries as of May 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year ended May 31, 1996 and the period from September 21, 1994
(inception) through May 31, 1995. 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 financial position of In-House
Rehab Corporation (formerly Perennial Development Corporation) and
Subsidiaries as of May 31, 1996 and 1995 and the results of their operations
and their cash flows for the year ended May 31, 1996 and the period from
September 21, 1994 (inception) through May 31, 1995 in conformity with
generally accepted accounting principles.
As more fully discussed in Note 1 to the consolidated financial statements, on
September 29, 1995, In-House Rehab Corporation (formerly Perennial Development
Corporation) acquired all the outstanding stock of In-House Rehab, Inc. The
stock exchange was accounted for as a capital transaction similar to a reverse
acquisition except that no goodwill was recorded and In-House Rehab, Inc. was
deemed to be the acquirer for accounting purposes. Accordingly, the
consolidated financial statements presented herein reflect the activities of
In-House Rehab, Inc., using In-House Rehab, Inc's. historical cost basis.
/s/ Coopers & Lybrand LLP
COOPERS & LYBRAND LLP
Louisville, Kentucky
September 12, 1996, except as to the name change and pro forma
information presented in Notes 1 and 2, respectively, for which
the date is January 9, 1997
F-8
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
(formerly PERENNIAL DEVELOPMENT CORPORATION)
CONSOLIDATED BALANCE SHEETS
May 31, 1996 and 1995
ASSETS
1996 1995
Current assets:
Cash and equivalents - $ 103,687
Accounts receivable, less allowance for
doubtful accounts of $50,000 in 1996 $ 3,314,055 318,174
Other current assets 20,067 14,873
----------- ---------
Total current assets 3,334,122 436,734
----------- ---------
Equipment, at cost 77,389 14,644
Less accumulated depreciation 13,867 3,937
----------- ---------
63,522 10,707
Covenant not to compete, net of accumulated
amortization of $46,400 in 1996 139,201 -
Deferred tax asset 31,986 -
Other assets 1,321 1,687
----------- ---------
$ 3,570,152 $ 449,128
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 725,000 -
Accounts payable 522,146 $ 97,181
Accrued expenses 276,329 96,491
Income taxes 89,100 2,500
Deferred tax liability 9,298 1,300
----------- ---------
Total current liabilities 1,621,873 197,472
Stockholders' equity:
Preferred stock, $10 par value; 10,000,000
shares authorized; no shares issued and
outstanding - -
Common stock, no par value; 20,000,000
shares authorized; 13,405,715 and
10,460,000 shares issued and outstanding
at May 31, 1996 and 1995, respectively 1,700,585 408,875
Subordinated convertible common stock, no
par value; 1,200,000 shares authorized;
no shares issued and outstanding - -
Common stock subscriptions receivable (54,785) (59,035)
Deferred compensation costs - (6,400)
Retained earnings (deficit) 302,479 (91,784)
----------- ---------
1,948,279 251,656
----------- ---------
$ 3,570,152 $ 449,128
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
(formerly PERENNIAL DEVELOPMENT CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the year ended May 31, 1996 and the period from
September 21, 1994 (inception) through May 31, 1995
Period
September 21, 1994
Year Ended (Inception)
May 31, 1996 To May 31, 1995
------------ ------------------
Revenues $6,623,410 $ 335,404
---------- ---------
Operating costs:
Salaries, wages and benefits 3,312,682 204,999
Contract therapists 1,229,340 92,429
Rental expense 86,544 15,030
Provision for doubtful accounts 50,000 -
Depreciation 9,930 3,937
Amortization 52,800 4,975
---------- ---------
4,741,296 321,370
---------- ---------
Gross profit 1,882,114 14,034
Selling, general and administrative
expenses 1,179,206 102,018
---------- ---------
Income (loss) from operations 702,908 (87,984)
Interest expense 65,533 -
---------- ---------
Income (loss) before income taxes 637,375 (87,984)
Provision for income taxes 243,112 3,800
---------- ---------
Net income (loss) $ 394,263 $ (91,784)
Net income (loss) per common share $ .04 $ (.01)
Weighted average number of common,
and common equivalent shares
outstanding 11,196,429 10,460,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
(formerly PERENNIAL DEVELOPMENT CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the year ended May 31, 1996 and the period
from September 21, 1994 (inception) through
May 31, 1995
<TABLE>
<CAPTION>
Common
Stock Sub- Deferred Retained
Common Stock scriptions Compensa- Earnings
Shares Amount Receivable tion Costs (Deficit) Total
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock (Note 1) 10,460,000 $ 408,875 $(157,500) $(11,375) $ 240,000
Deferred compensa-
tion amortization 4,975 4,975
Receipt of stock
subscription
payments 100,000 100,000
Accrued interest (1,535) (1,535)
Net loss $(91,784) (91,784)
---------- ---------- --------- -------- --------- ----------
Balances at
May 31, 1995 10,460,000 408,875 (59,035) (6,400) (91,784) 251,656
Acquisition of
the Company (re-
verse acquisition
as explained in
Note 1) 1,845,715 (29,364) (29,364)
Issuance of stock
in conjunction
with the Private
Placement 1,100,000 1,321,074 1,321,074
Deferred compensa-
tion 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 13,405,715 $1,700,585 $ (54,785) - $302,479 $1,948,279
</TABLE>
F-11
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
(FORMERLY PERENNIAL DEVELOPMENT CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended May 31, 1996 and the period from
September 21, 1994 (inception) through May 31, 1995
Period
September 21,
Year Ended 1994 (Inception)
May 31, 1996 to May 31, 1995
------------ ---------------
Cash flows from operating activities:
Net income (loss) $ 394,263 $ (91,784)
Adjustments to reconcile net income
(loss) to net cash used in operat-
ing activities:
Depreciation 9,930 3,937
Amortization 52,800 4,975
Allowance for doubtful accounts 50,000 -
Deferred income taxes (23,988) 1,300
Increase (decrease) in cash, net
of effect of acquisition, resulting
from changes in:
Accounts receivable (2,145,881) (318,227)
Interest receivable (3,250) (1,535)
Other current assets (5,194) (14,820)
Other assets 366 (1,687)
Accounts payable 109,355 97,181
Accrued expenses 179,838 96,491
Income taxes 86,600 2,500
----------- ---------
Net cash used in operating
activities (1,295,161) (221,669)
Cash flows from investing activities:
Purchase of equipment (62,745) (14,644)
Purchase of Total Rehab South, Inc. (510,601) -
----------- ---------
Net cash used in investing
activities (573,346) (14,644)
Cash flows from financing activities:
Issuance of common stock 1,291,710 340,000
Proceeds from stock subscriptions
receivable 7,500 -
Issuance of short-term borrowings 1,625,000 -
Repayments of short-term borrowings (1,400,000) -
Bank overdraft 240,610 -
----------- ---------
Net cash provided by financing
activities 1,764,820 340,000
----------- ---------
(Decrease) increase in cash and
equivalents (103,687) 103,687
Beginning cash balance 103,687 -
----------- ---------
Ending cash balance - $ 103,687
(Continued)
F-12
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
(FORMERLY PERENNIAL DEVELOPMENT CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended May 31, 1996 and the period from
September 21, 1994 (inception) through May 31, 1995
(Continued)
Period
September 21,
Year Ended 1994 (Inception)
May 31, 1996 to May 31, 1995
------------ ---------------
Supplemental disclosure:
Cash paid for interest $ 65,414 -
Cash paid for income taxes $ 180,500 -
Supplemental schedule of noncash
investing and financing activities:
Issuance of short-term borrowings
in connection with the purchase
of Total Rehab South, Inc. $ 500,000 -
Issuance of common stock $ 225,000 -
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
(FORMERLY PERENNIAL DEVELOPMENT CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Perennial Development Corporation (the Company) was formed under the laws of
the State of Colorado in May 1985 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
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. Additionally, during the period from June 1989 through May
1995, the Company legally divested itself of all of its subsidiaries:
Blum-Jackson Company, Blum-Jackson Realty and Perennial Properties, Inc. On
September 12, 1989, the Company filed a Form 15 and ceased being a reporting
entity. As of September 29, 1995, the Company had no assets or operations and
approximately $12,000 in total liabilities.
Effective December 9, 1996, the Company changed its name to In-House Rehab
Corporation. All references to the Company herein refer to the Company and
its subsidiaries.
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 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
and for the period from September 21, 1994 (inception) through May 31, 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.
IHR was incorporated on September 21, 1994, and is engaged in providing, on a
contract basis, physical, speech and occupational therapy personnel to
long-term care providers.
In November 1995, IHR formed a wholly-owned subsidiary, In-House Staffing,
Inc. (IHS), a Kentucky corporation, established for the purpose of providing
services in recruiting rehabilitation therapists for the Company and its
customers as well as other health care providers.
2. ACQUISITIONS:
On September 29, 1995, the Company entered the health care industry through
the acquisition of IHR. See Note 1 for further details.
F-14
<PAGE>
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
$510,610 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 16, 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.
The following table presents unaudited pro forma results of operations data as
if the acquisition of TRS described above had occurred on September 21, 1994.
Period from
September 21,
1994
(Inception)
Year Ended Through
May 31, 1996 May 31, 1995
------------ ------------
Unaudited
Revenue $9,325,553 $ 694,782
Net income (loss) 220,622 (147,783)
Net income (loss) per share .02 (.01)
The pro forma information includes adjustments for amortization of the non-
compete 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: 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
transactions have been eliminated.
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 totaling $240,610 at May 31, 1996 have been included in accounts
payable. Upon presentation for payment, they will be funded through available
cash balances or the revolving credit/demand loan agreement.
F-15
<PAGE>
Depreciation: Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.
Amortization of Noncompete Agreement: The noncompete agreement is amortized
over one year beginning March 1996 on a straight-line basis.
Net Income (Loss) per Common Share: Net income (loss) per common share is
based on the weighted average number of shares of common stock outstanding
during the year. Stock warrants were not considered in the computation as
their effect would be anti-dilutive.
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
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications have been made to the May 31,
1995 financial statements of the Company. These reclassifications had no
effect on previously reported net loss.
4. MAJOR CUSTOMER:
Approximately $5,129,800 or 77% of all revenue for the year ended May 31, 1996
and $1,528,000 or 49% of the balance of accounts receivable at May 31, 1996
relate to one customer who is a stockholder and related party of the Company.
At May 31, 1995 the balance of accounts receivable and all revenue for the
period from September 21, 1994 (inception) through May 31, 1995 relate to the
same customer.
5. ACCOUNTS RECEIVABLE:
Accounts receivable on May 31 consist of the following:
1996 1995
---------- --------
Trade accounts receivable $1,509,333 -
Accounts receivable - related party 1,629,722 $318,174
Due from Private Placement Trustee
(all received in June 1996) 225,000 -
---------- --------
3,364,055 318,174
Allowance for doubtful accounts 50,000 -
---------- --------
Net accounts receivable $3,314,055 $318,174
6. SHORT-TERM BORROWINGS:
On June 23, 1995, IHR 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 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 are available. Borrowings bear 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 is collateralized by
substantially all of IHR's assets. At May 31, 1996, approximately $1,207,000
of the revolving credit line was guaranteed by certain of the stockholders.
All borrowings are due on
F-16
<PAGE>
demand. Borrowings as of May 31, 1996 are $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.
7. ACCRUED EXPENSES:
Accrued expenses at May 31 consist of the following:
1996 1995
-------- --------
Compensation and benefits $187,094 $ 42,100
Taxes (other than taxes on income) 24,155 32,510
Other 65,080 21,881
-------- --------
$276,329 $ 96,491
8. INCOME TAXES:
Through March 31, 1995, the Company's stockholders elected to report the
operations of the Company on their individual federal and state income tax
returns (Subchapter S election). The loss for that period was reported on such
income tax returns. The accompanying consolidated financial statements contain
no provision or benefit related to federal or state income taxes for that
period. Effective April 1, 1995, the Company terminated its Subchapter S
election.
The provision for income taxes consists of the following:
1996 1995
--------- --------
Current payable:
Federal $ 231,296 $ 1,875
State 35,804 625
--------- --------
Total currently payable 267,100 2,500
Deferred:
Federal (20,754) 975
State (3,234) 325
--------- --------
Total deferred (23,988) 1,300
--------- --------
Total provision $ 243,112 $ 3,800
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:
1996 1995
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Noncompete agreement $16,889
Accrued vacation 15,097
Depreciation $9,298
Reinstatement of deferred
taxes upon termination of
Subchapter S election $1,700
Other $400
------- ------ ---- ------
Total deferred taxes $31,986 $9,298 $400 $1,700
F-17
<PAGE>
Based on the Company's prior earnings and the sufficiency of income to be
utilized in the carryback years, it is more likely than not that the net
deferred tax assets for 1996 will be realized. Therefore, no valuation
allowance has been established to reduce deferred tax assets for 1996.
Reconciliation of the federal statutory rate and the effective income tax rate
at May 31, 1996 follows:
1996 1995
---- ----
Federal statutory rate 34.0% (34.0)%
State income taxes, net of federal
income tax benefit 3.3 (3.3)
Effect of losses relating to S
Corporation status - 41.0
Other .9 .6
---- ----
Effective income tax rate 38.2% 4.3%
9. LEASE OBLIGATIONS:
The Company rents office space, certain office equipment and vehicles under
operating leases expiring at various dates through April 1998. These leases
generally include one or more renewal options. Approximate future minimum
rentals on all noncancelable operating leases in effect at May 31, 1996 are as
follows:
1997 $55,000
1998 42,000
1999 6,800
2000 700
Lease expense was approximately $37,000 and $15,000 for the year ended May 31,
1996 and the period from September 21, 1994 (inception) to May 31, 1995,
respectively.
10. 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 at $1.25 per share.
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, which will be
utilized for future acquisitions. The net proceeds include a stock receivable
from the Private Placement Trustee at May 31, 1996 of $225,000.
Investors who purchased at least eight units (each unit consists of 20,000
shares) 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.
As of May 31, 1996, 360,000 warrants had been issued in conjunction with the
Private Placement.
11. STOCK SUBSCRIPTIONS RECEIVABLE:
The Company had stock subscriptions receivable of $54,785 and $59,036 at May
31, 1996 and 1995, respectively. Such subscriptions receivable bear interest
at 6.5-8.5% per annum and are payable on or before September 30, 1996.
F-18
<PAGE>
12. STOCK COMPENSATION:
During the period from September 21, 1994 (inception) through May 31, 1995,
1,830,500 shares (175 shares prior to the recapitalization) of common stock
were issued in conjunction with certain officers' employment contracts. The
awards were recorded at the estimated market value of the shares at the time
the shares were awarded. The total market value of the shares, $11,375, was
treated as unearned compensation and is being charged to expense over the
one-year period of the related employment contract. This unearned compensation
was fully amortized at May 31, 1996.
13. 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 1996.
14. 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
$58,000 in total to the Company for advances as of May 31, 1996.
Additionally, a company owned by a stockholder of the Company owed
approximately $51,000 and $2,000 for advances as of May 31, 1996 and 1995,
respectively.
15. 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.
F-19
<PAGE>
TOTAL REHAB SOUTH, INC.
INTERIM BALANCE SHEET, February 29, 1996
(Unaudited)
__________________________
ASSETS
Current assets:
Accounts reeivable $ 1,023,305
Deferred income taxes 46,000
Other current assets 7,200
___________
$ 1,076,505
___________
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Checks drawn in excess of cash on deposit $ 33,917
Accounts payable 114,265
Accrued wages and salaries 131,402
Advances from related parties 346,580
Advance toward purchase 500,000
Payroll taxes 24,942
Other current liabilities 7,350
___________
Total current liabilities 1,158,456
Stockholders' deficit:
Common stock 500
Accumulated deficit (82,451)
___________
(81,951)
___________
$ 1,076,505
___________
See notes to interim financial statements.
F-20
<PAGE>
TOTAL REHAB SOUTH, INC.
INTERIM STATEMENTS OF OPERATIONS
FOR THE TWO-MONTH PERIODS ENDED FEBRUARY 28, 1995
AND FEBRUARY 29, 1996
(Unaudited)
_________________________
1995 1996
________ _________
Revenues $ 74,065 $ 810,607
________ _________
Operating costs:
Salaries, wages, benefits and payroll taxes 32,620 521,900
Contract therapists 540 64,051
Other 25 22,137
________ _________
33,185 608,088
________ _________
Gross profit 40,880 202,519
Selling, general and administrative expenses 28,235 136,778
________ _________
Income from operations 12,645 65,741
Interest expense - 3,471
________ _________
Income before income tax provision 12,645 62,270
Income tax provision 2,500 13,000
________ _________
Net income $ 10,145 $ 49,270
________ _________
Net income per common share $ 20.29 $ 98.54
________ _________
See notes to interim financial statements
F-21
<PAGE>
TOTAL REHAB SOUTH, INC.
INTERIM STATEMENTS OF CASH FLOWS
FOR THE TWO-MONTH PERIODS ENDED FEBRUARY 28, 1995
AND FEBRUARY 29, 1996
(Unaudited)
__________________
1995 1996
_________ _________
Cash flows from operating activities:
Net income $ 10,145 $ 49,270
Adjustments to reconcile net income to net
cash used in operating activities:
Deferred income taxes - 13,000
Increase (decrease) in cash resulting
from changes in:
Accounts receivable (65,583) (211,773)
Accounts payable 10,620 20,055
Accrued wages and salaries 26,558 940
Payroll taxes 1,302 (328,640)
Other current liabilities 2,500 (1,770)
________ _________
Net cash used in operating activities (14,458) (458,918)
________ _________
Cash flows from financing activities:
Issuance of common stock 500 -
Checks drawn in excess of cash on deposit - 33,917
Advances from related parties 27,100 (87,558)
Advance towards purchase - 500,000
________ __________
Net cash provided by financing activities 27,600 446,359
________ __________
Increase (decrease) in cash 13,142 (12,559)
Cash, beginning of period - 12,559
________ __________
Cash, end of period $ 13,142 $ -
________ __________
Supplemental disclosure:
Cash paid for interest $ - $ 3,471
________ __________
See notes to interim financial statements.
F-22
<PAGE>
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
_________________
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying interim financial
statements contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of financial condition and results of
operations. These notes should be read in conjunction with the notes to the
financial statements for the year ended December 31, 1995, included herein.
2. ADVANCES FROM RELATED PARTIES:
Advances from related parties consists of the following:
Note payable to stockholder $ 150,000
Advance from related entity 196,580
_________
$ 346,580
_________
3. ADVANCES TOWARD PURCHASE:
Advance towards purchase represents an advance of the $500,000 cash
payment required under the Sales Agreement to be effective March 1, 1996. In
addition, $500,000 in short-term notes were issued to consummate the
acquisition of Total Rehab South, Inc. by In-House Rehab, Inc.
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
In-House Rehab, Inc.
We have audited the accompanying balance sheet of Total Rehab South, Inc. as
of December 31, 1995, and the related statements of operations, stockholders'
deficit, and cash flows for the year then ended (initial period). 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit 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 the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Total Rehab South, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Ecken & Smith, P.S.C.
ECKEN & SMITH, P.S.C.
Louisville, Kentucky
January 9, 1997
F-24
<PAGE>
TOTAL REHAB SOUTH, INC.
BALANCE SHEET, December 31, 1995
________________________
ASSETS
Current assets:
Cash $ 12,559
Accounts reeivable 811,532
Deferred income taxes 59,000
Other current assets 7,200
___________
$ 890,291
___________
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 94,210
Accrued wages and salaries 130,462
Advances from related parties 434,138
Payroll taxes 353,582
Other current liabilities 9,120
___________
Total current liabilities 1,021,512
Stockholders' deficit:
Common stock 500
Accumulated deficit (131,721)
___________
(131,221)
___________
$ 890,291
___________
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
TOTAL REHAB SOUTH, INC.
STATEMENT OF OPERATIONS
for the year ended December 31, 1995 (initial period)
_________________________
Revenues $ 2,250,914
___________
Operating costs:
Salaries, wages, benefits and payroll taxes 1,614,369
Contract therapists 168,410
Other 77,321
___________
1,860,100
___________
Gross profit 390,814
Selling, general and administrative expenses 577,829
___________
Loss from operations (187,015)
Interest expense 3,706
___________
Loss before income tax benefit (190,721)
Income tax benefit 59,000
___________
Net loss $ (131,721)
___________
Net loss per common share $ (263.44)
___________
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
TOTAL REHAB SOUTH, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
for the year ended December 31, 1995 (initial period)
_________________________
Common Stock
($1 par value,
1,000 shares
authorized)
_______________
Accumulated
Shares Amount Deficit Total
______ ______ ___________ _________
Issuance of common stock 500 $ 500 $ 500
Net loss (131,721) (131,721)
______________ _________ _________
Balances, December 31, 1995 500 $ 500 $(131,721) $(131,221)
___ ______ _________ _________
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
TOTAL REHAB SOUTH, INC.
STATEMENT OF CASH FLOWS
for the year ended December 31, 1995 (initial period)
______________________
Cash flows from operating activities:
Net loss $ (131,721)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (59,000)
Increase (decrease) in cash resulting
from changes in:
Accounts receivable (811,532)
Other current assets (7,200)
Accounts payable 94,210
Accrued wages and salaries 130,462
Payroll taxes 353,582
Other current liabilities 9,120
_________
Net cash used in operating activities (422,079)
_________
Cash flows from financing activities:
Issuance of common stock 500
Advances from related parties 434,638
_________
Net cash provided by financing activities 434,638
_________
Increase in cash 12,559
Cash, beginning of year -
_________
Cash, end of period $ 12,559
_________
Supplemental disclosure:
Cash paid for interest $ 3,907
_________
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
TOTAL REHAB SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
_________________________
1. ORGANIZATION AND OPERATIONS:
Total Rehab South, Inc. (the Company, TRS) was incorporated in December
1994 and commenced operations in January 1995. The Company is engaged in
providing, on a contract basis, physical, speech and occupational therapy
personnel to long-term healthcare providers, principally in the Southeastern
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) USE OF 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
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) NET LOSS PER COMMON SHARE:
Net loss per common share is based on the weighted average number
of shares of common stock outstanding during the year.
(c) INCOME TAXES:
Income taxes (benefits) are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due (refundable) plus deferred taxes. Deferred taxes are recognized
for operating losses that are available to offset future taxable income.
3. ADVANCES FROM RELATED PARTIES:
Advances from related parties consists of the folowing:
Note payable to stockholder $ 150,000
Advance from related entity 284,138
---------
$ 434,138
The note payable to stockholder is payable on demand and bears interest at
twelve percent (12%). Interest expense for the year ended December 31, 1995
amounted to $3,706. The advance from related entity is payable on demand to a
company with similiar stock ownership as that of TRS. The advances are
noninterest bearing.
4. INCOME TAXES:
Income tax benefit in the accompanying statement of operations
represents deferred income taxes relating to utilization of the Company s net
operating loss carryforward, as follows:
Federal $ 49,000
State 10,000
--------
$ 59,000
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS, Continued
_________________________
No valuation allowance is provided against the related deferred tax asset in
that realization of the asset is more likely than not.
5. SUBSEQUENT SALE OF COMPANY:
On March 1, 1996, TRS sold substantially all its assets for a price of
$1 million. Under the Sales Agreement, the purchaser acquired accounts
receivable in the amount of $900,000 and assumed accounts payable of $75,000.
The purchase price consisted of $500,000 in cash and four monthly installments
of $125,000. In connection with the sale, the Company and its stockholders
entered into a Noncompetition Agreement for a period of one year.
F-30
<PAGE>
IN-HOUSE REHAB CORPORATION
PRO FORMA FINANCIAL DATA
On March 1, 1996, the Company acquired substantially all of the assets and
liabilities of TRS. The acquisition was accounted for using the purchase
method of accounting. The following table sets forth the unaudited pro forma
results of operating data for the year ended May 31, 1996, as if the
acquisition of TRS had occurred on June 1, 1995. The historical operating
data for the Company for the year ended May 31, 1996 have been derived from
the audited financial statements of the Company. The historical operating data
for TRS for the period June 1, 1995 through February 29, 1996 have been
derived from the historical unaudited financial statements of TRS. The pro
forma statement of operations does not purport to represent what the Company's
results of operations would actually have been had the acquisition, in fact,
occurred on such date, or to project the Company's results of operations at
any future date or for any future period. This summary data is qualified by
and should be read in conjunction with the financial statements and the
related notes thereto and the other financial information contained in the
Form 10-SB.
F-31
<PAGE>
IN-HOUSE REHAB CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended May 31, 1996
(unaudited)
Historical
Total Rehab
In-House South For
Rehab the Period
Corporation June 1, 1996
for the Year Through
Ended May 31, February 28, Pro Forma
1996 1996 Adjustments Pro Forma
------------ ----------- ----------- -----------
Revenues $ 6,623,410 $ 2,702,143 - $ 9,325,553
Operating costs 4,741,296 2,239,020 $ 139,201(a) 7,119,517
----------- ----------- ----------- -----------
Gross profit 1,882,114 463,123 (139,201) 2,206,036
Selling, general and
administrative
expenses 1,179,206 600,637 - 1,779,843
----------- ----------- ----------- -----------
Income (loss)
from operations 702,908 (137,514) (139,201) 426,193
Interest expense 65,533 7,177 68,216(b) 140,926
----------- ----------- ----------- -----------
Income (loss) before
income taxes 637,375 (144,691) (207,417) 285,267
Provision for (benefit
of) income taxes 243,112 (49,100) (82,967)(c) 111,045
----------- ----------- ----------- -----------
Net income (loss) $ 394,263 $ (95,591) $ (124,450) $ 174,222
Net income (loss) per
common and common
equivalent share $ 0.04 $ (0.01) $ (0.01) $ 0.02
Weighted average number
of common and common
equivalent shares
outstanding 11,196,429 11,196,429 11,196,429 11,196,429
(Continued)
F-32
<PAGE>
IN-HOUSE REHAB CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS, Continued
a) Adjustments to operating costs reflect increases in amortization expense,
which was calculated as follows:
Pro forma amortization expense -
covenant not to compete for the year
ended May 31, 1997 $ 185,601
Historical amortization expense -
covenant not to compete for the period
March 1, 1996 through May 31, 1996 (46,400)
---------
$ 139,201
(b) The adjustment to interest expense was calculated based upon the
acquisition debt of $1,010,601 at 9% for the period June 1, 1995 through
February 29, 1996.
(c) Pro forma income tax benefit was calculated at the statutory federal and
state tax rate of 40%.
F-33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized.
IN-HOUSE REHAB CORPORATION
By:/s/ David V. Hall
David V. Hall, President
Date: April 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet and statement of operations found on pages F-1 and F-2 of the
Company's Form 10SB, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,920,180
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,927,376
<PP&E> 197,844
<DEPRECIATION> 26,979
<TOTAL-ASSETS> 6,474,973
<CURRENT-LIABILITIES> 3,432,645
<BONDS> 0
0
0
<COMMON> 1,886,584
<OTHER-SE> 1,155,744
<TOTAL-LIABILITY-AND-EQUITY> 6,474,973
<SALES> 11,161,550
<TOTAL-REVENUES> 11,161,550
<CGS> 7,946,488
<TOTAL-COSTS> 9,556,269
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,794
<INCOME-PRETAX> 1,514,487
<INCOME-TAX> 604,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 910,487
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
