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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: May 31, 1998
Commission File No. 0-22155
IN-HOUSE REHAB CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0987697
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
325 West Main Street, Suite 1400B, Louisville, Kentucky 40202
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (502) 568-8923
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 20, 1998, 13,391,072 Shares of the Registrant's No Par Value
Common Stock were outstanding. The aggregate market value of voting stock
held by nonaffiliates of the Registrant on that date was approximately
$14,951,000.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year: $18,687,000.
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
In-House Rehab Corporation (the "Company") was formed under the laws of
the State of Colorado in May 1985 under the name of "Perennial Development
Corporation" for the purpose of engaging in real estate activities. In April
1987, the Company completed an initial public offering of its securities, and
became listed on Nasdaq.
The Company engaged in commercial land development operations. However,
due principally to escalating adverse economic conditions in the real estate
markets in which the Company was engaged, management eventually abandoned the
development of all of its projects. A combination of high leverage and severe
liquidity problems forced management to dispose of the properties during the
period from June 1989 to May 1994. A land development project in Somerton,
Arizona resulted in the filing of a bankruptcy petition on behalf of a
subsidiary which was settled during the year ended May 31, 1995.
On September 29, 1995, the Company acquired all of the outstanding stock
of In-House Rehab, Inc. ("IHR"), a Kentucky corporation, in exchange for
10,460,000 shares of the Company's authorized but unissued Common Stock. Such
shares were issued to the former shareholders of IHR and represent 85% of the
Company's Common Stock outstanding. As a result of this transaction, there
was a change in control of the Company. All of the Company's officers and
directors resigned, and new officers and directors selected by IHR were
elected.
IHR was formed in September 1994, and is engaged in providing, on a
contract basis, physical, speech and occupational therapy personnel to
long-term care providers.
Effective March 1, 1996, the Company acquired certain assets and
liabilities of Total Rehab South, Inc. ("TRS"), a Tampa, Florida based
provider of rehabilitation, speech and occupational therapists to nursing
homes and long-term care facilities in Florida and Georgia. Included in the
assets acquired by the Company were $900,000 in accounts receivable and the
rights of TRS under contracts it held to provide therapists to 28 facilities.
The Company also assumed up to $75,000 of liabilities of TRS. The total
price paid by the Company under the asset purchase agreement was $1,010,601
including a non-competition agreement in the amount of $185,601. In
connection with this acquisition, the therapists employed by TRS became
employees of the Company. TRS was merged into IHR on May 31, 1996.
Effective September 1, 1996, the Company acquired all of the stock of
Regal Health Care, Inc. ("RHC") for $1.00. RHC is a Clearwater, Florida based
provider of behavioral health services to nursing homes and long-term care
facilities in North Carolina. Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000. This
acquisition allowed the Company to add behavioral health services to the
rehabilitation services it currently offers. Effective September 10, 1997,
RHC changed its name to In-House Medical Resources, Inc.
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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.
Effective December 1, 1996, the Company acquired all of the stock of RT
Group Inc. ("RTG"), in exchange for $150,000 in cash. RTG is a Indianapolis,
Indiana based provider of respiratory care to nursing homes and long-term care
facilities in Indiana. Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000. The
Company now offers respiratory therapy services along with rehabilitation and
psych/social services in facilities under contract.
Effective December 1, 1996, the Company acquired all of the stock of
Daily Rehabilitation Institute, Inc. ("DRI") in exchange for $1.00 and an
option to purchase 30,000 shares of the Company's Common Stock at $2.25 per
share. DRI is a Jacksonville, Florida based provider of outpatient rehab
services in a clinic setting. Upon acquisition, DRI had assets totaling
approximately $116,000 and liabilities totaling approximately $124,000. The
clinic is a Medicare certified facility that the Company now markets in the
Florida based assisted living community.
Effective January 1, 1997, the Company acquired nine contracts to provide
therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. ("TSI") in exchange for $100,000 in cash which included $10,000
for a noncompete agreement. TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.
In July 1997, the Company entered into an agreement with an unrelated
company whereby the Company would provide operational support while the
partner company would provide the marketing support to sell the services
offered by the Company. This new company was a limited liability company,
Rehab Partners, L.L.C. ("RP") and IHR had an 85% interest in RP. Effective
May 31, 1998, RP was dissolved.
On September 30, 1997, the Company acquired the assets of Rehab & Therapy
Center of Naples, Inc.("RTCN"), an operator of a comprehensive outpatient
rehabilitation facility in southern Florida. This acquisition was made in
exchange for $20,000 in cash and 2,857 shares of the Company's Common Stock.
Effective December 12, 1997, IHR formed a new subsidiary, Doctors Rehab &
Therapy, Inc. ("DRT") and transferred the assets acquired from RTCN to DRT.
On March 30, 1998, the Company acquired all of the outstanding common
stock of Gateway Rehabilitation, Inc. ("Gateway") in exchange for 43,000
shares of the Company's Common Stock in a private transaction. The
acquisition was made pursuant to the terms of a Stock Purchase Agreement dated
March 1, 1998, among the Company, Gateway and Gateway's shareholders. Gateway
provides physical therapy, occupational therapy and rehabilitation program
management under contracts with thirty long-term care facilities in Illinois
and southwestern Indiana. During the year ended December 31, 1997, Gateway
had approximately $2,760,000 in sales and had a net loss of approximately
$17,000. At February 28, 1998, Gateway had approximately $883,000 in assets
and $1,137,000 in liabilities.
Under the terms of the Stock Purchase Agreement, the former shareholders
of Gateway have the right to require the Company to repurchase the shares of
the Company's Common Stock received by them in the transaction for $5.00 per
share during the 10 day period commencing May 31, 1999. As a result, the
Company could be required to repurchase these shares for an aggregate of
$215,000.
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On June 3, 1997, the Company formed Perennial Health Management, Inc.
("PHM") as a wholly-owned subsidiary for the purpose of acquiring, operating
and managing nursing home properties. As of August 1998, PHM has had only
very limited activities relating to the review of potential nursing home
acquisitions.
All references to the "Company" herein refers to the Company and its
subsidiaries, unless the context otherwise requires.
CONTRACT THERAPY SERVICES
The Company primarily provides rehabilitation services to nursing
facilities on a contract basis. These include physical therapy, occupational
therapy, speech-language pathology, respiratory therapy and behavioral health
services. 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. Behavioral health services is the
evaluation and treatment of patients suffering from psychological and
emotional disorders.
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. 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.
EXPERTISE. Therapy revenues represent a relatively small percentage
of a nursing facility's total revenues and operating activities.
Reimbursement and regulatory complexities concerning appropriate utilization,
documentation, denials management and quality oversight, if inadequately
administered, can seriously erode the profitability of therapy programs
staffed by and managed by employees of the nursing facility. As a result,
nursing facilities frequently choose to contract for specialized expertise.
In the current unsettled environment, the Company believes that it is
well-positioned to compete effectively with other contractors due to: (i) a
multi-disciplinary team approach to therapy that is designed to deliver a high
level of quality, (ii) reimbursement and regulatory expertise to assist
nursing facility operators in their dealings with third-party payors,
principally Medicare, and (iii) sophisticated management information systems
to assist operators in analyzing clinical outcomes, therapy utilization, claim
denials, staffing and marketing and educational activities.
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SERVICE AGREEMENTS
The Company enters into Contracts for Therapy Program Services with
operators of long-term care facilities. The Company provides rehabilitation
services to the facilities' patients based upon medical necessity,
professional recruiting, rehabilitation management, information technology 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.
(7) Providing information systems that track clinical and financial
outcomes, graphical trend reports for admission and discharge sources, minute
utilization for PPS patients (including RUGS categories minimum minutes,
minutes used, and number of disciplines participating in treatment).
In exchange for the services provided, the Company receives a monthly
management fee, which may be adjusted if the quantity of equipment, therapists
or other services subsequently change; a one-time set up fee; and a monthly
fee based on the number of treatment units of service provided by employees of
the Company.
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.
PROPOSED NURSING HOME OPERATIONS
In June 1998, the Company announced that it had formed a new subsidiary
to explore possible acquisition and nursing home management opportunities
which may arise as a result of the new Medicare reimbursement-billing system
which is expected to have a significant effect on nursing home operators.
Management anticipates that some operators may be unable to adapt to the new
system and that acquisition and management opportunities may arise.
Certain members of the Company's management have experience in managing
and operating nursing homes. In addition, the Company has experience in
working with nursing home operators in providing therapy services to their
patients.
The Company may acquire, through purchase or lease, long-term care
facilities that provide both routine and ancillary services. Routine services
such as room and board and basic nursing care services are provided in skilled
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long-term care facilities and assisted living/independent living facilities.
Certain long-term care facilities may also provide specialty services such as
HIV care, Alzheimer's disease units, wound care, subacute care, and stroke and
accident rehabilitation. It is anticipated that any facilities acquired will
derive most of their revenues from Medicaid and Medicare.
The Company may also agree to manage facilities for nursing home
operators. Such services would be performed under contracts which provide for
a fixed fee or a percentage of revenue as compensation for the management
services provided.
In evaluating an existing facility for acquisition, management will
consider the facility's historical occupancy rates and payor mix, reputation
and compliance history, physical condition and appearance, labor for
stability, the availability of financing on acceptable terms and, in the case
of assisted/independent living facilities, the demographics of the surrounding
area. There can be no assurance that the Company will locate any suitable
acquisitions or management opportunities.
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.
Any long-term care facilities operated or managed by the Company will
compete on a local and regional basis with other long-term care providers.
Some providers have greater financial resources than the Company and may
operate on a nonprofit basis or as charitable organizations. The Company
believes that the quality of care provided, the reputation and physical
appearance of facilities and, in the case of private pay patients, charges for
services, are significant competitive factors. There is limited, if any,
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competition in price with respect to Medicaid and Medicare patients, since
revenues for services to such patients are strictly controlled.
REIMBURSEMENT/GOVERNMENT PROGRAMS
Reimbursement for medical rehabilitation services is available through
Medicare, Medicaid, commercial insurance, managed care programs, veterans
benefits, workers' compensation and other government programs. Medicare is a
federally funded health program which provides health insurance coverage for
certain disabled persons and persons age 65 or older. Medicaid is a health
insurance program, jointly funded by the federal and state governments, which
provides health insurance coverage for certain financially or medically needy
persons regardless of age. Medicaid benefits supplement Medicare benefits for
financially needy persons age 65 or older. Congress has provided, through the
Medicare program, for coverage of contract therapy services. A substantial
portion of the Company's business, in effect, is reimbursed by Medicare, and a
small portion by Medicaid. As a result, regulations regarding Medicare and
Medicaid eligibility, certification and reimbursement are important to the
Company's activities and changes in these programs or regulations could
adversely affect the Company's business.
The Health Care Financing Administration ("HCFA"), the federal agency
responsible for the rates covering Medicare and Medicaid, issued specific
guidelines for the reimbursement of physical therapy, occupational therapy and
speech therapy which took affect on April 10, 1998. The rates are based upon
salary equivalency and they are not expected to have a significant adverse
impact on future results.
The Congress has passed, and the President has signed health care reform
in the Balanced Budget Act of 1997. This legislation is intended to slow the
annual rate of growth of Medicare and Medicaid expenditures. The legislation
includes a prospective payment system for all Medicare services provided in a
skilled nursing facility, including medical rehabilitation services. The
skilled nursing facility will receive a fixed reimbursement rate per patient
day, based upon a patient acuity rating system, which includes an added-on
amount for rehab services. The effective date of prospective payment for
skilled nursing facilities is on or after July 1, 1998. The new legislation
also provides for a $1,500 cap on outpatient therapy charges. Currently,
there is legislation pending to delay the implementation of the $1,500 cap.
Any nursing homes which the Company may acquire or manage are expected to
rely on the Medicare and Medicaid programs for a substantial portion of their
revenues. These revenues would be subject to the new prospective payment
system ("PPS") for Medicare contained in the Balance Budget Act of 1997. For
nursing homes that participated in the Medicare program prior to October 1995,
the Medicare PPS rates will be phased in over a four year period. During the
first three years, the rates will be established by a blend of
facility-specific costs and a federally determined acuity level rate. The
portion of the rate affected by acuity level will increase from 25% in year
one to 75% by year three. In year four, the entire PPS rate will be based on
federal determined acuity levels. Nursing homes that were not in the Medicare
program prior to October 1995 will go directly to the federally determined
acuity level rate.
GOVERNMENT REGULATION
The Federal Government and all states in which the Company does business
regulate various aspects of the Company's operations. In particular, the
operation of long-term facilities and the provision of healthcare services are
subject to federal, state and local laws relating to, among other things, the
adequacy of medical care, distribution of pharmaceuticals, equipment,
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personnel, operating policies, fire prevention and compliance with building
codes. Long-term care facilities are also subject to periodic inspection by
governmental and other authorities to assure continued compliance with various
standards, their continued licensing under state law and certification under
the Medicare and Medicaid programs. The failure to obtain or renew any
required regulatory approvals or licenses could adversely affect the Company's
growth and could prevent it from offering its existing or additional services.
Medicare certification is a critical factor for contributing to the
revenues and profitability of a long-term care facility and, accordingly, will
be a key objective of the Company's facility enhancement efforts with respect
to any facilities which the Company may acquire. Medicare certification
depends on a favorable facility review by the Health Standards and Quality
Bureau of the Health Care Financing Administration ("HCFA"). Any suspension
or delay in the administration of HCFA's survey and certification program, as
had been proposed by HCFA in 1995, could delay Medicare certification of any
new facilities acquired by the Company which are not already certified. There
can be no assurance that the Company will be able to obtain or maintain
Medicare certifications at its facilities.
Various federal and state laws regulate relationships of healthcare
services, including employment or service contracts or investment
relationships. The Medicare and Medicaid provisions of the Social Security
Act prohibit the payment or receipt of any remuneration by anyone in return
for, or to induce the referral of patients for items or services that are paid
for, in whole or in part, by Medicare or Medicaid funds. The so-called
"Stark" amendments of the Social Security Act provide, with certain
exceptions, that if a physician has a "financial interest" in an entity (which
may consist of either an ownership interest or a compensation arrangement),
the physician is prohibited from making a referral to the entity for the
provision of certain "designated health services" for which payment may be
made by Medicare or Medicaid. A violation of these provisions may result in
civil or criminal penalties for individuals or entities and/or exclusion from
participation in the Medicare or Medicaid programs.
The Company does not believe its healthcare operations are presently
subject to the Medicare and Medicaid anti-kickback and Stark provisions of the
Social Security Act. However, these provisions are broadly worded and often
vague, and the future interpretations of these provisions and their
applicability to the Company's operations cannot be fully predicated with
certainty. There can be no assurance that the Company will be able to arrange
its acquisitions or business relationships so as to comply with these laws or
that of the Company's present or future operations will not be accused of
violating, or be determined to have violated, such provisions. Any such
result could have a material adverse effect on the Company.
Furthermore, healthcare is an area of extensive and frequent regulatory
change. Changes in the laws or new interpretations of existing laws can have
a significant effect on methods and costs of doing business and amounts of
reimbursement from governmental and other payors. The Company's operations
could be adversely affected by, among other things, regulatory developments
such as mandatory increases in the scope and quality of care to be afforded
patients and revisions in licensing and certification standards. The Company
at all times attempts to comply with all applicable laws; however, there can
be no assurance that administrative or judicial interpretation of existing
laws or regulations will not have a material adverse effect on the Company's
operations or financial condition. Also, there can be no assurance that
federal, state or local laws or regulatory procedures which might adversely
affect the Company's business, financial condition, results of operations or
prospects will not be expanded or imposed.
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Most states have adopted certificate of need ("CON") or similar laws that
generally require that the appropriate state agency approve certain
acquisitions and determine that a need exists for certain new services and
capital expenditures or other changes. To the extent that CON or other
similar approvals are required for expansion of the Company's operations,
either through facility acquisitions or expansion or provision of new services
or other changes, such expansion could be adversely affected by the failure or
inability to obtain the necessary approvals, changes in standards applicable
to such approvals and possible delays and expenses associated with obtaining
such approvals.
Additionally, business corporations such as the Company are generally not
permitted under state law or practice medicine, exercise control over the
medical judgments or decisions of physicians or engage in certain practices,
such as fee splitting, with physicians. While the Company intends to
structure its relationships with physicians to comply with these laws, there
can be no assurance that regulatory authorities or other parties will not
assert that the Company's relationship with physicians violates these laws.
There have been a number of recent healthcare reform initiatives at the
federal and state levels. The Company cannot make any assessment as to the
ultimate timing and impact that any pending or future healthcare reform
proposals may have on the healthcare industry. No assurance can be given that
any such reform will not have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
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 August 17, 1998, the Company had approximately 520 employees of
which 184 are full-time. The Company's employees are not represented by any
labor union. Management believes that its relationships with employees are
favorable.
ITEM 2. DESCRIPTION OF PROPERTY.
Effective February 1, 1997, the Company entered into a new five year
lease for approximately 7,400 square feet of office space at Waterfront Plaza,
325 West Main Street, Louisville, Kentucky 40202. The base rent is $7,068 per
month and is fixed for the five year period.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are not currently parties to any
litigation that management believes would have a material adverse effect on
the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the fourth quarter of the period covered by this Report.
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PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The principal market for trading the Company's Common Stock has been the
over-the-counter market. Since December 1995, prices for the Company's Common
Stock have been quoted on the OTC Bulletin Board. The trading symbol is
currently "IHRB."
The range of high and low bid quotations for the Company's Common Stock
provided below were obtained from the OTC Bulletin Board and the National
Quotation Bureau. The stock is principally owned or controlled by officers
and directors, and the bid prices reported may not be indicative of the value
of the Common Stock. The volume of trading in the Company's Common Stock has
been very limited. The existence of an active trading market may not exist at
any given time and shareholders may have difficulty selling their shares.
These over-the-counter market quotations reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent
actual transactions.
BID
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YEAR ENDED MAY 31, 1998 HIGH LOW
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First Quarter $3.50 $2.25
Second Quarter 2.25 0.81
Third Quarter 1.25 0.88
Fourth Quarter 2.63 1.03
YEAR ENDED MAY 31, 1997
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First Quarter $2.25 $1.75
Second Quarter 2.25 2.25
Third Quarter 2.25 2.00
Fourth Quarter 4.25 2.00
As of August 12, 1998, there were approximately 303 record holders of the
Company's Common Stock. Based on securities position listings, the Company
believes that there are more than 500 beneficial owners of the Company's
Common Stock.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of the Company. Payment of cash dividends in the future will
depend, among other things, upon the Company's future earnings, requirements
for capital improvements and financial condition.
During the quarter ended May 31, 1998, the Company issued securities in
private transactions as follows:
The Company issued 43,000 shares of its Common Stock to three persons in
a private transaction in connection with the Company's acquisition of Gateway
Rehabilitation, Inc. on March 30, 1998. With respect to this transaction, the
Company relied on Section 4(2) of the Securities Act of 1933, as amended.
Each investor was given complete information concerning the Company. Each
investor represented that he was purchasing the shares for investment only and
not for the purpose of resale or distribution. The appropriate restrictive
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legends were placed on the certificates and stop transfer instructions were
issued to the transfer agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
This Report contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. Important factors that could cause results to differ materially
from those expected by management include reimbursement system changes,
including customer response to the establishment of salary equivalency
guidelines for certain therapies and the change from cost-based reimbursement
to fee schedules and per diem payments, the number and productivity of
clinicians, pricing of payer contracts, management retention and development,
management's success in integrating acquired business and in developing and
introducing new lines of business.
OVERALL SUMMARY
The following discusses the results of operations for the fiscal years
ended 1998 and 1997. The results of operations for fiscal 1997 and 1996 have
been reclassified to conform to the fiscal 1997 presentation.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
Net revenues for the year ended May 31, 1998 increased from the prior
year by $3,059,000 or 20% to $18,687,000. Although the Company transitioned
all of its RCA contracts to Sun (see "LIQUIDITY AND CAPITAL RESOURCES" for a
detailed discussion) the Company increased the number of non-RCA contracts it
services. This, in conjunction with acquisitions made during the year,
resulted in an increase in net revenue for the year ended May 31, 1998, as
compared to May 31, 1997.
Cost of services as a percentage of revenue for the year ended May 31,
1998, were 57%. This compares with 58% in the prior year. The decrease is
attributable to the Company decreasing the amount of contract therapists
utilized during fiscal 1998 as compared to fiscal 1997.
Selling, general and administrative expenses as a percentage of revenue
for the year ended May 31, 1998, were 28% as compared to 27% in the prior
year. The increase is primarily attributable to increases in the number of
personnel and wages and benefit costs.
The provision for loss on accounts receivable increased to 4.8% of
revenues for the year ended May 31, 1998, as compared to less than 1% in the
prior year. This increase is primarily attributable to specific accounts
receivable for services rendered in fiscal 1998 to one non-related customer of
which management believes up to $775,000 may be uncollectible.
Interest expense for the year ended May 31, 1998, was $370,000 versus
$148,000 in the prior year. The increase resulted from increased borrowings
on the credit line in order to finance the Company's increase in accounts
receivable during fiscal 1998.
The income tax provision for the year ended May 31, 1998, increased
slightly to 40.6% from 39.8% for the year ended May 31, 1997.
The Company's net income as a percentage of revenue was 3.3% for the
fiscal year ended May 31, 1998 as compared to 7.0% for the fiscal year ended
11
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May 31, 1997. The decrease is primarily attributable to an increase in the
provision for losses on accounts receivable as discussed above.
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
The Company generated $15,628,000 in net revenue for the fiscal year
ended May 31, 1997 compared with $6,623,000 in the prior year. The increase
was due to both the addition of new service contracts and acquisitions made
during the year. A very small portion of the change resulted from rate
adjustments.
Cost of services as a percentage of revenue for the year ended May 31,
1997 were 58%. This compares with 49% in the prior year. The increase is
attributed to the addition of clinical specialists hired to improve the
quality of service.
Selling, general and administrative expenses for the year ended May 31,
1997 were 27% of revenue compared to 37% in the prior year. The improvement
resulted from increasing revenue at a faster rate than the associated
overhead.
Interest expense for the year ended May 31, 1997 was $148,000 versus
$66,000 in the prior year. The increase resulted from expanding the credit
line in order to finance the Company's increase in accounts receivable
reflecting the Company's growth.
The income tax provisions for the year ended May 31, 1997 and 1996 were
39.8% and 38.2%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1998, the Company had working capital of $2,616,000 as
compared to $2,530,000 at May 31, 1997. The increase was primarily due to an
increase in trade receivables which was the result of an increase in the
number of contracts being serviced. As of May 31, 1998, the Company had 97
contracts to provide services compared to 82 contracts on May 31, 1997.
Net cash provided by operating activities totaled $878,000 for the year
ended May 31, 1998, as compared to $2,480,000 of net cash used in operating
activities in the prior year. The increase is primarily attributable to
better collection of accounts receivable and an increase in the allowance for
doubtful accounts in fiscal 1998.
The Company used $277,000 toward investing activities during the year
ended May 31, 1998, compared with $437,000 in the prior year. The decrease is
primarily attributable to a decrease in the amount of cash expended on
acquisitions during fiscal 1998 as compared to fiscal 1997.
Net cash used in financing activities for the year ended May 31, 1998,
was $243,000 as compared to $2,917,000 of net cash provided by financial
activities for the prior year. The decrease was primarily due to a decrease
in the use of short-term borrowings under the Company's credit line.
As of May 31, 1997, the Company had working capital of $2,530,000 as
compared to working capital of $1,712,000 at May 31, 1996. The increase was
primarily due to an increase in trade receivables which were the result of an
increase in the number of contracts being serviced. As of May 31, 1997, the
Company had 82 contracts to provide rehabilitation, respiratory and/or
behavioral health services compared with 66 contracts on May 31, 1996.
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Net cash used in operating activities totaled $2,480,000 for the year
ended May 31, 1997. This compares with $1,262,000 for the prior year. The
increase was primarily due to an increase in accounts receivable caused by
higher service revenue. The change was partially offset by an increase in net
income.
The Company used $437,000 toward investing activities during the year
ended May 31, 1997, compared with $573,000 in the prior year. The increase
resulted from the addition of equipment and two minor acquisitions: RT Group,
Inc. (a respiratory therapy company) and the purchase of nine Arkansas
facility contracts. Other than the potential acquisition of new companies,
the Company does not anticipate any other significant investing activities.
Net cash provided by financing activities for the year ended May 31, 1997
was $2,917,000 compared with $1,732,000 for the prior year. The increase was
almost entirely due to the use of short-term borrowing under the Company's
credit line. The need for financing is a normal result of the Company's
growth, and the Company's management expects it to continue.
On August 28, 1998, the Company's existing line of credit was replaced by
a line of credit agreement at another lending institution. The new agreement
provides for total borrowings up to $5,000,000, subject to a borrowing base
formula. Borrowings under this agreement bear interest at the LIBO rate plus
3.25%, payable monthly.
The Company's Gateway Rehabilitation, Inc. ("Gateway") subsidiary also
has a revolving line of credit agreement with a bank which provides for total
borrowings of $1,000,000, subject to a borrowing base formula. Borrowings
under this agreement bear interest at the prime rate, plus .25%, payable
monthly. This line of credit is collateralized by the accounts receivable of
Gateway. Total borrowings under this agreement were $784,878 at May 31, 1998.
Management believes the new line of credit together with cash flows from
operations are sufficient to meet the Company's current cash requirements.
Business expansion may create a need for additional funding which the Company
could attempt to raise through additional borrowing and/or an offering of debt
securities. As of May 31, 1998 and 1997, the Company had a $4.5 million line
of credit under which $3,422,000 and $3,525,000 had been borrowed,
respectively.
In February 1997, Retirement Care Associates, Inc. ("RCA"), a major
customer and stockholder in the Company, announced that it had entered into a
merger agreement with Sun Healthcare Group ("Sun"). This merger was
consummated on June 30, 1998. RCA continued to be a major customer of the
Company through December 31, 1997. As of May 31, 1998, approximately
$1,321,000 or 17% of the balance in accounts receivable related to RCA. RCA
and subsequently Sun continued to make payments on the account and as of August
27, 1998, had paid the accounts receivable balance in full. The Company
continues to increase the number of contracts it has with long-term care
facilities operated by entities other than RCA in an effort to offset the loss
of the RCA service contract revenues.
YEAR 2000 COMPLIANCE
The Company is continually assessing the effects of Year 2000 software
issues on its present information technology structure. As of August 31,
1998, the assessment, including a determination of the exposure of the
Company's business processes to these issues and the need for and estimated
costs associated with any necessary conversions, had not been completed.
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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 was effective for the Company's
fiscal year ending May 31, 1997 annual financial statements. The Company
continues to account for stock-based compensation awards under the provisions
of APB 25.
The Company adopted 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. Diluted earnings per share approximates earnings
per share as previously reported. Because the concept of basic earnings per
share does not include the impact of common stock equivalents, such as stock
options, basic earnings per share will be higher than diluted earnings per
share.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The provisions of SFAS No. 130 will
be effective for fiscal years beginning after December 15, 1997, and will not
have a material impact on the Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS.
See the consolidated financial statements and the notes thereto beginning
on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On October 1, 1997, Coopers & Lybrand L.L.P. ("C&L"), which served as the
Company's independent accountants for the fiscal years ended May 31, 1995 and
1996, and had been retained for the Company's fiscal year ended May 31, 1997,
resigned as the Company's independent accountants. The reports of C&L on the
Company's financial statements for the fiscal years ended May 31, 1995 and
1996 did not contain an adverse opinion or disclaimer of an opinion nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles or practices. The Company filed a report on Form 8-K dated October
1, 1997 reporting the resignation of C&L.
The Company is not aware of any "disagreement" or "reportable event"
within the meaning of Item 304 of Regulation S-B, with C&L during the fiscal
years ended May 31, 1995 and 1996, and from that date to the date of C&L's
resignation on October 1, 1997, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
except as described below.
In its audit of the Company's financial statements for the year ended May
31, 1997, C&L had completed most of its audit procedures by the end of July
1997 and had not raised any significant concerns about the Company's financial
statements, other than the following. On Friday, August 1, 1997, prior to the
Company's scheduled fourth quarter earnings release on Monday, August 4, 1997,
C&L advised the Company that it had concerns about the collectability of
certain accounts receivable from Retirement Care, a major customer of the
Company and a 27.4% shareholder of the Company's outstanding Common Stock.
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Retirement Care had historically been a slow paying customer, but even at this
time continues to make payments on the balances due to the Company for
services rendered.
C&L also served as the independent accountants for Retirement Care until
August 14, 1997, when C&L resigned as the independent accountants of
Retirement Care. In a letter filed with the Securities and Exchange
Commission concerning its resignation, C&L stated that it was unable to rely
on representations of Retirement Care's management, and did not intend to be
associated with any filings which may be made by Retirement Care with the
Securities and Exchange Commission.
During August and September 1997, the Company, Retirement Care and Chris
Brogdon, the President of Retirement Care and a Director of the Company, made
proposals to C&L to alleviate its concerns. Such proposals included
Retirement Care paying down the balance of the accounts receivable and
providing collateral which the Company's management believed would more than
adequately secure the payment of the remaining accounts receivable of
Retirement Care. However, C&L took the position that the collateral was
insufficient. C&L noted that even if such proposals were adopted that it
would still render an opinion with a "going concern" qualification based on
what C&L believed was the uncollectability of the Retirement Care accounts
receivables. The Company's management offered another proposal to provide a
letter of credit from an unaffiliated third party which would more than
adequately secure the Retirement Care accounts receivable, but C&L would not
provide a written commitment to the Company that this would be sufficient
collateral.
The Company's management believed that C&L's position with respect to the
Retirement Care accounts receivable was unreasonable and appeared to be a
result of C&L's adverse relationship with Retirement Care. Based on this
concern, the Company asked C&L to evaluate C&L's relationship with the Company
under applicable independence and conflicts of interest rules. In response,
C&L denied that any conflicts of interest or independence rules had been
violated, but stated that it was no longer appropriate for it to serve as the
Company's independent accountants because of a deterioration of the
client-auditor relationship.
The Company's management has fully advised the Audit Committee of the
Board of Directors of all of the above matters, and certain members of the
Board of Directors and the Audit Committee of the Board of Directors discussed
the above matters with C&L. However, neither the full Board of Directors nor
the full Audit Committee have discussed these matters with C&L.
The Company provided a copy of its Report on Form 8-K to C&L and
requested that C&L provide the Company with a letter addressed to the
Commission, as required by Item 304(a)(3) of Regulation S-B.
On October 14, 1997, C&L provided the Company with its response to the
Form 8-K (the "Response Letter"), wherein it disagreed with certain statements
made by the Company therein. The Company's management continues to stand by
the statements it made in the Form 8-K. The Company did not want a change in
accountants during an audit and continued to work with C&L to satisfy them
with respect to the collectability of the Retirement Care receivables during
August and September, until C&L's resignation on October 1, 1997.
The Company authorized C&L to respond fully to the inquiries of the
Company's successor independent accountants.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and Officers of the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
---- --- --------------------------
David V. Hall 56 President and a Director
Robert J. Babine 54 Chief Financial Officer, Treasurer
and a Director
Timothy M. Graven 48 Director
Bert L. Blieden 64 Director
Rebecca H. Krueger 43 Chief Operations Officer
Michael J. Kitchen 32 Vice President, Secretary and
General Counsel
Nicole D. Perry 34 Vice President of Finance
There is no family relationship between any Director or Executive Officer
of the Company.
Effective in August 1997, the Company established a compensation
committee and an audit committee. The members of both of these committees are
Timothy M. Graven and Bert L. Blieden. The Company has no nominating
committee.
Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
DAVID V. HALL - PRESIDENT AND DIRECTOR. Mr. Hall has been President and
Director of the Company since September 1995, and has held these same
positions with In-House Rehab, Inc. ("IHR"), the Company's wholly-owned
subsidiary, since September 1994. From 1986 to 1993, he was President of The
Cardinal Group, a nursing home operator which he founded, which grew to 26
nursing homes. Mr. Hall sold this company in 1993, and he was actively
involved in winding up this sale until the Summer of 1994. During this period
of time and until September 1994, he also worked on plans for starting
In-House Rehab, Inc. Since 1994, Mr. Hall has also served as Chairman of the
Board of Hallmark Communications, a company engaged in selling long distance
telephone service, primarily to businesses. From 1980 to 1985, he was
President, founder and sole owner of Cardinal Medical Corporation which
operated six full service nursing homes in Kentucky, which were sold to
Hillhaven Corp. in 1985 due to a change in Kentucky's Medicaid reimbursement
regulations. From 1977 to 1980, he was President, founder and sole owner of
Clinical Management Associates, a contract respiratory and cardiopulmonary
company which provided professionals and equipment to acute care hospitals.
At the time that Mr. Hall sold this company, it provided services to 22
hospitals in five states, had annual revenues of $6 million and had
approximately 220 employees. He received a B.A. Degree from the University of
Louisville in 1964.
ROBERT J. BABINE - CHIEF FINANCIAL OFFICER, TREASURER AND DIRECTOR. Mr.
Babine has been Chief Financial Officer, Secretary, Treasurer and a Director
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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.
TIMOTHY M. GRAVEN - DIRECTOR. Mr. Graven has been a Director of the
Company since August 1997, and is the Managing Partner and co-founder of Triad
Investment Company, LLC, a private investment firm founded in 1995. Mr.
Graven previously served as President and Chief Operating Officer of Steel
Technologies, Inc., of Louisville, Kentucky, a steel processing company, from
March 1990 to November 1994, as Chief Financial Officer from May 1985 to March
1990, and as Director from 1982 to 1994. Mr. Graven is currently also a
Director of Performance Food Group Company, a publicly-held company listed on
the Nasdaq Stock Market. Mr. Graven received a B.S. Degree in Accounting from
Murray State University in 1973.
BERT L. BLIEDEN - DIRECTOR. Mr. Blieden has been a Director of the
Company since July 1998. He is President of the Kaden Companies, a position
he has held since that company was formed in 1983. The Kaden Companies are
engaged in commercial real estate development with projects primarily in the
Midwest. Prior to the formation of the Kaden Companies, Mr. Blieden owned and
developed commercial and residential real estate for over twenty years through
his company, Bert L. Blieden Company Realtors. Mr. Blieden attended the
University of Louisville and the University of Louisville School of Law.
REBECCA H. KRUEGER - CHIEF OPERATIONS OFFICER. Mrs. Krueger became
employed by the Company in June 1996, and became Chief Operations Officer in
September 1996. From September 1990 to December 1995, she was employed by
Transitional Health Services ("THS") which was acquired by WelCare
International Management Corporation, Atlanta, Georgia ("WelCare") in December
1995, and continued to be employed by WelCare until June 1996. THS and
WelCare operate and manage a large number of nursing home facilities.
Initially, Mrs. Krueger was Director of Nursing of a facility owned by THS
where she supervised a nursing staff of approximately 160 persons, and
directed a rehabilitation program. Beginning in May 1992, she became a
Regional Nurse Consultant/Quality Assurance Specialist for THS, and was
responsible for eight facilities in evaluating staff performance and
compliance with federal and state regulations. In January 1994, Mrs. Krueger
became a Regional Director of Operations for THS where she was responsible for
the total operations of three to six long-term care facilities in Indiana,
Kentucky and Arkansas. Finally, from March 1996 to June 1996, she was
National Director of Subacute Services for WelCare, where she was responsible
for the development of all subacute and postacute programs for up to 78
facilities. Mrs. Krueger graduated from the University of the State of New
York in 1989 with an Associate Science and Nursing Degree.
MICHAEL J. KITCHEN - VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL. Mr.
Kitchen has been Secretary of the Company since July 1997, and has been the
general counsel and a Vice President since October 1996. From May 1994 to
October 1996, he was an attorney with the J. Bruce Miller Law Group in
Louisville, Kentucky, where he concentrated his practice in commercial
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litigation, business law and employment relations. From August 1992 to May
1994, Mr. Kitchen was an attorney with the firm of Segal and Shanks in
Louisville, Kentucky, where his practice was concentrated in the area of
insurance law. From 1991 to 1992, he was an attorney with the firm of Chauvin
& White in Louisville, Kentucky, where he practiced civil litigation/personal
injury law. Mr. Kitchen received a B.A. Degree in Marketing from the
University of Kentucky in 1988 and a J.D. Degree in law from the University of
Louisville in 1991. He is licensed to practice law in Kentucky and Indiana.
NICOLE D. PERRY - VICE PRESIDENT OF FINANCE. Ms. Perry has been Vice
President of Finance of the Company since June 1997. From February 1994 to
June 1997, she was a Manager for Coopers & Lybrand L.L.P. in Louisville,
Kentucky, where she managed audit engagements for a number of companies. From
March 1993 to February 1994, Ms. Perry was Controller for Atelier
International and Assistant Controller for Vecta, which are subsidiaries of
Steelcase, Inc. in Grand Prairie, Texas. From October 1990 to March 1993, she
was a Senior Accountant with Price Waterhouse L.L.P. in Dallas, Texas, where
she was responsible for planning, performing and supervising financial audits.
From October 1987 to October 1990, she was a Senior Accountant with Deloitte &
Touche, L.L.P. in Dallas, Texas, where she also planned, performed and
supervised financial audits of various private and public entities. Ms. Perry
received an AA Degree in Liberal Arts from Bakersfield (California) College in
1984, and a BBA Degree in Accounting from the University of Oklahoma in 1987.
She became licensed as a Certified Public Accountant in 1989.
The Company's executive officers hold office until the next annual
meeting of directors of the Company. There are no known arrangements or
understandings between any director or executive officer and any other person
pursuant to which any of the above-named executive officers or directors was
selected as an officer or director of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of the Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's common
stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, except that Nicole D.
Perry and Bert L. Blieden each filed Form 3's late and Rebecca H. Krueger
filed one Form 4 reporting one transaction late.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other Executive Officer who
received total salary and bonus in excess of $100,000 for the fiscal years
ended May 31, 1998, 1997 and 1996:
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<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
AWARDS PAYOUTS
------------------ -------
ANNUAL COMPENSATION SECURI-
-------------------------------- TIES UN-
OTHER RE- DERLYING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------- -------- ------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David V. Hall, 1998 $206,538 $ 4,783 $15,617 -0- 100,000 -0- $10,320
President <FN1> <FN2>
1997 $192,308 $ 28,803 $11,271 -0- 200,000 -0- $12,215
<FN3> <FN2>
1996 $ 69,200 $100,522 $14,654 -0- -0- -0- $ 3,881
<FN4> <FN2>
Robert J. Babine, 1998 $123,923 $ - $14,062 -0- -0- -0- $ 1,774
Chief Financial <FN5> <FN6>
Officer 1997 $110,000 $ 15,568 $ 8,347 -0- -0- -0- $ 1,515
<FN7> <FN6>
Rebecca H. Krueger, 1998 $108,533 $ 12,500 $ 7,300 -0- 37,500 -0- $ -
Chief Operating <FN8>
Officer
- ------------------
<FN>
<FN1>
Represents $5,383 paid for medical insurance benefits above those provided to
other full-time employees of the Company and $10,234 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 $11,271 paid for expenses of an automobile provided for Mr. Hall's
use.
<FN4>
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.
<FN5>
Represents $10,600 paid to Mr. Babine for the use of an automobile and $3,462
paid for medical insurance benefits above those provided and other full time
employees of the Company.
<FN6>
Represents the premium paid for a term life insurance policy provided for Mr.
Babine's benefit.
<FN7>
Represents compensation paid to Mr. Babine for the use of an automobile.
<FN8>
Represents an automobile allowance paid to Ms. Krueger.
</FN>
</TABLE>
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options made to each of the Executive Officers named above
during the fiscal year ended May 31, 1998:
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE
OPTION/SARs EMPLOYEES IN OR BASE EXPIRATION
GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE
----------- ---------------- ------------ ----------
David V. Hall 100,000 18.3% $1.20313 11/17/00
Robert J. Babine -0- -- -- --
Rebecca H. Krueger 12,500 2.3% 2.875 8/27/00
Rebecca H. Krueger 25,000 4.6% 1.21875 3/24/01
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES VALUE OF
UNDERLYING EXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTION/SARs OPTION/SARs
ACQUIRED ON AT FY-END AT FY-END
EXERCISE EXERCISABLE/ EXERCISABLE/
(NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
----------- -------- ------------- -------------
David V. Hall -0- -0- 100,000 / 0 $129,867 / 0
Robert J. Babine -0- -0- 0 / 0 0 / 0
Rebecca H. Krueger -0- -0- 37,500 / 0 32,031 / 0
Effective February 1, 1998, the Company entered into new three year
employment agreements with David V. Hall, President of the Company, and Robert
J. Babine, Chief Financial Officer and Treasurer of the Company. Each
agreement is for a term of three years, but is automatically renewed for a
three year term on a monthly basis. 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 $220,000 per year and Mr. Babine will
receive a base salary of $132,000 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 $12,000 per year for Mr. Hall and $11,700 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.
Effective February 1, 1998, the Company entered into a new employment
agreement with Rebecca Krueger, who is Chief Operating Officer of the Company,
pursuant to which Ms. Krueger agreed to devote a substantial portion of her
time to the business of the Company. The initial term of the agreement is for
one year, but is automatically renewed for one year on a monthly basis. Ms.
Krueger's base salary is $117,200 per year, and her base salary will be
increased each year by at least the increase in the cost of living index. She
will also receive bonuses at the discretion of the Company and an automobile
allowance of $675 per month. In the event that the Company terminates this
employment agreement without cause or as a result of a change in control, the
Company will be required to pay her base salary for twelve (12) months.
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Effective February 1, 1998, the Company entered into a new employment
agreement with Michael J. Kitchen, who is Vice President, Secretary and
General Counsel to the Company, pursuant to which Mr. Kitchen agreed to devote
a substantial portion of his time to the business of the Company. The initial
term of the agreement is for one year, is automatically renewed for one year
on a monthly basis. Mr. Kitchen's base salary is $103,500 per year, and his
base salary will be increased each year by at least the increase in the cost
of living index. He will also receive bonuses at the discretion of the
Company and an automobile allowance of $650 per month. In the event that the
Company terminates this employment agreement without cause or as a result of a
change in control, the Company will be required to pay his base salary for
twelve (12) months.
Effective February 1, 1998, the Company entered into a new employment
agreement with Nicole Perry, who is Vice President of Finance to the Company,
pursuant to which Ms. Perry agreed to devote a substantial portion of her time
to the business of the Company. The initial term of the agreement is for one
year. Ms. Perry's base salary is $80,000 per year, and her base salary will
be increased each year by at least the increase in the cost of living index.
She will also receive bonuses at the discretion of the Company and an
automobile allowance of $600 per month. In the event that the Company
terminates this employment agreement without cause or as a result of a change
in control, the Company will be required to pay her base salary for six (6)
months.
DIRECTOR COMPENSATION
Effective in August 1997, outside Directors of the Company receive a fee
of $500 per month and will receive stock options to purchase 2,500 shares of
Common Stock each year for their services in such capacity. Directors are
also reimbursed for all reasonable and necessary costs and expenses incurred
as a result of being a Director of the Company.
STOCK OPTION PLAN
In October 1996, the Company's Board of Directors adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan allows the Board to
grant stock options from time to time to employees, officers and directors of
the Company and consultants to the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who
are key employees of the Company. Vesting provisions are determined by the
Board at the time options are granted. As originally adopted, the total number
of shares of Common Stock subject to options under the 1996 Plan was not to
exceed 1,000,000, subject to adjustment in the event of certain recapitali-
zations, reorganizations and similar transactions. The option price cannot be
less than the fair market value of a share on the date the option is granted
and it must be satisfied by the payment of cash.
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.
21
<PAGE>
<PAGE>
OUTSTANDING OPTIONS UNDER THE PLAN
On December 26, 1996, the Company's Board of Directors granted options to
purchase an aggregate of 112,000 shares of Common Stock at $2.00 per share
under the 1996 Plan. The options are fully vested and expire three years after
the date of grant. Included in these options are non-qualified options to
purchase 100,000 shares granted to Rebecca Krueger, Chief Operations Officer
of the Company.
On March 4, 1997, the Company issued non-qualified options, under the
1996 Plan, to purchase 50,000 shares of Common Stock to an outside consultant
at $2.25 per share which was equal to the fair market value on the date of
grant. The options are exercisable for three years from the date of grant.
On May 19, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 158,000 shares of Common Stock at $3.00 per share
under the 1996 Plan. The options vest over various periods up to three years
and expire three years after the date of grant. Included in these options are
options granted to the following officers of the Company: Rebecca Krueger to
purchase 10,000 shares of Common Stock; Michael Kitchen to purchase 15,000
shares of Common Stock; and Nicole Perry to purchase 25,000 shares of Common
Stock.
On June 9, 1997, the Company's Board of Directors granted options to an
employee to purchase 20,000 shares of Common Stock at $3.31 per share under
the 1996 plan. The options are fully vested and expire three years after the
date of grant.
On June 12, 1997, the Company's Board of Directors granted options to an
employee to purchase 8,000 shares of Common Stock at $3.56 per share under the
1996 Plan. The options vest over a period of one year and expire seven years
after the date of grant.
On August 27, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 42,500 shares of Common Stock at $2.875 per share to
four employees. These options vest immediately and expire three years after
the date of grant. Included in these options are options granted to Rebecca
Krueger, an officer, to purchase 12,500 shares of Common Stock.
On November 17, 1997, the Company's Board of Directors granted options to
purchase an aggregate of 100,000 and 20,000 shares of Common Stock at $1.20313
and $1.094 per share, respectively, to five employees under the 1996 Plan.
These options vest immediately and expire three years after the date of grant.
Included in these options are options granted to David V. Hall, an officer, to
purchase 100,000 shares at $1.20313, and to Nicole D. Perry, an officer, to
purchase 12,500 shares of Common Stock at $1.094 per share.
Additionally, on November 17, 1997, the Company's Board of Directors
granted non-qualified options to purchase 2,500 shares of Common Stock at
$1.094 per share to each of Chris Brogdon, Mark Clein and Timothy M. Graven,
Directors of the Company. These options vest immediately and expire three
years after the date of grant.
On December 1, 1997, the Company's Board of Directors granted
non-qualified options to purchase an aggregate of 99,999 shares of Common
Stock at $1.0934 per share, which was equal to the fair market value on the
date of grant, to three consultants under the 1996 Plan. These options vest
immediately and expire three years after the date of grant.
On December 6, 1997, the Company's Board of Directors granted
non-qualified options to purchase an aggregate of 75,000 shares of Common
Stock at $1.3125 per share, which was equal to the fair market value on the
date of grant, to three consultants under the 1996 Plan. These options vest
immediately and expire three years after the date of grant.
22
<PAGE>
<PAGE>
On December 22, 1997, the Company's Board of Directors granted options to
an employee to purchase 10,000 shares of Common Stock at $1.3125 per share
under the 1996 Plan. The options vest over a period of six months and expire
three years from the date of grant.
On March 24, 1998, the Company's Board of Directors granted options to
purchase an aggregate of 170,500 shares of Common Stock at $1.21875 to 21
employees under the 1996 Plan. These options vest immediately and expire
three years after the date of grant. Included in these options are options
granted to Rebecca H. Krueger, Michael J. Kitchen, and Nicole D. Perry,
officers of the Company, to purchase 25,000, 20,000 and 14,000 shares of
Common Stock, respectively.
On July 1, 1998, the Company's Board of Directors granted non-qualified
options to an employee to purchase 160,000 shares of Common Stock at $2.50 per
share under the 1996 Plan. The options vest over a period of one year and
expire three years from the date of grant.
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 5, 1996, the Company issued non-plan options to two
shareholders of Daily Rehabilitation Institute, Inc. in connection with the
acquisition of that company. The options are to purchase an aggregate of
30,000 shares of Common Stock at $2.25 per share which was equal to the fair
market value on the date of grant. Of the 30,000 options, 15,000 options
expire on December 15, 1999 and 15,000 expire on December 31, 2000.
On December 26, 1996, the Company issued non-plan options to purchase
200,000 shares of Common Stock to David V. Hall at $2.00 per share which was
equal to the fair market value on the date of grant. Mr. Hall then
transferred these options to his two adult children who are also employees of
the Company. The options are exercisable for three years from the date of
grant.
401(k) PLAN
The Company maintains a 401(k) employee retirement and savings program
(the "401(k) Plan") for its employees. Under the 401(k) Plan, an employee may
contribute up to 15% of his or her gross annual earnings, subject to a
statutory maximum, for investment in one or more funds identified under the
Plan. The Company 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, 1998, the Company made contributions totaling
$12,144 under the 401(k) Plan.
23
<PAGE>
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of August 17, 1998, 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 3,648,225<FN1> 27.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Robert J. Babine 795,463<FN2> 6.0%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Timothy M. Graven 2,500<FN3> --
168 Totem Road
Louisville, KY 40207
Bert L. Blieden 13,000<FN4> 0.1%
3900 Glen Bluff Road
Louisville, KY 40222
Rebecca H. Krueger 151,500<FN5> 1.1%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Michael J. Kitchen 90,420<FN6> 0.7%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Nicole D. Perry 51,500<FN7> 0.4%
Suite 1400B
325 West Main Street
Louisville, Kentucky 40202
Retirement Care Associates, Inc. 3,661,000<FN8> 27.4%
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
All Executive Officers and 4,752,608 34.6%
Directors as a Group
(7 Persons)
_________________
<FN>
<FN1>
Includes 3,538,225 shares held directly by Mr. Hall, 10,000 shares held by his
wife as custodian for two minor children, and 100,000 shares underlying
currently exercisable options held by Mr. Hall.
<FN2>
Includes 782,463 shares held directly by Mr. Babine and 13,000 shares held by
a daughter.
24
<PAGE>
<PAGE>
<FN3>
Represents 2,500 shares underlying currently exercisable stock options held by
Mr. Graven.
<FN4>
Includes 10,000 shares held directly by Mr. Blieden and 3,000 shares held by
his wife.
<FN5>
Includes 4,000 shares held directly by Mrs. Krueger and 147,500 shares
underlying currently exercisable stock options held by her.
<FN6>
Includes 5,420 shares held directly by Mr. Kitchen and 85,000 shares
underlying currently exercisable stock options held by him.
<FN7>
Represents 51,500 shares underlying currently exercisable stock options held
by Ms. Perry.
<FN8>
Retirement Care Associates, Inc. is now a wholly-owned subsidiary of Sun
Healthcare Group, Inc, a publicly-held company.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the acquisition of In-House Rehab, Inc. in September
1995, certain persons who were then Officers and Directors of the Company
agreed to the cancellation of indebtedness owed to them by the Company as
follows:
NAME AMOUNT OF DEBT CANCELED
---------------- -----------------------
Albert L. Blum $226,655
Theodore Jackson 176,915
Fred B. Blum 18,367
Mark Jackson 177,315
--------
Total $599,252
The indebtedness to these persons was a result of advances made for working
capital and for debt service payments made for which the person was a personal
guarantor, including interest accrued thereon.
At May 31, 1997, the Company had contracts to provide physical, speech,
occupational and behavioral health therapists to approximately 71 nursing
homes of which 36 were either owned, operated or managed by Retirement Care
Associates, Inc.("Retirement Care"), a principal shareholder of the Company.
During the years ended May 31, 1998 and 1997, the Company billed approximately
$6,411,000 and $8,932,000 in fees under these agreements, respectively. As of
May 31, 1998 and 1997, there were approximately $1,287,000 and $4,513,000,
respectively, in accounts receivable relating to such services outstanding.
As of August 27, 1998, all of the accounts receivable had been paid in full.
In February 1997, Retirement Care announced that it had entered into a
merger agreement with Sun Healthcare. See "ITEM 6 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATIONS" for additional information concerning this
matter.
As of May 31, 1997, Retirement Care owed the Company approximately
$58,600 in connection with its original purchase during the fiscal year ended
May 31, 1995, of shares of stock of In-House Rehab, Inc. which shares were
subsequently exchanged for shares of the Company's Common Stock. This stock
subscription receivable was paid in full on September 9, 1997.
25
<PAGE>
<PAGE>
At May 31, 1998, the Company had contracts to provide physical, speech
and occupational therapists to approximately 69 nursing homes of which 5 are
either owned, operated or managed by NewCare Health Corporation ("NC"). A
former director of the Company is also a director and significant shareholder
of NC. During the year ended May 31, 1998, the Company billed approximately
$1,783,000 in fees under agreements with NC. As of May 31, 1998, there were
approximately $990,000 in accounts receivable relating to such services
outstanding.
As of May 31, 1998 and 1997, David V. Hall, an Officer, Director and
principal shareholder of the Company, owed the Company $84,000 and $18,000,
respectively, for advances made to him. In addition, as of May 31, 1998 and
1997, Hallmark Communications, a company of which Mr. Hall is the majority
owner, owed the Company $3,600 and $11,000, respectively, for advances made to
it by the Company.
On December 26, 1996, the Company's Board of Directors granted
non-qualified options to purchase 100,000 shares of Common Stock at $2.00 per
share to Rebecca Krueger, the Company's Chief Operating Officer, under the
Company's 1996 Stock Option Plan. The options are fully vested and expire
three years after the date of grant. On May 19, 1997, the Company's Board of
Directors granted incentive stock options to purchase 10,000 shares of Common
Stock at $3.00 per share to Rebecca Krueger and on August 27, 1997, she was
granted additional options to purchase 12,500 shares at $2.875 per share.
These options are fully vested and expire three years after the date of grant.
On March 1, 1996 and October 24, 1996, the Company's Board of Directors
granted non-qualified options to purchase 20,000 and 30,000 respectively,
shares of Common Stock at $1.75 and $2.25 per share, respectively, to Michael
Kitchen, the Company's Vice President, Secretary and General Counsel. The
options are fully vested and expire three years after the date of grant. On
May 19, 1997, the Company's Board of Directors granted incentive stock options
to purchase 15,000 shares of Common Stock at $3.00 per share to Michael
Kitchen under the Company's 1996 Stock Option Plan. The options are fully
vested and expire three years after the date of grant.
On May 19, 1997, the Company's Board of Directors granted incentive stock
options to purchase 25,000 shares of Common Stock at $3.00 per share to Nicole
Perry, the Company's Vice President of Finance. The options vest over one
year and expire three years after the date of grant.
On November 17, 1997, the Company's Board of Directors granted options to
purchase 100,000 and 12,500 shares of Common Stock at $1.20313 and $1.094,
respectively, to David V. Hall, President and CEO, and Nicole D. Perry, Vice
President of Finance, respectively. The options vest immediately and expire
three years after the date of grant.
Additionally, on November 17, 1997, the Company's Board of Directors
granted non-qualified options to purchase 2,500 shares of Common Stock at
$1.094, each to Timothy M. Graven, Chris Brogdon, and Mark Clein, Directors.
These options vest immediately and expire three years after the date of grant.
On March 24, 1998, the Company's Board of Directors granted options to
purchase 25,000, 20,000 and 14,000 shares of Common Stock at $1.21875 to
Rebecca H. Krueger, Chief Operating Officer, Michael J. Kitchen, Vice
President, General Counsel and Secretary, and Nicole D. Perry, Vice President
of Finance, respectively. These options vest immediately and expire three
years after the date of grant.
26
<PAGE>
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed as part of this Report:
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3.1 Articles of Incorporation, Incorporated by reference to
as amended Exhibit 3.1 to Registrant's
Registration Statement on
Form 10SB
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to Registrant's
Registration Statement on
Form 10SB
10.1 1996 Stock Option Plan Incorporated by reference to
Exhibit 10.1 to Registrant's
Registration Statement on
Form 10SB
10.2 Employment Agreement with Filed herewith electronically
David V. Hall
10.3 Employment Agreement with Filed herewith electronically
Robert J. Babine
10.4 Lease Agreement on Office Incorporated by reference to
Space Exhibit 10.4 to Registrant's
Registration Statement on
Form 10SB
10.5 Contracts for Therapy Incorporated by reference to
Program Services with Exhibit 10.5 to Registrant's
Affiliates Form 10-KSB for the year ended
May 31, 1997
10.6 Credit Facility Agreement with Incorporated by reference to
Great Financial Bank and Exhibit 10.7 to Registrant's
related Security Agreement and Form 10-KSB for the year ended
Promissory Note May 31, 1997
10.7 Loan and Security Agreement To be filed by amendment
with Daiwa Healthco-III LLC
and related Promissory Note
10.8 Employment Agreement with Filed herewith electronically
Rebecca Krueger
10.9 Employment Agreement with Filed herewith electronically
Michael Kitchen
10.10 Employment Agreement with Filed herewith electronically
Nicole Perry
27
<PAGE>
<PAGE>
21 Subsidiaries of the Filed herewith electronically
Registrant
23 Consent of Strothman & Filed herewith electronically
Company PSC
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
last quarter of the period covered by this Report.
28
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
In-House Rehab Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of In-House Rehab
Corporation and Subsidiaries as of May 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of In-House Rehab Corporation and Subsidiaries as of May 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
STROTHMAN & COMPANY PSC
/s/ Strothman & Company PSC
Louisville, Kentucky
August 31, 1998
F-1
<PAGE>
<PAGE>
IN-HOUSE REHAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1998 and 1997
ASSETS 1998 1997
---------- ----------
Current assets:
Cash $ 358,230 $ -
Accounts receivable - trade, less allowance
for doubtful accounts of $382,000
and $75,000 in 1998 and 1997, respectively 5,206,978 2,736,132
Accounts receivable - trade - related party 2,360,371 4,548,493
Other current assets 299,862 15,057
---------- ----------
Total current assets 8,225,441 7,299,682
Equipment, at cost 380,911 265,556
Less accumulated depreciation 107,455 48,660
---------- ----------
273,456 216,896
Intangible assets, net of accumulated
amortization of $338,000 and $209,600
in 1998 and 1997, respectively 802,012 353,974
Investment in subsidiary 145,500 -
Deferred tax asset 249,312 123,402
Other assets 65,609 3,375
---------- ----------
$9,761,330 $7,997,329
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $4,206,535 $3,542,102
Notes payable 104,500 -
Accounts payable 263,392 553,564
Accrued expenses 1,005,207 532,215
Checks issued in excess of cash on deposit - 121,900
Deferred tax liability 29,921 19,630
---------- ----------
Total current liabilities 5,609,555 4,769,411
Stockholders' equity:
Preferred stock, $10 par value; 10,000,000
shares authorized; no shares issued - -
Common stock, no par value; 20,000,000
shares authorized; 13,390,072 and 13,344,215
shares issued and outstanding at May 31, 1998
and 1997, respectively 2,136,584 1,886,584
Subordinated convertible common stock,
no par value; 1,200,000 shares authorized;
no shares issued - -
Common stock subscriptions receivable - (58,577)
Retained earnings 2,015,191 1,399,911
---------- ----------
4,151,775 3,227,918
---------- ----------
$9,761,330 $7,997,329
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the years ended May 31, 1998 and 1997
1998 1997
----------- -----------
Revenues:
Contract services $10,493,002 $ 6,695,648
Contract services - related party 8,193,980 8,932,219
----------- -----------
18,686,982 15,627,867
Cost of services:
Salaries, wages and benefits 8,693,421 6,565,118
Contract therapists 2,021,176 2,528,254
----------- -----------
10,714,597 9,093,372
----------- -----------
Gross profit 7,972,385 6,534,495
Selling, general and administrative expenses 5,198,843 4,180,519
Rental expense 329,432 153,533
Provision for losses on accounts receivable 902,694 30,621
Depreciation 60,508 33,826
Amortization 74,725 163,175
----------- -----------
Income from operations 1,406,183 1,972,821
Interest expense 370,032 148,344
----------- -----------
Income before income taxes 1,036,151 1,824,477
Provision for income taxes 420,871 727,045
----------- -----------
Net income $ 615,280 $ 1,097,432
=========== ===========
Net income per common share - basic $ .05 $ .08
=========== ===========
Net income per common share - assuming dilution $ .05 $ .08
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1998 and 1997
Subordinated
Convertible
Preferred Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
------- ------- ---------- ---------- ------ ------
Balances at
May 31, 1996 - - 13,405,715 $1,700,585 - -
Issuance of stock in
conjunction with the
Private Placement 200,000 185,999
Stock received in
connection with
termination of
employee (261,500)
Accrued interest
Net income
------- ------- ---------- ---------- ------ ------
Balances at
May 31, 1997 - - 13,344,215 $1,886,584 - -
------- ------- ---------- ---------- ------ ------
Issuance of stock in
conjunction with
acquisitions 45,857 220,000
Issuance of stock
options for services
received 30,000
Accrued interest
Receipt of stock
subscription payments
Net income
------- ------- ---------- ---------- ------ ------
Balances at
May 31, 1998 - - 13,390,072 $2,136,584 - -
------- ------- ---------- ---------- ------ ------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended May 31, 1998 and 1997
(Continued)
Common Stock
Subscriptions Retained
Receivable Earnings Total
------------- ------------ ----------
Balances at
May 31, 1996 $(54,785) $302,479 $1,948,279
Issuance of stock in
conjunction with the
Private Placement 185,999
Stock received in
connection with
termination of
employee
Accrued interest (3,792) (3,792)
Net income 1,097,432 1,097,432
--------- ---------- ----------
Balances at
May 31, 1997 $(58,577) 1,399,911 3,227,918
--------- ---------- ----------
Issuance of stock in
conjunction with
acquisitions 220,000
Issuance of stock
options for services
received 30,000
Accrued interest (342) (342)
Receipt of stock
subscription payments 58,919 58,919
Net income 615,280 615,280
--------- ---------- ----------
Balances at
May 31, 1998 $ - $2,015,191 $4,151,775
========= ========== ==========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended May 31, 1998 and 1997
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 615,280 $ 1,097,432
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 60,508 33,826
Amortization 74,725 163,175
Provision for losses on accounts receivable 902,293 25,000
Deferred income taxes (115,619) (81,084)
Stock option compensation charge 30,000 -
Change in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (308,504) (3,995,570)
Interest receivable 3,792 (3,792)
Other current assets (288,597) 5,010
Other assets (90,307) (130,002)
Accounts payable (388,926) 239,007
Accrued expenses 413,716 225,717
Income taxes (30,169) (58,931)
----------- -----------
Net cash provided by (used in)
operating activities 878,192 (2,480,212)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (111,064) (187,200)
Acquisition of businesses (20,000) (250,000)
Investment in subsidiary (145,500) -
----------- -----------
Net cash used in investing activities (276,564) (437,200)
----------- -----------
Cash flows from financing activities:
Issuance of common stock - 185,999
Proceeds from stock subscriptions receivable 58,577 -
Issuance of short-term borrowings 3,200,257 6,633,770
Repayments of short-term borrowings (3,380,332) (3,816,668)
Checks issued in excess of cash on deposit (121,900) (85,689)
----------- -----------
Net cash (used in) provided by
financing activities (243,398) 2,917,412
----------- -----------
Net increase in cash and equivalents 358,230 -
Cash, beginning of year - -
----------- -----------
Cash, end of year $ 358,230 -
----------- -----------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<PAGE>
IN-HOUSE REHAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
for the years ended May 31, 1998 and 1997
1998 1997
----------- -----------
Supplemental disclosures:
Cash paid for interest $ 329,221 $ 129,522
----------- -----------
Cash paid for income taxes $ 850,916 $ 867,060
----------- -----------
Supplemental schedule of noncash investing
and financing activities:
Assumption of short-term borrowings
in connection with acquisitions $ 725,456 $ 144,228
----------- -----------
Issuance of common stock $ 250,000 $ -
----------- -----------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
In-House Rehab Corporation (the Company), through its subsidiaries, is engaged
in providing, on a contract basis, physical, speech, occupational, respiratory
therapy and behavioral health services and management services to primarily
long-term care providers.
2. ACQUISITIONS
Effective September 1, 1996, the Company acquired all of the stock of Regal
Health Care, Inc. (RHC) for $1.00. RHC is a Clearwater, Florida based
provider of behavioral health services to nursing homes and long-term care
facilities in North Carolina. Upon acquisition, RHC had assets totaling
approximately $30,000 and liabilities totaling approximately $70,000. This
new area of service is now being offered in addition to the core group of
rehabilitation services offered by the Company. Effective September 10, 1997,
RHC changed its name to In-House Medical Resources (IHMR).
Effective December 1, 1996, the Company acquired all of the stock of RT Group
Inc. (RTG) in exchange for $150,000 in cash. RTG is an Indianapolis, Indiana
based provider of respiratory care to nursing homes and long-term care
facilities in Indiana. Upon acquisition, RTG had assets totaling
approximately $75,000 and liabilities totaling approximately $49,000. The
Company is now offering respiratory therapy services along with rehabilitation
and behavioral health services in facilities under contract.
Effective December 1, 1996, the Company acquired all of the stock of Daily
Rehabilitation Institute, Inc. (DRI) in exchange for $1.00 and an option to
purchase 30,000 shares of the Company's Common Stock at $2.25 per share. DRI
is a Jacksonville, Florida based provider of outpatient rehab services in a
clinic setting. Upon acquisition, DRI had assets totaling approximately
$116,000 and liabilities totaling approximately $124,000.
Effective January 1, 1997, the Company acquired nine contracts to provide
therapy services to certain long-term care providers from Tri-Therapy
Services, Inc. (TSI) in exchange for $100,000 in cash which included $10,000
for a noncompete agreement. TSI is a Madison, Mississippi based provider of
physical, occupational and speech therapy care to nursing homes and long-term
care facilities in Arkansas.
On September 30, 1997, the Company acquired the assets of Rehab & Therapy
Center of Naples, Inc. (RTCN), an operator of a comprehensive outpatient
rehabilitation facility in southern Florida. This acquisition was made in
exchange for $20,000 in cash and 2,857 shares of the Company's common stock.
Effective December 12, 1997, IHR formed a new subsidiary, Doctors Rehab &
Therapy, Inc. (DRT) and transferred the assets acquired from RTCN to DRT.
On March 30, 1998, the Company acquired all of the outstanding common stock of
Gateway Rehabilitation, Inc. (GR) in exchange for 43,000 shares of the
Company's Common Stock in a private transaction. The acquisition was made
pursuant to the terms of a Stock Purchase Agreement dated March 1, 1998, among
the Company, GR and GR's shareholders. GR provides physical therapy,
occupational therapy and rehabilitation program management under contracts
with thirty long-term care facilities in Illinois and southwestern Indiana.
During the year ended December 31, 1997, GR had approximately $2,760,000 in
sales and had a net loss of approximately $17,000. Under the terms of the
Stock Purchase Agreement, the former shareholders of GR have the right to
require the Company to repurchase the shares of the Company's Common Stock
received by them in the transaction for $5.00 per share during the ten day
period commencing May 31, 1999. As a result, the Company could be required to
repurchase these shares for an aggregate of $215,000.
F-8
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<PAGE>
The following is a summary of the allocation of the purchase price for GR:
Fair value of assets acquired (principally
accounts receivable) $ 883,080
Liabilities assumed 1,137,206
----------
Excess of fair value of assets acquired 254,126
Common Stock issued 215,000
----------
Total cost in excess of fair value of net
assets acquired $ 469,126
==========
On June 3, 1998, the Company formed Perennial Health Management, Inc. (PHM) as
a wholly owned subsidiary for the purpose of acquiring, operating and managing
nursing home properties. As of August 28, 1998, there has been very limited
activity with PHM.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated 1998 financial statements
include the accounts of the Company, its wholly owned subsidiary, In-House
Rehab, Inc. (IHR), and IHR's wholly owned subsidiaries, IHMR, RTG, DRI, RTCN
and GR. The consolidated 1997 financial statements include the accounts of
the Company, its wholly-owned subsidiary, IHR, and IHR's wholly-owned
subsidiaries, IHMR, RTG and DRI. All significant intercompany accounts and
transactions have been eliminated.
RECLASSIFICATIONS: Certain amounts in the fiscal 1997 consolidated financial
statements have been reclassified to conform with the fiscal 1998
presentation.
CASH AND EQUIVALENTS: Cash and equivalents includes highly liquid investments
with an original maturity of three months or less. The cash management system
provides for daily investment of available balances and the funding of
outstanding checks when presented for payment. There were no outstanding but
unpresented checks at May 31, 1998, and $121,900 at May 31, 1997.
DEPRECIATION: Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.
EXCESS COST OF NET ASSETS ACQUIRED: Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred taxes have been
recorded to the extent of the difference between the fair value and the tax
basis of the assets acquired and liabilities assumed. The excess of the
purchase price over the fair value of the net assets acquired, including the
recognition of applicable deferred taxes, is amortized on a straight line
basis over a period of up to 25 years. The Company performs an annual
assessment of the recoverability of goodwill based on estimated future
undiscounted cash flows and operating income.
AMORTIZATION OF NONCOMPETE AGREEMENTS: The noncompete agreements are
amortized over a period of one to two years on a straight-line basis.
STOCK-BASED COMPENSATION: The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
during fiscal year 1997, electing to continue accounting for its employee
stock options under the provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," accompanied by a
disclosure, if considered material, of the pro forma effects on net income and
net income per share had the expense provisions of the new accounting
principle been applied.
F-9
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<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS: The Company adopted SFAS No. 128,
"Earnings Per Share" for the year ended May 31, 1998. This accounting
pronouncement requires the disclosure of basic and diluted earnings per share.
Diluted earnings per share approximates 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 are higher than diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The provisions of SFAS No. 130 will
be effective for fiscal years beginning after December 15, 1997 and will not
have a material impact on the Company's financial statements.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. NET INCOME PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
became effective for periods ending after December 15, 1997. This statement
revised the calculation of earnings per share from the "primary" and "fully
diluted" methods previously employed, to the "basic" and "assuming dilution"
methods. The Company had not previously presented fully diluted earnings per
share because the result was not materially different than the primary
calculation. Under the new statement, basic earnings per share represents
earnings divided by the weighted average number of shares outstanding during
the period. Earnings per share-assuming dilution represents the basic
weighted average shares outstanding adjusted for the effects of stock options
and warrants. The calculation of the Company's earnings per share-assuming
dilution closely resembles that used in prior calculations of primary earnings
per share.
In accordance with this statement, the Company has replaced its disclosure of
primary net income per share with net income per share-basic and net income
per share-assuming dilution.
F-10
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<PAGE>
The following table sets forth the computation and reconciliation of net
income per share-basic and net income per share-assuming dilution.
For the Three Months For the Year
Ended May 31, Ended May 31,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net income (loss) $ (206,041) $ 186,945 $ 615,280 $ 1,097,432
=========== =========== =========== ===========
Weighted average
shares outstanding:
Basic 13,375,583 13,344,315 13,353,250 13,487,363
Stock options and
warrants 149,500 415,941 144,961 181,466
----------- ----------- ----------- -----------
Assuming dilution 13,525,083 13,760,256 13,498,211 13,668,829
=========== =========== =========== ===========
Net income (loss)
per share:
Basic $ (0.01) $ 0.02 $ 0.05 $ 0.08
=========== =========== =========== ===========
Assuming dilution $ (0.01) $ 0.02 $ 0.05 $ 0.08
=========== =========== =========== ===========
The Company did not include warrants, equivalent to 520,000 and 390,000 shares
of common stock, or options to purchase 677,500 and 518,375 shares of common
stock for the three and twelve months ended May 31, 1998, respectively,
because their effects are antidilutive. There were no transactions that
occurred subsequent to May 31, 1998 that would have materially changed the
number of shares used in computing net income per share-basic or net income
per share-assuming dilution.
5. MAJOR CUSTOMER
Approximately $6,411,000 and $8,932,000 or 34% and 57% of all revenue for the
years ended May 31, 1998 and 1997, respectively, and approximately $1,321,000
and $4,519,000 or 17% and 61% of the balance of accounts receivable at May 31,
1998 and 1997, respectively, related to one customer who is a stockholder and
related party of the Company, Retirement Care Associates, Inc. (RCA).
Effective June 30, 1998, the stockholders of RCA and Sun Healthcare Group,
Inc. (Sun) approved a Merger Agreement pursuant to which RCA was merged into a
subsidiary of Sun, which provides rehabilitation services similar to those
offered by the Company. During January and February 1998, the Company
transitioned RCA facilities serviced by the Company to Sun. As a result, the
Company had no contracts for therapy program service with RCA at May 31, 1998,
as compared with 38 at May 31, 1997. RCA and Sun continued to make payments
on its outstanding amount due to the Company and, as of August 27, 1998, had
paid the accounts receivable balance in full.
6. SHORT-TERM BORROWINGS
On October 29, 1996, the Company entered into a revolving line of credit
agreement with a bank. The agreement initially provided for advances up to
$2,500,000, subject to a borrowing base formula. On March 3, 1997, the
agreement was amended to provide for total borrowings up to $4,500,000.
Borrowings under this agreement bear interest at the prime rate plus .25%,
payable monthly, based upon the Company's leverage ratio. The line of credit
is collateralized by substantially all of the Company's assets except those
held by GR, a subsidiary. Total borrowings under this agreement were
$3,421,657 at May 31, 1998, and $3,525,000 at May 31, 1997.
On August 31, 1998, the $4,500,000 line of credit was replaced by a line of
credit agreement at another lending institution. The new agreement provides
for total borrowings up to $5,000,000, subject to a borrowing base formula.
Borrowings under this agreement bear interest at the London Interbank Offering
Rate (LIBOR) plus 3.25%, payable monthly. This new line of credit is
collateralized by substantially all of the Company's assets except those held
by GR. This agreement expires on August 31, 2001.
F-10
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<PAGE>
GR has a revolving line of credit agreement with a bank which provides for
total borrowings of $1,000,000, subject to a borrowing base formula.
Borrowings under this agreement bear interest at the prime rate, plus .25%,
payable monthly. This line of credit is collateralized by the accounts
receivable of GR. Total borrowings under this agreement were $784,878 at May
31, 1998.
7. ACCRUED EXPENSES
Accrued expenses at May 31 consist of the following:
1998 1997
---------- --------
Compensation and benefits $ 637,248 $446,336
Health insurance 201,609 -
Accounting and legal 45,528 -
Rents 15,458 -
Other 105,364 55,710
---------- --------
$1,005,207 $502,046
========== ========
8. INCOME TAXES
The provision for income taxes on earnings at May 31 consists of the
following:
1998 1997
--------- ---------
Current payable:
Federal $ 427,225 $643,541
State 109,265 164,588
--------- --------
Total currently payable 536,490 808,129
Deferred:
Federal (92,071) (64,570)
State (23,548) (16,514)
--------- --------
Total deferred (115,619) (81,084)
--------- --------
Total provision $ 420,871 $727,045
========= ========
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:
1998 1997
--------------------- ---------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
Noncompete agreements $ 92,317 $ 81,162
Allowance for doubtful
accounts 115,143 -
Accrued vacation 30,515 40,531
Depreciation $29,921 $18,551
Amortization 11,337 1,709 1,079
-------- ------- -------- -------
Total deferred taxes $249,312 $29,921 $123,402 $19,630
======== ======= ======== =======
F-11
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<PAGE>
Based on the Company's prior earnings and the sufficiency of income available
to be utilized in the carryback years, it is more likely than not that the net
deferred tax assets for 1998 and 1997 will be realized. Therefore, no
valuation allowance has been established to reduce deferred tax assets for
1998 and 1997.
Reconciliation of the federal statutory rate and the effective income tax rate
at May 31 follows:
1998 1997
----- -----
Federal statutory rate 34.0% 34.0%
State income taxes, net of federal
income tax benefit 4.5% 5.2%
Other 2.1% 0.6%
---- ----
Effective income tax rate 40.6% 39.8%
9. COMMITMENTS AND CONTINGENCIES
The Company rents office space, certain office equipment and vehicles under
operating leases expiring at various dates through January 2003. These leases
generally include one or more renewal options. Approximate future minimum
rentals on all noncancelable operating leases in effect at May 31, 1998 are as
follows:
1999 $262,000
2000 133,000
2001 106,000
2002 62,000
2003 1,000
Lease expense was approximately $327,000 and $107,000 for the years ended May
31, 1998 and 1997, respectively.
The Company is subject to litigation and claims in the ordinary course of
business. Management believes none of these matters would have a material
adverse effect on the financial condition or results of operations of the
Company.
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. As of May 31, 1996, the Company had issued
1,100,000 shares of the no par value common stock for net proceeds of
approximately $1,321,000. The net proceeds included a stock receivable from
the Private Placement Trustee at May 31, 1996 of $225,000 which was collected
in June 1996. As of May 31, 1997, the Company had issued an additional
200,000 shares of the no par value common stock for net proceeds of
approximately $186,000.
Investors who purchased at least eight units (each unit consists of 20,000
shares costing $25,000) also received warrants to purchase 20,000 shares of
common stock for each unit purchased. The warrants are exercisable at $2.50
per share and will expire three years from the date of the Private Placement,
March 12, 1999. In conjunction with the Private Placement 520,000 warrants
have been issued of which 360,000 are still outstanding at August 28, 1998.
F-12
<PAGE>
<PAGE>
11. STOCK OPTIONS
In October 1996, the Company's Board of Directors adopted the Company's 1996
Stock Option Plan (the 1996 Plan). The 1996 Plan allows the Board to grant
stock options from time to time to employees, officers and directors of the
Company and consultants to the Company. The Board has the power to determine
at the time the option is granted whether the option will be an Incentive
Stock Option (an option which qualifies under Section 422 of the Internal
Revenue Code of 1986) or an option which is not an Incentive Stock Option.
However, Incentive Stock Options will only be granted to persons who are key
employees of the Company. Vesting provisions are determined by the Board at
the time options are granted. The total number of shares of Common Stock
subject to options under the 1996 Plan is not to exceed 1,000,000. The
following summarizes the stock option award activity during the years ended
May 31, 1998 and 1997:
Weighted
1996 Non-1996 Average
Plan Plan Exercise
Shares Shares Price
------- -------- --------
Outstanding at May 31, 1996 - - -
Granted 320,000 439,000 $ 1.84
Exercised - - -
Canceled - (29,000) 1.75
------- ------- --------
Outstanding at May 31, 1997 320,000 410,000 $ 1.84
------- ------- --------
Granted 545,999 - $ 1.42
Exercised - - -
Canceled (25,500) (18,000) 2.66
------- ------- --------
Outstanding at May 31, 1998 840,499 392,000 $ 1.81
======= ======= ========
These options are exercisable for a period of three to seven years from the
date of grant. The options price equaled the market price of a share at the
date the options were granted. As of May 31, 1998 and 1997, no options have
been exercised and the weighted average remaining contractual life for the
outstanding options is two years. There were 1,177,999 options which were
exercisable at May 31, 1998, with a weighted average exercise price of $1.77.
There were 679,500 options which were exercisable at May 31, 1997, with a
weighted average exercise price of $2.11.
The Company's common stock has been quoted on the OTC Bulletin Board since
December 1995 and the Company's Board of Directors have based their
determination of the fair market value of the common stock on the closing bid
quotations on the OTC Bulletin Board.
As permitted by SFAS No. 123, the Company follows the provisions of APB
Opinion No. 25 and related Interpretations in accounting for its stock option
grants. Under APB 25, the Company recognizes no compensation expense with
respect to stock-based awards to employees. Pro forma information regarding
net income and earnings per share is required by SFAS 123 for awards granted
after December 31, 1994, as if the Company had accounted for its stock-based
awards to employees under the fair value method of SFAS 123. The fair value
of the Company's stock-based awards to employees was estimated using a
Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. The Black-Scholes model
requires the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock-based awards to employees
F-13
<PAGE>
<PAGE>
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming an expected term ranging from one
and one-half years to two and one-half years, a risk-free interest rate
ranging from 5.60% - 6.08%, stock price volatility of 32.85% and no expected
dividends. The expected turnover was not considered as forfeitures will be
considered in future calculations as they occur.
The weighted average fair value of options was $.30 and $.42 as of May 31,
1998 and 1997, respectively.
If compensation cost had been determined based on the fair value of the awards
at the grant date, net income and earnings per common share would have been as
follows at May 31:
1998 1997
-------- ----------
Net income -
As reported $615,280 $1,097,432
Pro forma 538,142 941,963
Basic earnings per share -
As reported 0.05 0.08
Pro forma 0.04 0.07
Diluted earnings per share -
As reported 0.05 0.08
Pro forma 0.04 0.07
12. 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 a
contribution to the plan during 1998 in the amount of $12,144. No
contributions were made to the plan during 1997.
13. 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.
At May 31, 1998, the Company had contracts to provide physical, speech and
occupational therapists to approximately 69 nursing homes of which 5 are
operated by NewCare Health Corporation (NC). A former director of the Company
is also a director and significant shareholder of NC. During the year ended
May 31, 1998, the Company billed approximately $1,783,000 in fees under
agreements with NC. As of May 31, 1998, there were approximately $990,000 in
accounts receivable relating to such services outstanding.
Two stockholders, who are also employees of the Company, owe approximately
$84,000 and $18,000 in total to the Company for advances as of May 31, 1998
and 1997, respectively. Additionally, a company owned by a stockholder of the
Company owed approximately $3,600 and $11,000 for advances as of May 31, 1998
and 1997, respectively.
F-14
<PAGE>
<PAGE>
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended,
--------------------------------------------------------------
Aug.31 Nov.30 Feb.28 May 31 Year
1998 --------------------------------------------------------------
Net revenue $4,718,106 $5,297,221 $4,361,218 $4,310,438 $18,686,983
Gross profit 1,943,538 2,357,940 1,930,692 1,740,215 7,972,385
Net income
(loss) 278,249 338,408 204,664 (206,041) 615,280
Net income
(loss) per
share 0.02 0.02 0.02 (0.01) 0.05
Quarter Ended,
--------------------------------------------------------------
Aug.31 Nov.30 Feb.28 May 31 Year
1997 --------------------------------------------------------------
Net revenue $3,434,994 $3,593,768 $4,129,109 $4,471,996 $15,627,867
Gross profit 1,481,782 1,513,261 1,768,503 1,770,949 6,534,495
Net income 319,010 256,689 334,788 186,945 1,097,432
Net income
per share 0.02 0.02 0.02 0.02 0.08
F-15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IN-HOUSE REHAB CORPORATION
Dated: August 31, 1998 By:/s/ David V. Hall
David V. Hall, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the company
and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ David V. Hall President (Principal August 31, 1998
David V. Hall Executive Officer)
and Director
/s/ Robert J. Babine Chief Financial Officer, August 31, 1998
Robert J. Babine Treasurer (Principal
Financial and Accounting
Officer) and Director
/s/ Timothy M. Graven Director August 31, 1998
Timothy M. Graven
/s/ Bert L. Blieden Director August 31, 1998
Bert L. Blieden
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
10.2 Employment Agreement with Filed herewith electronically
David V. Hall
10.3 Employment Agreement with Filed herewith electronically
Robert J. Babine
10.8 Employment Agreement with Filed herewith electronically
Rebecca Krueger
10.9 Employment Agreement with Filed herewith electronically
Michael Kitchen
10.10 Employment Agreement with Filed herewith electronically
Nicole Perry
21 Subsidiaries of the Registrant Filed herewith electronically
23 Consent of Strothman & Filed herewith electronically
Company PSC
27 Financial Data Schedule Filed herewith electronically
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between In-House Rehab Corporation., a Colorado corporation
("Corporation"), and David V. Hall ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on February 1, 1998 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as President, and Chief
Executive Officer, and Employee is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation as President and Chief Executive Officer,
and Corporation agrees to employ and retain Employee in such capacities.
Employee shall devote a substantial portion of his business time, energy, and
skill to the affairs of the Corporation as Employee shall report to the
Corporation's Board of Directors, and at all times during the term of this
Agreement shall have powers and duties at least commensurate with his position
as President, as such duties are outlined in Appendix A hereto.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform his duties in compliance with this
Agreement after written notice to the Employee by the Board of Directors
specifying such failure, provided that such "cause" shall have been found by a
majority vote of the members of the Board of Directors of the Corporation
other than Employee.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constructive termination
as described in subsection 2.1.2, (ii) "Termination Upon a Change in Control,"
and (iii) termination by reason of Employee's death or disability as described
in Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a termination of
Employee's employment with Corporation following a "Change in Control."
2.1.5 "Change in Control" shall mean (i) the time that Corporation first
determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of forty percent
(40%) or more of Corporation's outstanding securities.
<PAGE>
2.2 Initial Term. The term of employment of Employee by Corporation shall be
for a period of three (3) years beginning with Effective Date, unless
terminated earlier pursuant to this Section. This Agreement, and the three
(3) year term hereof shall be deemed to have been renewed the first day of
each month after the effective date. At any time, Corporation and Employee
may by mutual written agreement extend or modify the term of Employee's
employment under the terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement and shall be
effected by written notification to Employee. Upon Termination For Cause,
Employee shall promptly be paid all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but
Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any
time upon giving written notice to Employee of such termination. Upon any
Termination Other Than For Cause, Employee shall promptly be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
awards granted to Employee under the Corporation's stock option plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.2, but no other compensation or
reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Directors of
Corporation, has failed to perform his duties under this Agreement on account
of illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder
by written notification to Employee and payment to Employee of all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of this Agreement,
but Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
<PAGE>
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
any awards granted to Employee under Corporation's Stock Option Plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation agrees to pay to Employee a "Base Salary" for the twelve (12)
calendar months beginning the Effective Date at the rate of $220,000.00 per
annum payable in twenty-six equal, bi-weekly installments of $8,461.54.
Employee's Base Salary shall be reviewed annually by the Compensation
Committee of the Board of Directors ("Compensation Committee"), and the Base
Salary for each year (or portion thereof) beginning February 1, 1999 shall be
determined by the Compensation Committee which shall authorize an increase in
Employee's Base Salary for such year in an amount which, at a minimum, shall
be equal to the cumulative cost-of-living increment on the Base Salary as
report in the "Consumer Price Index, All Items," published by the U.S.
Department of Labor (using February 1, 1998 as the base date for computation).
3.2 Bonuses. Employee shall be eligible to receive a discretionary bonus for
each year (or portion thereof) during the term of this Agreement and any
extensions thereof, with the actual amount of any such bonus to be determined
in the sole discretion of the Board of Directors based upon its evaluation of
Employee's performance during such year. All such bonuses shall be reviewed
annually by the Compensation Committee.
3.3 Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate in
such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, annual physical examinations, dental and medical
plans, personal catastrophe and disability insurance, financial planning,
retirement plans and supplementary executive retirement plans, if any. For
purposes of establishing the length of service under any benefit plans or
programs of Corporation, Employee's employment with the Corporation will be
deemed to have commenced on September 30, 1994.
<PAGE>
3.3.2 Vacation. Employee shall be entitled to two (2) weeks of vacation
during each year during the term of this Agreement and any extensions thereof,
prorated for partial years.
3.3.3 Life Insurance. For the term of this Agreement and any extensions
thereof, Corporation shall at its expense procure and keep in effect term life
insurance on the life of Employee payable to the Estate of the Employee the
minimum aggregate amount of Two Million ($2,000,000.00) dollars.
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance of $1,000 per month.
3.3.5 Reimbursement for Expenses. During the term of this Agreement,
Corporation shall reimburse Employee for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by Employee in
connection with his duties under this Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for the
remaining portion of the Term of this Agreement. Employee shall continue to
accrue retirement benefits and shall continue to enjoy any benefits under any
plans of the Corporation in which Employee is a participant to the full extent
of Employee's rights under such plans, including any perquisites provided
under this Agreement, though the remaining term of this Agreement.
Notwithstanding anything in this Section to the contrary, Employee may in
Employee's sole discretion, by delivery of a notice to Corporation within
thirty (30) days following a Termination Upon a Change in Control, elect to
receive from Compensation a lump sum severance payment by bank cashier's check
equal to the present value of the flow of cash payments that would otherwise
be paid to Employee pursuant to this Section. Employee shall also be entitled
to an accelerated vesting of any awards granted to Employee under the
Corporation's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant. Employee shall continue to
accrue retirement benefits and shall continue to enjoy any benefits under any
plans of the Corporation in which Employee is a participant to the full extent
of Employee's rights under such plans, including any perquisites provided
under this Agreement, though the remaining term of this Agreement; provided,
however, that the benefits under any such plans of the Corporation in which
Employee is a participant, including any such perquisites, shall cease upon
re-employment by a new employer.
4.1.1 Purchase of Shares Held by Employee and Insurance Coverage. In
the event Employee's employment is terminated in a Termination Upon a Change
in Control, the Corporation will also be required, at the sole option of the
Employee, to redeem a minimum of fifty percent (50%) of the Corporation stock,
or any stock dividends thereof, owned by the Employee as of the Effective
Date, that are owned by the employee at the date of severance. The price to
be paid will be the market determined value at the close of business at the
date of severance. If a public market has not been created, or is not in
existence at the time of severance, then the price to be paid shall be the
most recent share price obtained in any private offering of the Corporation
shares of common stock. In the event Employee's employment is terminated in a
Termination Upon a Change in Control, the Corporation will also provide family
medical insurance consistent with coverages extended to other employees until
the Employee reaches the age of sixty five (65). The requirement that the
Corporation purchase family medical insurance shall be excused during any
period of subsequent employment where the new employer provides equal or
better coverage.
<PAGE>
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination
Other Than for Cause, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for a
period equal to the remaining portion of the Term of this Agreement.
Employee may, in Employees sole discretion, by delivery of a notice to the
Corporation within thirty (30) days following a Termination Other Than for
Cause, elect to receive from Corporation a lump sum severance payment by
cashiers check equal to the present value of the flow of cash payments that
would otherwise be paid to Employee pursuant to this Section. Employee shall
be entitled to an accelerated vesting of any awards granted to Employee under
Corporation's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant.
4.2.1 Purchase of Shares Held by Employee and Insurance Coverage. In the
event Employee's employment is terminated in a Termination Other Than for
Cause, the Corporation will also be required, at the sole option of the
Employee, to redeem a minimum of fifty percent (50%) of the Corporation stock,
or any stock dividends thereof, owned by the Employee as of the Effective
Date, that are owned by the employee at the date of severance. The price to
be paid will be the market determined value at the close of business at the
date of severance. If a public market has not been created, or is not in
existence at the time of severance, then the price to be paid shall be the
most recent share price obtained in any private offering of the Corporation
shares of common stock. In the event Employee's employment is terminated in a
Termination Other Than for Cause, the Corporation will also provide family
medical insurance consistent with coverages extended to other employees until
the Employee reaches the age of sixty five (65). The requirement that the
Corporation purchase family medical insurance shall be excused during any
period of subsequent employment where the new employer provides equal or
better coverage.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.6, Employee or his estate shall
not be paid any severance compensation.
Section 5. Outside Activities of Employee. Corporation acknowledges that
Employee has commitments and business activities not related to the
Corporation and that certain of these commitments and business affairs involve
activities in the long term care industry. There shall be no restriction on
Employee's ability to fulfill such commitments or engage in such business
activities, provided that during the term of Employee's employment under this
Agreement or for a period of six months after the termination of such
employment (other than a Termination Other Than For Cause or a Termination
Upon Change in Control) Employee shall not divert away from the Corporation,
for officers personal benefit, or for the benefit of an organization in which
officer has a material financial interest, any opportunity, arising during
such period to pursue such opportunities personally unless the Board of
Directors of the corporation have determined not to pursue such opportunity.
Section 6. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 7. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
<PAGE>
Section 8. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and
similar taxes and payments required by applicable law.
Section 9. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Washington Business Corporation Act or any successor provision thereof
and any other applicable state law, and shall pay Employee's expenses in
defending any civil or criminal action, suit, or proceeding in advance of the
final disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 10. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street, Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
1011 Alta Vista Drive
Louisville, Ky. 40205
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 11. Law Governing. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
Section 12. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 13. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 14. Agreement Binding. This Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 15. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
Section 16. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday,
Sunday, or a legal holiday, in which event the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday, in which event
the period shall run until the end of the next day thereafter which is not a
Saturday, Sunday, or legal holiday.
Section 17. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
<PAGE>
Section 18. Arbitration. If at any time during the term of this Agreement any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 19. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 20. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 21. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 22. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 23. Separate Counsel. The parties acknowledge that the Corporation
has been represented in this transaction by the J. Bruce Miller Law Group,
that the Employee has not been represented in this transaction by the
Corporation's attorneys, and the Employee has been advised that it is
important for the Employee to seek separate legal advise and representation in
this matter.
Date: February 1, 1998
In-House Rehab Corporation
a Colorado Corporation
By:/s/ /s/ Robert Babine /s/ David V. Hall
Robert Babine, Authorized Director David V. Hall, Individually
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between In-House Rehab, Inc., a Kentucky corporation and wholly
owned subsidairy of In-House Rehab Corporation ("Corporation"), and Robert J.
Babine ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on February 1, 1998 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Vice President & Chief
Financial Officer, and Employee is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation as Chief Financial Officer and Vice
President, and Corporation agrees to employ and retain Employee in such
capacities. Employee shall devote a substantial portion of his business time,
energy, and skill to the affairs of the Corporation as Employee shall report
to the Corporation's President, and at all times during the term of this
Agreement shall have powers and duties at least commensurate with his position
as Vice President and Chief Financial Officer, as such duties are outlined in
Appendix A hereto.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform his duties in compliance with this
Agreement after written notice to the Employee by the Board of Directors
specifying such failure, provided that such "cause" shall have been found by a
majority vote of the members of the Board of Directors of the Corporation
other than Employee.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constructive termination
as described in subsection 2.1.2, (ii) "Termination Upon a Change in Control,"
and (iii) termination by reason of Employee's death or disability as described
in Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a termination
of Employee's employment with Corporation following a "Change in Control."
<PAGE>
2.1.5 "Change in Control" shall mean (i) the time that Corporation
first determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of forty percent
(40%) or more of Corporation's outstanding securities.
2.2 Initial Term. The term of employment of Employee by Corporation shall be
for a period of three (3) years beginning with Effective Date, unless
terminated earlier pursuant to this Section. This Agreement, and the three
(3) year term hereof shall be deemed to have been renewed the first day of
each month after the effective date. At any time, Corporation and Employee
may by mutual written agreement extend or modify the term of Employee's
employment under the terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement and shall be
effected by written notification to Employee. Upon Termination For Cause,
Employee shall promptly be paid all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but
Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any
time upon giving written notice to Employee of such termination. Upon any
Termination Other Than For Cause, Employee shall promptly be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
awards granted to Employee under the Corporation's stock option plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.2, but no other compensation or
reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Directors of
Corporation, has failed to perform his duties under this Agreement on account
of illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder
by written notification to Employee and payment to Employee of all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of this Agreement,
but Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
<PAGE>
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
any awards granted to Employee under Corporation's Stock Option Plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation agrees to pay to Employee a "Base Salary" for the twelve (12)
calendar months beginning the Effective Date at the rate of $132,000.00 per
annum payable in twenty-six equal, bi-weekly installments of $5,076.92.
Employee's Base Salary shall be reviewed annually by the Compensation
Committee of the Board of Directors ("Compensation Committee"), and the Base
Salary for each year (or portion thereof) beginning February 1, 1999 shall be
determined by the Compensation Committee which shall authorize an increase in
Employee's Base Salary for such year in an amount which, at a minimum, shall
be equal to the cumulative cost-of-living increment on the Base Salary as
report in the "Consumer Price Index, All Items," published by the U.S.
Department of Labor (using February 1, 1998 as the base date for computation).
3.2 Bonuses. Employee shall be eligible to receive a discretionary bonus for
each year (or portion thereof) during the term of this Agreement and any
extensions thereof, with the actual amount of any such bonus to be determined
in the sole discretion of the Board of Directors based upon its evaluation of
Employee's performance during such year, and in accordance with the Bonus
program adopted by the Board of Directors. All such bonuses shall be reviewed
annually by the Compensation Committee.
<PAGE>
3.3 Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate
in such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, annual physical examinations, dental and medical
plans, personal catastrophe and disability insurance, financial planning,
retirement plans and supplementary executive retirement plans, if any. For
purposes of establishing the length of service under any benefit plans or
programs of Corporation, Employee's employment with the Corporation will be
deemed to have commenced on September 30, 1994.
3.3.2 Vacation. Employee shall be entitled to vacation during each
year during the term of this Agreement and any extensions thereof, prorated
for partial years, in accordance with the Corporations standard policy for
administrative personnel.
3.3.3 Life Insurance. For the term of this Agreement and any
extensions thereof, Corporation shall at its expense procure and keep in
effect term life insurance on the life of Employee payable to the Estate of
the Employee the minimum aggregate amount of Five Hundred Thousand
($500,000.00) dollars.
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance equal to $975 per month.
3.3.5 Reimbursement for Expenses. During the term of this
Agreement, Corporation shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with his duties under this Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for the
remaining portion of the Term of this Agreement. Employee shall continue to
accrue retirement benefits and shall continue to enjoy any benefits under any
plans of the Corporation in which Employee is a participant to the full extent
of Employee's rights under such plans, including any perquisites provided
under this Agreement, though the remaining term of this Agreement.
4.1.1 Purchase of Shares Held by Employee and Insurance Coverage.
In the event Employee's employment is terminated in a Termination Upon a
Change in Control, the Corporation will also, be required to, at the sole
option of the Employee, redeem a minimum of twenty-five percent (25%) of the
Corporation stock, or any stock dividends thereof, owned by the Employee as of
the Effective Date, that are owned by the employee at the date of severance.
The price to be paid will be the market determined value at the close of
business at the date of severance. If a public market has not been created,
or is not in existence at the time of severance, then the price to be paid
shall be the most recent share price obtained in any private offering of the
Corporation shares of common stock. In the event Employee's employment is
terminated in a Termination Upon a Change in Control, the Corporation will
also provide family medical insurance consistent with coverages extended to
other employees until the Employee reaches the age of sixty five (65). The
requirement that the Corporation purchase family medical insurance shall be
excused during any period of subsequent employment where the new employer
provides equal or better coverage.
<PAGE>
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination
Other Than for Cause, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for a
period equal to the remaining portion of the Term of this Agreement.
Employee may, in Employees sole discretion, by delivery of a notice to the
Corporation within thirty (30) days following a Termination Other Than for
Cause, elect to receive from Corporation a lump sum severance payment by
cashiers check equal to the present value of the flow of cash payments that
would otherwise be paid to Employee pursuant to this Section. Employee shall
be entitled to an accelerated vesting of any awards granted to Employee under
Corporation's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant.
4.2.1 Purchase of Shares Held by Employee and Insurance Coverage. In
the event Employee's employment is terminated in a Termination Other Than for
Cause, the Corporation will also be required, at the sole option of the
Employee, to redeem a minimum of twenty-five percent (25%) of the Corporation
stock, or any stock dividends thereof, owned by the Employee as of the
Effective Date, that are owned by the employee at the date of severance. The
price to be paid will be the market determined value at the close of business
at the date of severance. If a public market has not been created, or is not
in existence at the time of severance, then the price to be paid shall be the
most recent share price obtained in any private offering of the Corporation
shares of common stock. In the event Employee's employment is terminated in a
Termination Other Than for Cause, the Corporation will also provide family
medical insurance consistent with coverages extended to other employees until
the Employee reaches the age of sixty five (65). The requirement that the
Corporation purchase family medical insurance shall be excused during any
period of subsequent employment where the new employer provides equal or
better coverage.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, Termination by Death, or
Termination by reason of Employee's disability pursuant to Section 2.6,
Employee or his estate shall not be paid any severance compensation.
Section 5. Outside Activities of Employee. Corporation acknowledges that
Employee has commitments and business activities not related to the
Corporation and that certain of these commitments and business affairs involve
activities in the long term care industry. There shall be no restriction on
Employee's ability to fulfill such commitments or engage in such business
activities, provided that during the term of Employee's employment under this
Agreement or for a period of six months after the termination of such
employment (other than a Termination Other Than For Cause or a Termination
Upon Change in Control) Employee shall not divert away from the Corporation,
for officers personal benefit, or for the benefit of an organization in which
officer has a material financial interest, any opportunity, arising during
such period to pursue such opportunities personally unless the Board of
Directors of the corporation have determined not to pursue such opportunity.
Section 6. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 7. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
<PAGE>
Section 8. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and
similar taxes and payments required by applicable law.
Section 9. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Kentucky Business Corporation Act or any successor provision thereof and
any other applicable state law, and shall pay Employee's expenses in defending
any civil or criminal action, suit, or proceeding in advance of the final
disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 10. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street, Suite 1400 B
Louisville, Ky. 40202
addressed to the Employee at:
14201 Willow Grove Circle
Louisville, Ky. 40245
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 11. Law Governing. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
Section 12. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 13. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 14. Agreement Binding. This Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 15. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
Section 16. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday,
Sunday, or a legal holiday, in which event the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday, in which event
the period shall run until the end of the next day thereafter which is not a
Saturday, Sunday, or legal holiday.
Section 17. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
<PAGE>
Section 18. Arbitration. If at any time during the term of this Agreement
any dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 19. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 20. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 21. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 22. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 23. Separate Counsel. The parties acknowledge that the Corporation
has been represented in this transaction by counsel, and that the Employee has
not been represented in this transaction by the Corporation's attorneys, and
the Employee has been advised that it is important for the Employee to seek
separate legal advise and representation in this matter.
Date: February 1, 1998
In-House Rehab, Inc
a Kentucky Corporation
By:/s/ David Hall /s/ Robert J. Babine
David Hall, President Robert J. Babine, Individually
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between In-House Rehab Corporation, a Colorado corporation
("Corporation"), and Rebecca Krueger ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on February 1, 1998 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Chief Operating Officer,
and Employee is willing to accept such employment by Corporation, on the terms
and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation, and its wholly owned subsidiary,
In-House Rehab, Inc., as Chief Operating Officer and Corporation agrees to
employ and retain Employee in such capacity. Employee shall devote a
substantial portion of her business time, energy, and skill to the affairs of
the Corporation as Employee shall report to the Corporation's President and
Chief Executive Officer and at all times during the term of this Agreement
shall have powers and duties at least commensurate with her position as Chief
Operating Officer.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation
of Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform her duties in compliance with this
Agreement after written notice to the Employee by the President specifying
such failure.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constrictive termination
as described in subsection 2.1.2., (ii) "Termination Upon a Change in
Control," and (iii) termination by reason of Employee's death or disability as
described in Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a
termination by Employee of Employee's employment with Corporation within 120
days following a "Change in Control."
2.1.5 "Change in Control" shall mean (i) the time that Corporation
first determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of twenty percent
(20%) or more of Corporation's outstanding securities.
<PAGE>
2.2 Initial Term. The term of employment of Employee by Corporation shall be
for a period of one (1) year beginning with Effective Date, unless terminated
earlier pursuant to this Section. This Agreement, and the one (1) year term
hereof shall be deemed to have been renewed the first day of each month after
the effective date. At any time, Corporation and Employee may by mutual
written agreement extend or modify the term of Employee's employment under the
terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement after written
notification to Employee pursuant to Section 2.9 hereof. Upon Termination For
Cause, Employee shall promptly be paid all accrued salary, bonus compensation
to the extent earned, vested deferred compensation (other than pension play or
profit sharing plan benefits which will be paid in accordance with the
applicable plan), any benefits under any plans of the Corporation in which
Employee is a participant to the full extent of Employee's rights under such
plans, accrued vacation pay and any appropriate business expenses incurred by
Employee in connection with her duties hereunder, all to the date of
termination, but Employee shall not be paid any other compensation or
reimbursement of any kind, including without limitation, severance
compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any
time upon written notice to Employee of such termination in accordance with
Section 2.9 hereof. Upon any Termination Other Than For Cause, Employee shall
promptly be paid all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans (including
accelerated vesting, if any, of awards granted to Employee under the
Corporation's stock option plan), accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with her duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.2, but no other compensation or reimbursement of any
kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the President or officer
acting in her place, has failed to perform her duties under this Agreement on
account of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder
by written notification to Employee and payment to Employee of all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with her duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of this Agreement,
but Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which her death occurs and Corporation shall
promptly pay to her estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
her duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
<PAGE>
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with her duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
any awards granted to Employee under Corporation's Stock Option Plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with her duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation, through its subsidiary, In-House Rehab, Inc., agrees to pay to
Employee a "Base Salary" at the rate of $117,200 per annum payable in
twenty-six equal, bi-weekly installments of $4,507.69. Employee's Base Salary
shall be reviewed annually by the Compensation Committee of the Board of
Directors ("Compensation Committee"), and the Base Salary for each year (or
portion thereof) beginning February 1, 1999 shall be determined by the
Compensation Committee which shall authorize an increase in Employee's Base
Salary for such year in an amount which, at a minimum, shall be equal to the
cumulative cost-of-living increment on the Base Salary as reported in the
"Consumer Price Index, All Items," published by the U.S. Department of Labor
(using February 1, 1998 as the base date for computation).
3.2 Bonuses. Employee shall be eligible to receive bonuses for each year (or
portion thereof) during the term of this Agreement and any extensions thereof,
in accordance with the executive bonus plan adopted by the Corporation.
3.3 Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate
in such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, annual physical examinations, dental and medical
plans, and disability insurance. For purposes of establishing the length of
service under any benefit plans or programs of Corporation, Employee's
employment with the Corporation will be deemed to have commenced on June 20,
1996.
3.3.2 Vacation. Employee shall be entitled to two (2) weeks of
vacation during each year during the term of this Agreement and any extensions
thereof, prorated for partial years.
<PAGE>
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance in the amount of $675.00 per month. In addition, the Employee shall
have the option to purchase the vehicle leased by the Employee at the
expiration of the initial lease term.
3.3.5 Reimbursement for Expenses. During the term of this
Agreement, Corporation shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with her duties under this Agreement.
3.3.6. Maintenance of Licenses. During the term of this
Agreement, Corporation shall pay/reimburse Employee for any and all fees,
dues, continuing education programs, or other amounts to satisfy other
obligations in connection with maintaining any professional license that
Employee has as of the effective date hereof, or that employee obtains
incident to Employment and with consent of the Corporation.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, Employee shall be paid as severance compensation her
Base Salary (at the rate payable at the time of such termination), for a
period of one (1) year, however, if Employee is employed by a new employer
during such period, the severance compensation payable to Employee during such
period will be reduced by the amount of compensation that Employee actually
receives from the new employer. However, Employee is under no obligation to
mitigate the amount owed Employee pursuant to this Section by seeking other
employment or otherwise. Employee shall also be entitled to an accelerated
vesting of any awards granted to Employee under the Corporation's Stock Option
Plan to the extent provided in the stock option agreement entered into at the
time of grant. Employee shall continue to accrue retirement benefits and
shall continue to enjoy any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans, including any perquisites provided under this Agreement, for the
same period of time, and in direct proportion to the amount of severance
received under the terms of this Section; provided, however, that the benefits
under any such plans of the Corporation in which Employee is a participant,
including any such perquisites, shall cease upon re-employment by a new
employer.
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination
Other Than for Cause, Employee shall be paid as severance compensation her
Base Salary (at the rate payable at the time of such termination), for a
period of twelve (12) months, however, that if Employee is employed by a new
employer during such period, the severance compensation payable to Employee
during such period will be reduced by the amount of compensation that Employee
actually receives from the new employer, Employee is under no obligation to
mitigate the amount owed to the officer pursuant to this Section by seeking
employment or otherwise. Employee shall be entitled to an accelerated vesting
of any awards granted to Employee under Corporation's Stock Option Plan to the
extent provided in the stock option agreement entered into at the time of
grant.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.6, Employee or her estate shall
not be paid any severance compensation.
<PAGE>
Section 7. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 8. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
Section 9. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and
similar taxes and payments required by applicable law.
Section 10. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Kentucky Business Corporation Act or any successor provision thereof and
any other applicable state law, and shall pay Employee's expenses in defending
any civil or criminal action, suit, or proceeding in advance of the final
disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 11. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street, Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
12414 Covered Bridge Road
Sellersburg, Indiana 47172
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 12. Law Governing. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
Section 13. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 14. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 15. Agreement Binding. This Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 16. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
<PAGE>
Section 17. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday,
Sunday, or a legal holiday, in which event the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday, in which event
the period shall run until the end of the next day thereafter which is not a
Saturday, Sunday, or legal holiday.
Section 18. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
Section 19. Arbitration. If at any time during the term of this Agreement
any dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 20. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 21. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 22. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 23. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 24. Separate Counsel. The parties acknowledge that the Corporation
has been represented in this transaction by outside counsel, and that the
Employee has not been represented in this transaction by the Corporation's
attorneys, and the Employee has been advised that it is important for the
Employee to seek separate legal advise and representation in this matter.
Date: February 1, 1998
In-House Rehab Corporation
a Colorado Corporation
By:/s/ David V. Hall /s/ Rebecca Krueger
David V. Hall, President Rebecca Krueger, Personally
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between In-House Rehab, Inc., a wholly owned subsidiary of
In-House Rehab Corporation, a Colorado corporation ("Corporation"), and
Michael Kitchen ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on February 1, 1998 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Vice President and Chief
Legal Counsel, and Employee is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation, and its wholly owned subsidiary,
In-House Rehab, Inc., as Vice President and Chief Legal Counsel and
Corporation agrees to employ and retain Employee in such capacity. Employee
shall devote a substantial portion of his business time, energy, and skill to
the affairs of the Corporation as Employee shall report to the Corporation's
President and Chief Executive Officer and at all times during the term of this
Agreement shall have powers and duties at least commensurate with his position
as Vice President and Chief Legal Counsel.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation
of Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform his duties in compliance with this
Agreement after written notice to the Employee by the President specifying
such failure.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constrictive termination
as described in subsection 2.1.2., (ii) "Termination Upon a Change in
Control," and (iii) termination by reason of Employee's death or disability as
described in Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a
termination by Employee of Employee's employment with Corporation within 120
days following a "Change in Control."
2.1.5 "Change in Control" shall mean (i) the time that Corporation
first determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of twenty percent
(20%) or more of Corporation's outstanding securities.
<PAGE>
2.2 Initial Term. The term of employment of Employee by Corporation shall
be for a period of one (1) year beginning with Effective Date, unless
terminated earlier pursuant to this Section. This Agreement, and the one (1)
year term hereof shall be deemed to have been renewed the first day of each
month after the effective date. At any time, Corporation and Employee may by
mutual written agreement extend or modify the term of Employee's employment
under the terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement after written
notification to Employee pursuant to Section 2.9 hereof. Upon Termination For
Cause, Employee shall promptly be paid all accrued salary, bonus compensation
to the extent earned, vested deferred compensation (other than pension play or
profit sharing plan benefits which will be paid in accordance with the
applicable plan), any benefits under any plans of the Corporation in which
Employee is a participant to the full extent of Employee's rights under such
plans, accrued vacation pay and any appropriate business expenses incurred by
Employee in connection with his duties hereunder, all to the date of
termination, but Employee shall not be paid any other compensation or
reimbursement of any kind, including without limitation, severance
compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any
time upon written notice to Employee of such termination in accordance with
Section 2.9 hereof. Upon any Termination Other Than For Cause, Employee shall
promptly be paid all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans (including
accelerated vesting, if any, of awards granted to Employee under the
Corporation's stock option plan), accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.2, but no other compensation or reimbursement of any
kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the President or officer
acting in his place, has failed to perform his duties under this Agreement on
account of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than twelve (12) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder
by written notification to Employee and payment to Employee of all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, with the exception of medical and
dental benefits which shall continue through the expiration of this Agreement,
but Employee shall not be paid any other compensation or reimbursement of any
kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
<PAGE>
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination
Upon a Change in Control, Employee shall immediately be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
any awards granted to Employee under Corporation's Stock Option Plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation, through its subsidiary, In-House Rehab, Inc., agrees to pay to
Employee a "Base Salary" at the rate of $103,500 per annum payable in
twenty-six equal, bi-weekly installments of $3,980.77. Employee's Base Salary
shall be reviewed annually by the Compensation Committee of the Board of
Directors ("Compensation Committee"), and the Base Salary for each year (or
portion thereof) beginning February 1, 1999 shall be determined by the
Compensation Committee which shall authorize an increase in Employee's Base
Salary for such year in an amount which, at a minimum, shall be equal to the
cumulative cost-of-living increment on the Base Salary as reported in the
"Consumer Price Index, All Items," published by the U.S. Department of Labor
(using February 1, 1998 as the base date for computation).
3.2 Bonuses. Employee shall be eligible to receive bonuses for each year (or
portion thereof) during the term of this Agreement and any extensions thereof,
in accordance with the executive bonus plan adopted by the Corporation.
3.3 Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate
in such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, annual physical examinations, dental and medical
plans, and disability insurance. For purposes of establishing the length of
service under any benefit plans or programs of Corporation, Employee's
employment with the Corporation will be deemed to have commenced on October 1,
1996.
3.3.2 Vacation. Employee shall be entitled to two (2) weeks of
vacation during each year during the term of this Agreement and any extensions
thereof, prorated for partial years.
<PAGE>
3.3.4 Automobile Allowance. For the term of this agreement and any
extensions thereof the corporation shall provide officer with an automobile
allowance in the amount of $650.00 per month.
3.3.5 Reimbursement for Expenses. During the term of this
Agreement, Corporation shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with his duties under this Agreement.
3.3.6. Maintenance of Licenses. During the term of this
Agreement, Corporation shall pay/reimburse Employee for any and all fees,
dues, continuing education programs, or other amounts to satisfy other
obligations in connection with maintaining in good standing with the Kentucky,
Indiana and American Bar associations.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for a
period of one (1) year, however, if Employee is employed by a new employer
during such period, the severance compensation payable to Employee during such
period will be reduced by the amount of compensation that Employee actually
receives from the new employer. However, Employee is under no obligation to
mitigate the amount owed Employee pursuant to this Section by seeking other
employment or otherwise. Employee shall also be entitled to an accelerated
vesting of any awards granted to Employee under the Corporation's Stock Option
Plan to the extent provided in the stock option agreement entered into at the
time of grant. Employee shall continue to accrue retirement benefits and
shall continue to enjoy any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans, including any perquisites provided under this Agreement, for the
same period, and in direct proportion to the Severance received hereunder;
provided, however, that the benefits under any such plans of the Corporation
in which Employee is a participant, including any such perquisites, shall
cease upon re-employment by a new employer.
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination
Other Than for Cause, Employee shall be paid as severance compensation his
Base Salary (at the rate payable at the time of such termination), for a
period of twelve (12) months, however, that if Employee is employed by a new
employer during such period, the severance compensation payable to Employee
during such period will be reduced by the amount of compensation that Employee
actually receives from the new employer, officer is under no obligation to
mitigate the amount owed to the officer pursuant to this Section by seeking
employment or other Employee shall be entitled to an accelerated vesting of
any awards granted to Employee under Corporation's Stock Option Plan to the
extent provided in the stock option agreement entered into at the time of
grant.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.6, Employee or his estate shall
not be paid any severance compensation.
Section 5. Outside Activities of Employee. Corporation acknowledges that
Employee has commitments and business activities not related to the
Corporation. There shall be no restriction on Employee's ability to fulfill
such commitments or engage in such business activities. However, for
activities other than those required for the maintenance of professional
licensees, Employee shall conduct such activities on the Employees own time.
<PAGE>
Section 6. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 7. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
Section 8. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and
similar taxes and payments required by applicable law.
Section 9. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Kentucky Business Corporation Act or any successor provision thereof and
any other applicable state law, and shall pay Employee's expenses in defending
any civil or criminal action, suit, or proceeding in advance of the final
disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 10. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street, Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
8503 Nottingham Parkway
Louisville, Kentucky 40222
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 11. Law Governing. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
Section 12. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 13. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 14. Agreement Binding. This Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 15. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
<PAGE>
Section 16. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday,
Sunday, or a legal holiday, in which event the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday, in which event
the period shall run until the end of the next day thereafter which is not a
Saturday, Sunday, or legal holiday.
Section 17. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
Section 18. Arbitration. If at any time during the term of this Agreement
any dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 19. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 20. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 21. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 22. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 23. Separate Counsel. The parties acknowledge that the Corporation
has been represented in this transaction by outside counsel, and that the
Employee has not been represented in this transaction by the Corporation's
attorneys, and the Employee has been advised that it is important for the
Employee to seek separate legal advise and representation in this matter.
Date: February 1, 1998
In-House Rehab Corporation
a Colorado Corporation
By:/s/ David V. Hall /s/ Michael J. Kitchen
David V. Hall, President Michael J. Kitchen, Personally
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this
date by and between In-House Rehab Corporation, a Colorado corporation
("Corporation"), and Nicole Perry ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement begin
on February 1, 1998 ("Effective Date").
WHEREAS, Corporation desires to employ Employee as Vice President Corporate
Finance, and Employee is willing to accept such employment by Corporation, on
the terms and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation, as Vice President Corporate Finance and
Corporation agrees to employ and retain Employee in such capacity. Employee
shall devote a substantial portion of her business time, energy, and skill to
the affairs of the Corporation as Employee shall report to the Corporation's
Chief Financial Officer and at all times during the term of this Agreement
shall have powers and duties at least commensurate with her position as Vice
President Corporate Finance.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
2.1.1 "Termination For Cause" shall mean termination by Corporation
of Employee's employment by Corporation by reason of Employee's willful
dishonesty towards, fraud upon, or deliberate injury or attempted injury to,
Corporation or by reason of Employee's willful material breach of this
Agreement which has resulted in material injury to Corporation, or continuance
of failure by the Employee to perform duties in compliance with this Agreement
after written notice to the Employee specifying such failure.
2.1.2 "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a
Termination for Cause) and shall include constructive termination of
Employee's employment by reason of material breach of this Agreement by
Corporation, such constructive termination to be effective upon notice from
Employee to Corporation of such constructive termination.
2.1.3 "Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constrictive termination
as described in subsection 2.1.2., (ii) "Termination Upon a Change in
Control," and (iii) termination by reason of Employee's death or disability as
described in Sections 2.5 and 2.6.
2.1.4 "Termination Upon a Change in Control" shall mean a
termination by Employee of Employee's employment with Corporation within 120
days following a "Change in Control."
2.1.5 "Change in Control" shall mean (i) the time that Corporation
first determines that any person and all other persons who constitute a group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of twenty percent
(20%) or more of Corporation's outstanding securities.
<PAGE>
2.2 Initial Term. The term of employment of Employee by Corporation shall be
for a period of one (1) year beginning with Effective Date, unless terminated
earlier pursuant to this Agreement. At any time, Corporation and Employee may
by mutual written agreement extend or modify the term of Employee's employment
under the terms of this Agreement.
2.3 Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement after written
notification to Employee pursuant to Section 2.9 hereof. Upon Termination For
Cause, Employee shall promptly be paid all accrued salary, bonus compensation
to the extent earned, vested deferred compensation (other than pension play or
profit sharing plan benefits which will be paid in accordance with the
applicable plan), any benefits under any plans of the Corporation in which
Employee is a participant to the full extent of Employee's rights under such
plans, accrued vacation pay and any appropriate business expenses incurred by
Employee in connection with his duties hereunder, all to the date of
termination, but Employee shall not be paid any other compensation or
reimbursement of any kind, including without limitation, severance
compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any
time upon written notice to Employee of such termination in accordance with
Section 2.9 hereof. Upon any Termination Other Than For Cause, Employee shall
promptly be paid all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans (including
accelerated vesting, if any, of awards granted to Employee under the
Corporation's stock option plan), accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.2, but no other compensation or reimbursement of any
kind.
2.5 Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Employee s supervisor,
has failed to perform his duties under this Agreement on account of illness or
physical or mental incapacity, and such illness or incapacity continues for a
period of more than twelve (12) consecutive months, Corporation shall have the
right to terminate Employee's employment hereunder by written notification to
Employee and payment to Employee of all accrued salary, bonus compensation to
the extent earned, vested deferred compensation (other than pension plan or
profit sharing plan benefits which will be paid in accordance with the
applicable plan), any benefits under any plans of the Corporation in which
Employee is a participant to the full extent of Employee's rights under such
plans, accrued vacation pay and any appropriate business expenses incurred by
Employee in connection with his duties hereunder, all to the date of
termination, with the exception of medical and dental benefits which shall
continue through the expiration of this Agreement, but Employee shall not be
paid any other compensation or reimbursement of any kind, including without
limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination. The Employee's estate
shall not be paid any other compensation, including without limitation,
severance compensation.
<PAGE>
2.7 Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon
a Change in Control, Employee shall immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans (including accelerated vesting, if any, of
any awards granted to Employee under Corporation's Stock Option Plan), accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.1, but no other compensation or
reimbursement of any kind.
2.9 Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination. Employee may effect a
termination of this Agreement pursuant to the provisions of this Section upon
giving thirty (30) days' written notice to Corporation of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation, through its subsidiary, In-House Rehab, Inc., agrees to pay to
Employee a "Base Salary" at the rate of $80,000.00 per annum payable in
twenty-six equal, bi-weekly installments of $3,076.92. Employee's Base Salary
shall be reviewed annually by the Compensation Committee of the Board of
Directors ("Compensation Committee"), and the Base Salary for each year (or
portion thereof) beginning February 1, 1999 shall be determined by the
Compensation Committee.
3.2 Bonuses. Employee shall be eligible to receive bonuses for each year (or
portion thereof) during the term of this Agreement and any extensions thereof,
in accordance with the executive bonus plan adopted by the Corporation. The
target bonus for fiscal year 1998 shall be seventeen and one-half percent
(17.5%) of base compensation.
3.3 Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
3.3.1 Employee Benefits. Employee shall be eligible to participate
in such of Corporation's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Corporation, including, without limitation, Corporation's Stock Option
Plan, profit sharing plans, dental and medical plans, and disability
insurance. For purposes of establishing the length of service under any
benefit plans or programs of Corporation, Employee's employment with the
Corporation will be deemed to have commenced on June 9, 1997.
3.3.2 Vacation. Employee shall be entitled to vacation in
accordance with the Corporation s policy, but shall be entitled to a minimum
of three (3) weeks vacation anytime after being employed by the Corporation
for three (3) years.
<PAGE>
3.3.4 Automobile/Parking Allowance. For the term of this agreement
and any extensions thereof the corporation shall provide officer with an
automobile allowance in the amount of $600.00 per month, and shall be issued a
parking space near the Corporation s premises upon availability, or, in the
alternative, given a parking allowance in the amount of $50.00 per month.
3.3.5 Reimbursement for Expenses. Corporation shall reimburse
Employee for reasonable and properly documented out-of-pocket business and/or
entertainment expenses incurred by Employee in connection with her duties
under this Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination
Upon a Change in Control, Employee shall be paid as severance compensation her
Base Salary (at the rate payable at the time of such termination), for a
period of six (6) months, however, if Employee is employed by a new employer
during such period, the severance compensation payable to Employee during such
period will be reduced by the amount of compensation that Employee actually
receives from the new employer. Employee shall also be entitled to an
accelerated vesting of any awards granted to Employee under the Corporation's
Stock Option Plan to the extent provided in the stock option agreement entered
into at the time of grant. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of
Employee's rights under such plans, including any perquisites provided under
this Agreement, for the same period, and in direct proportion to the Severance
received hereunder; provided, however, that the benefits under any such plans
of the Corporation in which Employee is a participant, including any such
perquisites, shall cease upon re-employment by a new employer.
4.2 Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination
Other Than for Cause, Employee shall be paid as severance compensation her
Base Salary (at the rate payable at the time of such termination), for a
period of six (6) months, however, that if Employee is employed by a new
employer during such period, the severance compensation payable to Employee
during such period will be reduced by the amount of compensation that Employee
actually receives from the new employer. Employee is under no obligation to
mitigate the amount owed to the Employee pursuant to this Section by seeking
employment. Employee shall be entitled to an accelerated vesting of any
awards granted to Employee under Corporation's Stock Option Plan to the extent
provided in the stock option agreement entered into at the time of grant.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, or termination by reason of
Employee's disability pursuant to Section 2.6, Employee or her estate shall
not be paid any severance compensation.
Section 5. Payment Obligations. Corporation's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation, to the
extent permitted by applicable law and the Corporations' Articles of
Incorporation and Bylaws, hereby indemnifies Employee for Employee's
reasonable attorneys' fees and disbursements incurred in such litigation.
Section 6. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or
as such information is within the public domain or comes within the public
domain without any breach of this Agreement.
<PAGE>
Section 7. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and
similar taxes and payments required by applicable law.
Section 8. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under Kentucky Business Corporation Act or any successor provision thereof and
any other applicable state law, and shall pay Employee's expenses in defending
any civil or criminal action, suit, or proceeding in advance of the final
disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 9. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposit in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
325 West Main Street, Suite 1400 B
Louisville, Kentucky 40202
addressed to the Employee at:
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
Section 10. Law Governing. this Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
Section 11. Titles and Captions. All section titles or captions contained in
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 12. Entire Agreement. this Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 13. Agreement Binding. this Agreement shall be binding upon the
heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 14. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in
any appeal therefrom, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the arbitrator, trial court,
and/or appellate court.
Section 15. Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday,
Sunday, or a legal holiday, in which event the period shall begin to run on
the next day which is not a Saturday, Sunday, or legal holiday, in which event
the period shall run until the end of the next day thereafter which is not a
Saturday, Sunday, or legal holiday.
Section 16. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
<PAGE>
Section 17. Arbitration. If at any time during the term of this Agreement
any dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered
by the arbiter may be entered in any court having jurisdiction thereof.
Section 18. Presumption. this Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 19. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section 20. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 21. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
Section 22. Separate Counsel. The parties acknowledge that the Corporation
has been represented in this transaction by outside counsel, and that the
Employee has not been represented in this transaction by the Corporation's
attorneys, and the Employee has been advised that it is important for the
Employee to seek separate legal advise and representation in this matter.
Date: February 1, 1998
In-House Rehab Corporation
a Colorado Corporation
By:/s/ Robert J. Babine /s/ Nicole Perry
Robert J. Babine, CFO Nicole Perry, Personally
SUBSIDIARIES OF THE REGISTRANT
Other Names
State of Incorporation used in
Name or Organization Business
- ------------------------------- ---------------------- -----------
In-House Rehab, Inc. Kentucky None
Daily Rehabilitation Florida None
Institute of Ponte Vedra, Inc.
In-House Medical Resources, Inc. Kentucky None
RT Group, Inc. Indiana None
In-House Rehab Partners, LLC Kentucky None
Rehab Tools, Inc. Delaware None
Doctors Rehab & Therapy, Inc. Kentucky None
Gateway Rehabilitation, Inc. Illinois None
Perennial Health Management, Inc. Kentucky None
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
In-House Rehab Corporation on Form S-8 of our report dated August 28, 1998 on
our audits of the consolidated financial statements of In-House Rehab
Corporation as of and for the years May 31, 1998 and 1997, included in the
Annual Report on Form 10-KSB for the fiscal year ended May 31, 1998.
/s/ Strothman & Company PSC
Strothman & Company PSC
Louisville, Kentucky
August 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages F-2 and F-3 of the
Company's Form 10-KSB for the fiscal year ended May 31, 1998, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 358,230
<PAGE>
<SECURITIES> 0
<RECEIVABLES> 7,958,906
<ALLOWANCES> 382,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,225,441
<PP&E> 380,911
<DEPRECIATION> 107,455
<TOTAL-ASSETS> 9,761,330
<CURRENT-LIABILITIES> 5,609,555
<BONDS> 0
0
0
<COMMON> 2,136,584
<OTHER-SE> 2,015,191
<TOTAL-LIABILITY-AND-EQUITY> 4,151,775
<SALES> 18,686,982
<TOTAL-REVENUES> 18,686,982
<CGS> 10,714,597
<TOTAL-COSTS> 10,714,597
<OTHER-EXPENSES> 6,566,202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370,032
<INCOME-PRETAX> 1,036,151
<INCOME-TAX> 420,871
<INCOME-CONTINUING> 615,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 615,280
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
