<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
IN HOME HEALTH, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
IN HOME HEALTH, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Items 22(a)(2) of Schedule A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
7-18-95
REVISED
PRELIMINARY
PROXY MATERIALS
IN HOME HEALTH, INC.
CARLSON CENTER, SUITE 500
601 LAKESHORE PARKWAY
MINNETONKA, MINNESOTA 55305-5214
[DATE]
Dear Stockholder:
At a special meeting called for [DATE], stockholders of In Home Health, Inc.
(the "Company") will be asked to consider a proposed investment of approximately
$41.9 million in the Company by Manor Healthcare Corp. ("Manor Healthcare").
Approximately $21.9 million of this investment will provide the funding for a
tender offer by the Company to repurchase approximately 40% of the Company's
outstanding Common Stock. Company stockholders will receive separate written
materials describing the tender offer.
The proposed Manor Healthcare investment is described in the attached Proxy
Statement, which I invite you to review carefully. Stockholders are being asked
to authorize the sale and issuance to Manor Healthcare of approximately
6,440,000 shares of Common Stock, 200,000 shares of Series A Preferred Stock and
a three-year warrant to purchase up to 6,000,000 additional shares of Common
Stock. The Series A Preferred Stock would pay a 12% cumulative dividend, would
be convertible into 10,000,000 shares of Common Stock and would have voting
rights on an as-if-converted basis. On completion of its investment, Manor
Healthcare would directly own shares representing approximately 63% of the then
existing voting power of the Company. Upon full exercise of the three-year
warrant, Manor Healthcare would own approximately 70% of the Company's combined
voting power and would effectively control the Company. The proposed investment
is contingent upon the Company's stockholders tendering, and the Company
repurchasing, a minimum of 5,635,000 shares of Common Stock in the Company
tender offer, at a purchase price of $3.40 per share. The number of shares of
Common Stock sold by the Company to Manor Healthcare will in all cases equal the
number of shares of Common Stock tendered to and repurchased by the Company from
current stockholders. If the Company repurchases the minimum number of shares,
the Manor Healthcare investment would be reduced by $2.7 million to
approximately $39.2 million, with an equivalent reduction in the proceeds to be
used by the Company to fund the tender offer. Stockholders are also being asked
to approve amendments to the Company's Articles of Incorporation and Stock
Option Plans which are related to the Manor Healthcare investment. A complete
discussion of the background and considerations relevant to the proposed Manor
Healthcare investment begins at page 12 of the attached Proxy Statement (See
"Investment Proposals").
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MANOR HEALTHCARE
INVESTMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSALS RELATING
TO THAT INVESTMENT.
It is important that your shares be represented and voted at the meeting.
Whether or not you plan to attend the special meeting, please sign and date the
enclosed proxy card and return it promptly in the enclosed postage-paid
envelope. Please note that a failure to vote in effect constitutes a vote
against the proposals related to the Manor Healthcare investment. Accordingly,
we urge you to take a moment now to sign, date and mail your proxy.
On behalf of the Board of Directors, thank you for your cooperation and
continued support.
Sincerely,
Judy M. Figge
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
IN HOME HEALTH, INC.
------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
[DATE OF MEETING]
MINNEAPOLIS, MINNESOTA
---------------------
To the Stockholders of
IN HOME HEALTH, INC.:
Notice is hereby given that a Special Meeting of Stockholders of In Home
Health, Inc. (the "Company") will be held on [WEEKDAY, DATE] at [TIME], local
time, at [LOCATION], to consider and act upon three proposals (the "Investment
Proposals") related to the Securities Purchase and Sale Agreement dated as of
May 2, 1995 between the Company and Manor Healthcare Corp. ("Manor Healthcare"),
as it may be amended from time to time (the "Purchase Agreement"). A copy of the
Purchase Agreement as presently in effect is attached as Appendix I to the
enclosed Proxy Statement. The Investment Proposals are summarized as follows:
1. To approve the Purchase Agreement and the transactions on the part of
the Company thereunder, including the issuance and sale to Manor
Healthcare of approximately 6,440,000 shares of Common Stock, 200,000
shares of Series A Preferred Stock and a three-year warrant to purchase
up to 6,000,000 additional shares of Common Stock (Proposal One);
2. To approve an amendment to Article III of the Articles of Incorporation
of the Company to provide that the Board of Directors, in designating the
voting rights of any series of preferred stock, may provide that shares
of preferred stock have voting rights equal to the number of shares of
Common Stock into which they are convertible (Proposal Two);
3. To approve amendments to the Company's 1987 and 1995 Stock Option Plans
to: (i) provide that the options of non-employee directors of the Company
will vest upon a change in control of the Company; (ii) increase the
total number of shares of Common Stock available under the 1995 Stock
Option Plan from 650,000 to 1,300,000 in order to permit the granting of
options for an aggregate 650,000 shares to five officers or employees of
the Company as of the closing of the Purchase Agreement; and (iii) impose
a limit of 300,000 shares that can be issued to any participant under
each Plan during any fiscal year (Proposal Three).
THE APPROVAL OF EACH INVESTMENT PROPOSAL IS CONTINGENT UPON THE APPROVAL OF
ALL INVESTMENT PROPOSALS. UNLESS ALL INVESTMENT PROPOSALS ARE APPROVED BY THE
STOCKHOLDERS AT THE SPECIAL MEETING, NONE OF THE PROPOSALS WILL BE EFFECTED BY
THE COMPANY. Holders of record of shares of Common Stock of the Company at the
close of business on [RECORD DATE] are entitled to notice of and to vote at the
Special Meeting and any adjournments thereof.
By Order of the Board of Directors,
Kenneth J. Figge, SECRETARY
Minneapolis, Minnesota
[MAILING DATE]
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE SIGN AND
DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
Proxies are revocable at any time prior to the time they are voted, and
stockholders who are present at the Special Meeting may withdraw their proxies
and vote in person if they so desire.
<PAGE>
IN HOME HEALTH, INC.
CARLSON CENTER, SUITE 500
601 LAKESHORE PARKWAY
MINNETONKA, MINNESOTA 55305-5214
------------------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
[MEETING DATE]
------------------------
INTRODUCTION
This Proxy Statement is furnished by the Board of Directors of In Home
Health, Inc. (the "Company") in connection with the solicitation of proxies to
be voted at a Special Meeting of Stockholders which will be held at [LOCATION]
at [TIME], local time, on [WEEKDAY], [DATE], and at any adjournments thereof
(the "Special Meeting") for the purpose of submitting to a vote of the
stockholders the proposals described in the attached Notice of Special Meeting
(the "Investment Proposals"). This Proxy Statement and the accompanying form of
proxy are being mailed to stockholders on or about [MAILING DATE].
Shares represented by properly executed proxies received prior to or at the
Special Meeting, unless such proxies have been revoked, will be voted in
accordance with the instructions indicated in the proxies. If no instructions
are indicated on a properly executed proxy of the Company, the proxy will be
voted in accordance with the recommendations of the Board of Directors.
Stockholders will not have dissenters' rights with respect to the Investment
Proposals.
A stockholder may revoke a proxy at any time before it is exercised by
filing with the Secretary of the Company a written revocation or a duly executed
proxy bearing a later date or by voting in person at the Special Meeting. Any
written notice revoking a proxy should be sent to the attention of Kenneth J.
Figge, Secretary, In Home Health, Inc., Carlson Center, Suite 500, 601 Lakeshore
Parkway, Minnetonka, Minnesota 55305-5214.
The cost of soliciting proxies will be borne by the Company. The Company
expects to solicit proxies by mail, but directors, officers, and regular
employees of the Company may also solicit in person or by telephone, facsimile
or mail. The Company has retained D.F. King & Company, Inc. to assist in the
solicitation for a fee estimated at $6,500 plus reasonable expenses. The Company
may also reimburse brokers, nominees, fiduciaries or other custodians their
reasonable expenses for sending proxy material to, and obtaining instructions
from, persons for whom they hold Common Stock of the Company.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION.............................................................. 1
TABLE OF CONTENTS......................................................... 2
SUMMARY................................................................... 3
VOTING SECURITIES AND PRINCIPAL HOLDERS................................... 9
INVESTMENT PROPOSALS...................................................... 10
Background of the Investment Proposals.................................. 10
Reasons for the Purchase Agreement Transactions......................... 12
Board of Directors Recommendations...................................... 13
Opinion of Financial Advisor............................................ 14
Description of the Investment by Manor Healthcare....................... 19
Common Stock Investment by Manor Healthcare........................... 19
Company Self-Tender Offer............................................. 19
Purchase of Series A Preferred Stock.................................. 19
Stock Purchase Warrant................................................ 21
Registration Rights Agreement......................................... 22
Description of the Purchase Agreement................................... 22
Purchase and Sale of Securities....................................... 22
Conditions to Closing................................................. 22
Representations and Warranties; Indemnification....................... 23
Covenants............................................................. 23
Conduct of Business Pending Closing................................... 24
Termination........................................................... 24
Company Payments in the Event of Termination.......................... 24
Effects of the Investment on the Company................................ 25
Use of Proceeds....................................................... 25
Pro Forma Financial Effect............................................ 25
Required Consents..................................................... 28
Percentage Ownership by Manor Healthcare After Closing................ 28
Changes to Company Management........................................... 29
Board of Directors.................................................... 29
Management Personnel.................................................. 30
Post-Closing Covenants................................................ 31
Future Arrangements................................................... 31
Source of Funds......................................................... 31
Information Concerning Manor Healthcare................................. 31
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 33
PROPOSAL 1 -- APPROVAL OF PURCHASE AGREEMENT.............................. 38
Reasons for Approval.................................................... 38
Control Share Acquisition Act Approval.................................. 38
Required Vote........................................................... 38
PROPOSAL 2 -- AMENDMENT TO ARTICLES OF INCORPORATION...................... 39
Reasons for the Amendment............................................... 39
Required Vote........................................................... 39
PROPOSAL 3 -- AMENDMENT OF STOCK OPTION PLANS............................. 40
Reasons for the Amendments.............................................. 40
Summary of the Plans.................................................... 41
Grants of Options....................................................... 43
Federal Income Tax Treatment............................................ 44
Required Vote........................................................... 44
STOCKHOLDER PROPOSALS FOR 1996 ANNUAL MEETING............................. 44
OTHER MATTERS............................................................. 44
FINANCIAL STATEMENTS OF THE COMPANY....................................... F-1
APPENDIX I -- Securities Purchase and Sale Agreement dated as of May 2,
1995 between In Home Health, Inc. and Manor Healthcare
Corp........................................................ A-1
APPENDIX II -- Certificate of Designation for Series A Preferred Stock.... A-35
APPENDIX III -- Opinion of Hambrecht & Quist LLC.......................... A-51
APPENDIX IV -- Manor Healthcare Corp. Information Statement............... A-54
</TABLE>
2
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
CONTAINED IN THIS PROXY STATEMENT, THE APPENDICES HERETO AND DOCUMENTS REFERRED
TO HEREIN.
<TABLE>
<S> <C>
PARTIES TO THE PURCHASE AGREEMENT:
In Home Health, Inc. .............. In Home Health, Inc., a Minnesota corporation (the
"Company"), provides health care services to clients
of all ages in their homes. Since its organization in
1984, the Company has grown to 41 offices in 19
geographic markets throughout the United States. The
Company provides a variety of services which include
skilled nursing, infusion therapy and hospice,
rehabilitation and personal care.
The Company's executive offices are located at Carlson
Center, Suite 500, 601 Lakeshore Parkway, Minnetonka,
Minnesota 55305-5214 and its telephone number is (612)
449-7500.
Manor Healthcare Corp. ............ Manor Healthcare Corp., a Delaware corporation ("Manor
Healthcare"), is a subsidiary of Manor Care, Inc., a
publicly-held corporation with consolidated revenues
of $1.2 billion in its fiscal year ended May 31, 1994,
of which approximately 79% was derived from health
care related services. Manor Healthcare owns, operates
or manages 172 nursing centers (including 10 medical
and physical rehabilitation centers and 15 assisted
living centers) which provide high acuity services,
skilled nursing care, intermediate nursing care,
custodial care and assisted living services,
principally for residents over the age of 65. Manor
Healthcare also owns approximately 82.3% of Vitalink
Pharmacy Services, Inc., a public company that
operates 17 institutional pharmacies in five states.
Manor Healthcare also owns and operates an acute care
general hospital and five nursing assistant training
schools.
Manor Healthcare's nursing centers generally provide
five types of services: high acuity services for
persons who require complex medical and physical
rehabilitation services; skilled nursing care for
persons who require 24 hour-a-day professional
services of a registered nurse or a licensed prac-
tical nurse; intermediate care for persons needing
less intensive nursing care; custodial care for
persons needing a minimum level of care; and assisted
living for persons needing some supervision and
assistance with personal care.
Substantially all of Manor Healthcare's nursing
centers are currently certified to receive benefits
provided under Medicare and under programs
administered by the various states to provide medical
assistance to the medically indigent ("Medicaid").
However, Manor Healthcare attempts to locate and
operate its nursing centers in a manner designed to
attract patients who pay directly to the facilities
for services
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
without benefit of any government assistance program.
Patients seeking the services of the nursing centers
come from a variety of sources and are principally
referred by hospitals and physicians.
Manor Healthcare's principal executive offices are
located at 10750 Columbia Pike, Silver Spring,
Maryland 20901 and its telephone number is (301)
681-9400.
SPECIAL MEETING OF THE COMPANY STOCKHOLDERS:
Time, Date and Place............... The Special Meeting will be held at [TIME], local time
on [DATE] at [LOCATION]
Purpose of Special Meeting......... The purpose of the Special Meeting is to consider and
vote upon three related proposals (the "Investment
Proposals"):
(1) The first proposal is to approve the Securities
Purchase and Sale Agreement dated as of May 2, 1995
between the Company and Manor Healthcare (the
"Purchase Agreement"), attached hereto as Appendix I,
and the transactions on the part of the Company
thereunder. The Purchase Agreement provides for an
investment of approximately $41.9 million by Manor
Healthcare in various securities of the Company
including Series A Preferred Stock, a Warrant and
Common Stock of the Company, as set forth in the
Purchase Agreement and summarized in this Proxy State-
ment (the "Investment"). Of the total Investment by
Manor Healthcare, approximately $21.9 million will be
used by the Company to effect a self-tender offer to
repurchase approximately 40% of its out-standing
Common Stock. The remaining $20 million, net of
approximately $2 million in transaction expenses
described in this document, will be available for use
by the Company following the self-tender offer. See
"Investment Proposals" and "Proposal One -- Approval
of Purchase Agreement."
(2) The second proposal is an amendment to Article
III of the Articles of Incorporation of the Company to
make it clear that any series of preferred stock may
have voting rights equal to the number of shares of
Common Stock into which the shares of the preferred
stock are convertible. See "Proposal Two -- Amendment
to Articles of Incorporation."
(3) The third proposal is to approve amendments to
the Company's 1987 and 1995 Stock Option Plans to: (i)
provide that the options of non-employee directors of
the Company will vest upon a change in control of the
Company; (ii) increase the total number of shares of
Common Stock available under the 1995 Stock Option
Plan from 650,000 to 1,300,000 in order to permit the
granting of options for an aggregate 650,000 shares to
five officers or employees of the Company as of the
closing of the transactions contemplated by the
Purchase Agreement; and (iii) impose a limit of
300,000 shares that can be issued to any participant
under
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
each Plan during any fiscal year. See "Investment
Proposals -- Changes to Company Management --
Management Personnel" and "Proposal Three -- Amendment
of Stock Option Plans."
Approval of each Investment Proposal is contingent on
the approval of all Investment Proposals. Unless all
Investment Proposals are approved at the Special
Meeting, and certain other conditions to closing are
met, including the successful completion of a
self-tender offer by the Company, none of the
Proposals will be effected by the Company. See
"Investment Proposals -- Description of the Purchase
Agreement -- Conditions to Closing."
Record Date........................ Only holders of record of shares of Common Stock
outstanding as of the close of business on [RECORD
DATE], 1995 (the "Record Date") are entitled to notice
of and to vote at the Special Meeting.
Vote Required for Approval......... Approval of Proposal One will require the affirmative
vote of (i) a majority of the shares of Common Stock
outstanding on the Record Date, and (ii) a majority of
such outstanding shares excluding those held by
officers and directors of the Company. See "Proposal
One -- Approval of Purchase Agreement -- Required
Vote." Approval of Proposal Two will require the
affirmative vote of a majority of the shares of Common
Stock outstanding on the Record Date. See "Proposal
Two -- Amendment to Articles of Incorporation --
Required Vote." Approval of Proposal Three will
require the affirmative vote of a majority of all the
votes present and entitled to vote at the Special
Meeting. See "Proposal Three -- Amendment of Stock
Option Plans -- Required Vote."
Opinion of Financial Advisor
Regarding the Investment.......... The Company's financial advisor, Hambrecht & Quist
LLC, has rendered an opinion to the Board of Directors
of the Company that the transactions contemplated by
the Purchase Agreement are fair, from a financial
point of view, to the Company and its stockholders.
See "Investment Proposals -- Opinion of Financial
Advisor" and the opinion of Hambrecht & Quist LLC
attached hereto as Appendix III.
Board Recommendation............... THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY
RECOMMENDS APPROVAL OF THE INVESTMENT PROPOSALS.
TERMS OF THE INVESTMENT:
Company Self-Tender Offer; Common
Stock Investment by Manor
Healthcare........................ As part of the Investment, Manor Healthcare will
purchase for $3.40 per share approximately 6,440,000
shares of Common Stock. This purchase of Common Stock
will be made concurrently with the closing of a
self-tender offer by the Company for the same number
of shares at $3.40 per share
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
(the "Self-Tender Offer"), which will be funded out of
the proceeds of the purchase by Manor Healthcare. The
Investment is contingent upon a minimum of 5,635,000
shares of Common Stock being tendered and repurchased
by the Company in the Self-Tender Offer. If the
Company repurchases the minimum number of shares, the
Manor Healthcare Investment would be reduced by $2.7
million, to approximately $39.2 million, with an
equivalent reduction in the proceeds to be used by the
Company to fund the Self-Tender Offer. The terms of
the Self-Tender Offer are described in a Tender Offer
Statement dated , 1995, being mailed to
the stockholders of the Company on or about [MAILING
DATE].
Investment in Series A Preferred
Stock............................. As part of the Investment, Manor Healthcare will
purchase 200,000 shares of Series A Preferred Stock
for $20 million in cash. The Series A Preferred Stock
pays cumulative dividends at a rate of 12%, which are
payable, at the Company's option, in cash or in shares
of Common Stock. The Preferred Stock is convertible
into 10,000,000 shares of Common Stock, subject to
anti-dilution adjustments, resulting in an effective
initial conversion price of $2.00 per share of Common
Stock. The Preferred Stock may be converted, in whole
or in part at any time, and conversion will not result
in the Company receiving any additional consideration.
See "Description of the Investment by Manor Healthcare
-- Purchase of Series A Preferred Stock --
Conversion." The Series A Preferred Stock votes
together with the Common Stock as if the Series A
Preferred Stock had been fully converted. Thus, each
share of Series A Preferred Stock initially has 50
votes.
Stock Purchase Warrant............. As part of the Investment, Manor Healthcare will
receive a three-year Warrant to purchase up to
6,000,000 shares of Common Stock of the Company at an
exercise price of $3.75 per share (the "Warrant"). The
Warrant is exercisable effective immediately, in whole
or in part at any time, for a period of three years
from the date of the Warrant. The Warrant will not
have voting rights, although the shares of Common
Stock purchasable upon exercise of the Warrant will
have voting rights upon issuance.
EFFECTS ON THE COMPANY:
Ownership by Manor Healthcare in
the Company....................... Upon consummation of the transactions contemplated by
the Purchase Agreement, Manor Healthcare will directly
own approximately 6,440,000 shares of the Common
Stock, 200,000 shares of the Series A Preferred Stock
and a Warrant to acquire up to an additional 6,000,000
shares of the Common Stock of the Company. Manor
Healthcare would then directly own shares having
approximately 63% of the Company's total voting power,
reflecting the voting power of the Series A Preferred
Stock on an as-if-converted basis
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
(initially equivalent to 10,000,000 shares of Common
Stock). Assuming complete exercise of the Warrant,
Manor Healthcare would hold approximately 70% of the
Company's outstanding voting power, of which
approximately 20% would be represented by Common Stock
purchased directly by Manor Healthcare under the
Purchase Agreement, 31% would be represented by the
Series A Preferred Stock, and 19% would be represented
by the additional 6,000,000 shares of Common Stock
issued upon exercise of the Warrant.
Post-Closing Operations............ Manor Healthcare has agreed that, for a period of at
least two years following the closing of the Purchase
Agreement: the Company's corporate headquarters will
be maintained in the Minneapolis, Minnesota
metropolitan area (unless otherwise unanimously
approved by the Company's Board of Directors); the
Common Stock of the Company will continue to be
publicly traded; and the Company will continue to
operate in the lines of business in which it currently
engages.
Effects on Management of the
Company........................... Upon consummation of the Investment, the conditional
resignations of two directors of the Company (S.
Marcus Finkle and Sheldon Lieberbaum) will become
effective and the Company's Board of Directors will be
expanded to seven members, four of which have been
designated by Manor Healthcare, as described under
"Investment Proposals -- Changes to Company
Management." At the same time Mark Gildea, an officer
of Manor Healthcare, will become Chief Executive
Officer and a director of the Company. Judy Figge will
continue as President and will be named as Chairperson
of the Board of Directors of the Company. Ms. Figge
and Kenneth Figge, the Company's Executive Vice
President and Chief Financial Officer, will each be
employed by the Company pursuant to two-year
employment agreements. Ms. Figge and Mr. Figge will
continue as members of the Company's Board of
Directors. James Lynn, who is also a member of the
Board of Directors, will be offered a two-year
employment agreement.
Cathy Reeves, the Company's Vice President of
Operations, and Margaret Maxon, the Company's Vice
President of Customer Relations, will each be offered
one-year employment agreements by the Company. See
"Investment Proposals -- Changes to Company Management
-- Management Personnel."
CLOSING:
Conditions to Closing.............. Consummation of the Investment and the Self-Tender
Offer by the Company is conditioned upon the
fulfillment of certain conditions set forth in the
Purchase Agreement. These include completion of the
Self-Tender Offer by the Company pursuant to which at
least 5,635,000 shares of Common Stock shall have been
tendered and accepted for purchase,
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
approval of the Investment Proposals at the Special
Meeting, the completion of requirements under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976,
the continuing accuracy of the representations of the
parties made in the Purchase Agreement, the
performance of the obligations of each party under the
Purchase Agreement, and the absence of threatened or
pending litigation challenging the transaction. The
Purchase Agreement may be terminated prior to closing
in a number of circumstances: by mutual consent of the
Company and Manor Healthcare; if the transaction is
not completed by September 15, 1995; if any required
regulatory approval is denied or if any governmental
entity enjoins or prohibits the consummation; if the
stockholders of the Company fail to approve the
Purchase Agreement; or if a party materially breaches
the Purchase Agreement and does not cure such breach
within 10 business days after receipt of proper notice
of such breach. See "Investment Proposals --
Description of the Purchase Agreement."
Closing Date....................... The Closing is expected to be held on the second
business day following the satisfaction or waiver of
all of the conditions to Closing, unless otherwise
agreed.
</TABLE>
8
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS
Only holders of record of the Company's Common Stock, par value $.01 (the
"Common Stock"), at the close of business on [RECORD DATE] (the "Record Date")
are entitled to vote at the Special Meeting. As of the close of business on
[RECORD DATE], there were outstanding 16,102,105 shares of Common Stock. Such
shares are each entitled to one vote.
The following table presents information provided to the Company as to the
beneficial ownership of the Common Stock as of [RECORD DATE] by persons known to
the Company to hold 5% or more of such stock and by all directors and executive
officers as of the end of the last fiscal year and by all current directors and
executive officers as a group. All shares represent sole voting and investment
power, unless indicated to the contrary. Some officers and directors of the
Company may tender all or a portion of their shares in connection with the
Self-Tender Offer.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP SHARES
- ------------------------------ ------------------ -----------
<S> <C> <C>
Judy M. Figge (1)(2)(3) 652,172(4)(5) 4.0%
Kenneth J. Figge (2)(3) 406,150(4)(5) 2.5%
S. Marcus Finkle (2) 134,100(5) *
Sheldon Lieberbaum (2) 34,100(5) *
James J. Lynn (2) 70,860(5) *
Cathy R. Reeves (3) 72,869(5) *
Harry W. Alcorn, Jr. (3) 32,500(5) *
Wesley N. Perry (3) 41,874 *
All Current Directors and
Executive Officers as a Group
(7 persons) 1,390,216(5) 8.5%
<FN>
- ------------------------
* Less than one percent
(1) Ms. Figge's business address is Carlson Center, Suite 500, 601 Lakeshore
Parkway, Minnetonka, Minnesota 55305-5214.
(2) Director of the Company.
(3) Executive officer named in Summary Compensation Table of the proxy
statement for the Company's 1995 Annual Meeting. Mr. Perry resigned as an
officer in November of 1994.
(4) Kenneth J. Figge is the husband of Judy M. Figge. Their respective holdings
of Company Common Stock listed above do not reflect the other's holdings,
as each of Ms. Figge and Mr. Figge disclaim beneficial ownership of the
other's shares of Company Common Stock.
(5) Includes 85,500 shares for Ms. Figge, 52,300 shares for Mr. Figge, 14,100
shares for each of Messrs. Finkle and Lieberbaum, 44,100 shares for Mr.
Lynn, 54,500 shares for Ms. Reeves, 32,500 shares for Mr. Alcorn and
284,150 shares for all current directors and officers as a group which may
be acquired within sixty days upon exercise of outstanding stock options.
Does not include options to purchase 300,000 shares to be granted to Ms.
Figge, 200,000 shares to be granted to Mr. Figge, and 50,000 shares to be
granted to each of Mr. Lynn, Ms. Reeves and Margaret Maxon, effective upon
closing of the Purchase Agreement. Also does not include an additional
20,900 shares for each of Messrs. Finkle and Lieberbaum that will become
exercisable upon the approval of Proposal Three at the Special Meeting.
</TABLE>
9
<PAGE>
INVESTMENT PROPOSALS
CERTAIN ASPECTS OF THE INVESTMENT PROPOSALS ARE SUMMARIZED BELOW. THIS
SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PURCHASE AGREEMENT AND OTHER APPENDICES TO THIS PROXY
STATEMENT, EACH OF WHICH IS HEREBY INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS ARE URGED TO READ THE APPENDICES TO THIS PROXY STATEMENT IN THEIR
ENTIRETY.
THE APPROVAL OF EACH INVESTMENT PROPOSAL IS CONTINGENT ON THE APPROVAL OF
ALL INVESTMENT PROPOSALS. UNLESS ALL INVESTMENT PROPOSALS ARE APPROVED BY THE
STOCKHOLDERS AT THE MEETING, ALL INVESTMENT PROPOSALS WILL BE DEEMED TO HAVE
BEEN REJECTED BY THE STOCKHOLDERS.
BACKGROUND OF THE INVESTMENT PROPOSALS
The background of the proposed Purchase Agreement with Manor Healthcare
involves the Company's participation in the Medicare program, which accounted
for 74%, 73% and 68% of the Company's revenues in its fiscal years ended
September 30, 1994, 1993 and 1992, respectively. While these percentages are
higher than the Company would prefer, the Company has not been able to reduce
the relative proportion of its Medicare business because of the very high
percentage of home health service recipients who are Medicare beneficiaries and
the impracticality of refusing Medicare patients referred to the Company by
valued referral sources.
The Medicare program's method for paying for home health services, unlike
that for inpatient hospital services, is based on cost reimbursement. Under this
system, the Medicare program pays the portion of the provider's costs which it
believes are allowable under Medicare regulations and not in excess of certain
ceilings. Thus for a significant portion of its overall business, namely the
Medicare portion, the Company cannot establish in advance a price for a
particular service or services. Instead, to recognize revenue under the Medicare
program, the Company keeps detailed accounting records as to its costs and each
fiscal year submits a cost report, based on incurred expenses believed to be
reimbursable, to one of the fiscal intermediaries (typically members of the Blue
Cross Association or insurance companies) who administer the Medicare program
for home health services. Pursuant to generally accepted accounting principles,
the Company recognizes revenue for services to Medicare beneficiaries at the
time it provides the services and incurs the costs that it believes are
reimbursable.
The cost reports submitted by home health providers to the Medicare fiscal
intermediaries are subject to audit and retroactive adjustment or disallowance,
and these procedures often occur years after the cost report was filed. If the
fiscal intermediary believes that the provider has been overpaid, the amount of
the alleged overpayment is setoff from undisputed payments owed to the provider
for subsequent years. While the provider has the right to an administrative
appeal, these appeals often take years to be heard.
While the Company (and to its knowledge, many other providers of home health
services) have always had some disputes concerning Medicare reimbursement,
beginning in fiscal 1993 the magnitude of these disputes began to increase. This
in turn has forced the Company to curtail its growth and to establish reserves
which have substantially eroded the Company's profitability.
During fiscal 1993 and 1994 the Company's Board of Directors became
progressively more concerned about the reductions in the Company's profitability
and in its cash and working capital due to Medicare disputes, and ultimately
concluded that the Company should consider additional financing, a strategic
partnership or a sale of the Company. The Board of Directors was also concerned
that to remain competitive in the face of the continuing integration of the
health care industry it might be advantageous for the Company to enter into some
form of partnership or alliance to broaden the scope of services it could offer.
10
<PAGE>
The Board authorized the Company to enter into a financial advisory
agreement with Hambrecht & Quist LLC ("Hambrecht & Quist") on September 19, 1994
to investigate these alternatives and on September 21, 1994 the Company issued a
press release to publicly announce the retention of Hambrecht & Quist. The
Company also separately continued very preliminary discussions which had taken
place over an extended period of time with an integrated health care company.
The announcement of the retention of Hambrecht & Quist led to several
preliminary inquiries concerning the possibility of some form of transaction
with the Company. Ultimately eleven entities entered into confidentiality
agreements in order to obtain nonpublic information concerning the Company or to
conduct varying degrees of "due diligence" inquiries. Discussions with eight of
the eleven entities did not develop to the stage of those entities making
written proposals for a transaction with the Company, and discussions with those
eight entities were terminated. However, in March 1995 two companies (other than
Manor Healthcare) which had entered into confidentiality agreements delivered to
the Company nonbinding "indication of interest" letters. Both of these companies
already had a substantial presence in the home health industry. One of these
firms proposed discussions concerning an acquisition of all the Company's
outstanding Common Stock for $2.65 per share in cash, and the other proposed
discussion of an acquisition of all outstanding Common Stock for a price in the
$2.75 to $3.25 per share range, payable entirely in the form of stock of the
acquiring entity.
In March 1995 the Company also received a verbal indication of interest from
Manor Care, Inc., the parent company of Manor Healthcare. This led to a
presentation on April 5, 1995 to the Company's entire Board of Directors by
representatives of Manor Healthcare, who included Mark Gildea, the President of
its Alternate Site Services Division, and the Vice President-Finance of Manor
Care, Inc. Representatives of Hambrecht & Quist and the Company's legal counsel
also participated in the meeting. At the April 5 meeting, Manor Healthcare made
its initial proposal to the Company, which proposal consisted of a tender offer
for 25-35% of the Company's outstanding Common Stock at $2.85 per share and the
purchase for $20 million of preferred stock or debentures convertible to 11
million shares of Common Stock and a warrant to obtain up to 5 million
additional shares of Common Stock for $4.00 per share. The Board of Directors
and its advisors conferred and advised the Manor Healthcare representatives that
the price proposed for purchasing the outstanding Common Stock was too low.
There was also discussion of whether, under certain "anti-takeover provisions"
of the Minnesota Business Corporation Act, it was preferable for the Company to
make any tender offer and issue the same number of shares to Manor Healthcare.
This was not resolved at the April 5 meeting, but Manor Healthcare's
representatives did indicate that it would be willing to acquire 40% (instead of
25-35%) of the outstanding Common Stock for $3.40 per share (instead of $2.85)
and have the preferred stock or debenture convertible to 10 million (instead of
11 million) shares of Common Stock, if the exercise price of the proposed
warrant was reduced from $4.00 to $3.75 per share.
The Company's Board of Directors concluded from Manor Healthcare's
presentation on April 5 that there was a reasonable basis for continuing
discussions with Manor Healthcare and trying to reach agreement concerning the
terms of a possible transaction. It appeared to the Board of Directors that
there was a good strategic fit between Manor Healthcare and the Company. Manor
Healthcare was not providing home health services and was anxious to enter that
field to complement its existing business. Manor Healthcare's parent corporation
was well established and had a strong balance sheet. Manor Healthcare also was
interested in a strategic partnership rather than a complete acquisition. The
Company's Board of Directors found this attractive, in that it might allow both
liquidity for the Company's stockholders who wished to sell all or a portion of
their shares and a continued investment opportunity in a potentially stronger
Company for those who continued as Company stockholders. The other two parties
which made proposals were already in the home health industry and seemed to be
motivated by a desire to increase market share. Thus, they did not seem willing
to offer the price Manor Healthcare was willing to pay and were interested in a
complete acquisition, which would not allow any continued investment in the
Company as a separate entity. For these reasons the Board of
11
<PAGE>
Directors decided on April 5 to focus on negotiations with Manor Healthcare and
not to pursue the two proposals referred to above from other parties which
involved lower prices. Thus, neither of these two entities were asked to make a
higher offer in light of Manor Healthcare's proposal.
On April 18, 19 and 20, 1995, Ms. Figge, Mr. Figge, the Company's Treasurer
and representatives of Hambrecht & Quist and the Company's legal counsel met in
New York City with representatives of Manor Healthcare (who included Mr. Gildea
and the Vice President-Finance of Manor Care, Inc.) and their legal counsel to
continue negotiations concerning a possible transaction. The principal
unresolved issues that were discussed included whether the Company or Manor
Healthcare would conduct the tender offer, whether the Company would issue
preferred stock or debentures to Manor Healthcare, the extent of voting rights
which any preferred stock would possess, the amount of the "break-up fee" (which
Manor Healthcare proposed be $5 million), the period for which the Company's
representations and warranties would survive after a closing, which Company
officers (in addition to Ms. Figge and Mr. Figge) would enter into employment
agreements with the Company and what the compensation provisions of all of the
employment agreements would be, and the scope and duration of any individual
representations and warranties by Ms. Figge and Mr. Figge. It was tentatively
resolved that the Company would conduct any tender offer and issue a like number
of shares to Manor Healthcare, and that preferred stock rather than debentures
would be issued if the proposed investment was consummated. However, the
remainder of the principal issues were unresolved.
On April 24, 1995 the Company's entire Board of Directors met in
Minneapolis, together with a representative of Hambrecht & Quist and the
Company's legal counsel, to review the status of the negotiations and the
outstanding issues. The Board authorized Hambrecht & Quist to communicate
compromise proposals to Manor Healthcare concerning voting rights of the
proposed preferred stock, the terms of employment contracts, the amount of the
break-up fee and the terms of corporate and individual representations and
warranties. At the April 24 meeting, the Board of Directors also appointed a
Special Committee consisting of S. Marcus Finkle and Sheldon Lieberbaum (the
Company's two non-employee directors) to be ready to evaluate the definitive
offer that Manor Healthcare was expected to make in the near future.
Several days later, the Company was advised that on April 27, 1995 the Board
of Directors of Manor Healthcare's parent corporation had met and approved
making a definitive offer to the Company that was generally consistent with the
Company's proposals on April 24.
Both members of the Special Committee of the Company's Board of Directors
met by conference telephone call on Monday, May 1, 1995 to discuss Manor
Healthcare's now definitive proposal and to consult with a representative of
Hambrecht & Quist. There was considerable discussion and Hambrecht & Quist
orally opined that the proposed transaction was fair to the Company and its
stockholders from a financial point of view. The Special Committee unanimously
resolved to approve the proposed transaction and recommend it to the Company's
Board of Directors.
On May 2, 1995 the Company's entire Board of Directors met (with Messrs.
Finkle and Lieberbaum participating by telephone conference call) and
unanimously approved the proposed transaction and the Purchase Agreement. Later
that day the Purchase Agreement was signed. The conditional employment
agreements of Ms. Figge and Mr. Figge and conditional resignations of Mr. Finkle
and Mr. Lieberbaum (all of which become effective only if and when the Purchase
Agreement is closed) were also executed on May 2, 1995 as required by the
Purchase Agreement.
REASONS FOR THE PURCHASE AGREEMENT TRANSACTIONS
The reasons for the Company's Board of Directors authorizing the Purchase
Agreement and proposed transactions thereunder and recommending them to the
Company's stockholders include the following:
(i) the proposed transactions would provide substantial new cash and
working capital to the Company which, among other things, should allow it to
grow more quickly;
12
<PAGE>
(ii) the proposed transactions would provide a means for stockholders
who wish to sell all or a portion of their Company holdings to do so, in
whole or in part, at a premium to recent market prices;
(iii) the proposed transactions would bring the Company into a strategic
relationship with a large and financially strong partner in a closely
related segment of the health care industry, which the Board of Directors
believes will give the Company opportunities to offer its services to a
large group of new potential patients; and
(iv) the proposed transactions would, in the opinion of the Board of
Directors, strengthen the Company's general competitive position in the
ongoing consolidation of the U.S. health care industry.
BOARD OF DIRECTORS RECOMMENDATIONS
The Board of Directors has reviewed and considered the terms and conditions
of the Investment Proposals and believes that the Investment Proposals are fair
to, and are advisable and in the best interests of, the Company and its
stockholders and has unanimously approved the Investment Proposals and
unanimously recommends that stockholders vote for approval of the Investment
Proposals. The Company's directors and executive officers (who currently hold
Common Stock representing in the aggregate less than 10% of the Company's
outstanding Common Stock) have indicated that they intend to vote all shares of
voting stock over which they exercise voting power as of the close of business
on the Record Date in favor of approval of the Investment Proposals.
The Board of Directors considered a number of factors, both positive and
negative, in deciding to recommend the Investment Proposals and the Purchase
Agreement to stockholders:
(i) The Board believed that the Company needs additional working capital
due to the unresolved Medicare disputes and their effect on the Company's
cash position. The Board considered it a positive factor that the
transaction would provide the Company with approximately $18 million in new
cash (after expenses) and the opportunity to receive additional cash in the
next three years if the Warrant is exercised by Manor Healthcare.
(ii) The Board believed that a positive feature of the proposed
transaction is the opportunity it provides for stockholders who wish to sell
all or a portion of their Company Common Stock for cash at a premium to
recent market prices.
(iii) The Board believed that the $2.00 per share conversion price, 12%
dividend rate and as-if-converted voting rights for the preferred stock were
negative factors if viewed in isolation, but that they were outweighed by
the positive features of the $3.40 per share price available to public
stockholders who wished to sell, the $3.75 per share exercise price of the
Warrant, the limited three year term of the Warrant and the large amount
that Manor Healthcare was investing. The Board concluded that Manor
Healthcare viewed the economic terms of the preferred stock as linked to the
economic terms of the other securities, and that the terms of the preferred
stock could not be improved without an adverse effect on the other economic
elements of the transaction.
(iv) The Board believed that a positive feature of the transaction was
that the Company would remain in existence as a separate public company,
which allowed existing stockholders who wished to do so to continue their
investment in the Company as a separate entity.
(v) The Board considered the change in control of the Company that would
result from Manor Healthcare becoming the Company's largest stockholder and
nominating four of the seven members of the Company's Board of Directors.
The Board recognized that having a single controlling stockholder could in
the future create conflicts of interest or discourage or prevent the Company
from entering into transactions or relationships with other businesses that
could be advantageous to the Company. This was viewed by the Board as a
potentially negative factor.
13
<PAGE>
(vi) The Board believed that Manor Healthcare's complementary lines of
business, record of success and financial strength were positive factors in
favor of the proposed transaction. The Board believed that because Manor
Healthcare's business is focused in nursing centers and custodial care, the
Company's home health business offered natural synergies that made the
Company more valuable to Manor Healthcare than it would be to the Company's
current direct competitors and would provide important growth and profit
opportunities for the Company.
(vii) The Board believed that the Manor Healthcare transaction would
strengthen the Company's general competitive position in the ongoing
consolidation of the U.S. health care industry. The Board viewed this as a
positive factor in favor of the proposed transaction.
(viii) The Board considered as a positive factor that the transaction
would be subject to approval by the Company's stockholders, who could vote
to reject the proposed transaction if they found it unsatisfactory.
(ix) The Board viewed as a negative factor Manor Healthcare's insistence
on a $1.3 million "break-up fee" which would be payable in the event that
Manor Healthcare terminated the Purchase Agreement due to certain breaches
of the Purchase Agreement by the Company, the Company's Board of Directors
or its Special Committee withdrawing its recommendation for the Manor
Healthcare Investment or recommending an acquisition proposal of another
party, or in the event of the Company terminating the Purchase Agreement in
favor of an acquisition proposal from another party. Manor Healthcare viewed
that fee as an essential corollary to the Purchase Agreement expressly
providing that the Company retained the legal right to terminate the
Purchase Agreement in the event of a more attractive offer from another
party which the Board had a fiduciary duty to entertain. Manor Healthcare
initially proposed a fee of $5 million, but after extended negotiations
agreed to a fee of $1.3 million, which the Company believed was acceptable
and the best result it could achieve on this point.
(x) The Board considered as a negative factor the reductions in the
Company's net income per common and common equivalent share (but not net
income) that would result from the future dividends payable on the preferred
stock. While a negative factor, the Board believed the dividend was
reasonable in light of market conditions and the cost and availability of
capital from other sources.
(xi) The Board viewed as positive the desire of Manor Healthcare to have
the Company's senior executives enter into employment agreements and Manor
Healthcare's willingness to place two other key officers under contract.
(xii) The Board considered as a positive factor the receipt of Hambrecht
& Quist's opinion that the proposed transactions were fair to the Company
and to its stockholders from a financial point of view.
THE BOARD OF DIRECTORS BELIEVES THAT THE INVESTMENT PROPOSALS ARE FAIR TO,
AND ARE ADVISABLE AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS
AND HAS UNANIMOUSLY APPROVED THE INVESTMENT PROPOSALS AND UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR" APPROVAL OF THE INVESTMENT
PROPOSALS.
The Board of Directors reserves its right, pursuant to the Purchase
Agreement, to amend or waive the provisions of the Purchase Agreement and the
other documents related thereto in all respects before or after approval of the
Investment Proposals by the Company's stockholders. In addition, the Board of
Directors reserves the right to terminate the Purchase Agreement in accordance
with its terms notwithstanding stockholder approval.
OPINION OF FINANCIAL ADVISOR
The Company engaged Hambrecht & Quist to act as its financial advisor in
connection with the Company's review of strategic and financial planning
matters. Hambrecht & Quist was subsequently
14
<PAGE>
engaged to render an opinion as to the fairness from a financial point of view
of the Investment to the Company and its stockholders. Hambrecht & Quist
undertook a presentation to the Special Committee of the Board of Directors on
May 1, 1995 and to the entire Board of Directors on May 2, 1995 and rendered its
oral opinion (subsequently confirmed in writing) that, as of such date, the
Investment was fair to the holders of Common Stock from a financial point of
view. For purposes of its opinion, Hambrecht & Quist defined the Investment as
collectively: (i) the purchase by Manor Healthcare of an aggregate of
approximately 6,440,000 shares of Common Stock for $3.40 per share in cash, (ii)
the purchase by Manor Healthcare for $20 million of 200,000 shares of Series A
Preferred Stock, which are convertible into an aggregate of 10,000,000 shares of
Common Stock, and a three-year Warrant to purchase up to 6,000,000 shares of
Common Stock at a purchase price of $3.75 per share, and (iii) the Self-Tender
Offer by the Company for approximately 6,440,000 shares of Common Stock at a
cash purchase price of $3.40 per share.
A COPY OF HAMBRECHT & QUIST'S OPINION DATED MAY 2, 1995 WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS OF THE REVIEW
UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST IS ATTACHED AS
APPENDIX III TO THIS PROXY STATEMENT. THE COMPANY'S STOCKHOLDERS ARE ADVISED TO
READ THE OPINION IN ITS ENTIRETY. No limitations were placed on Hambrecht &
Quist by the Special Committee of the Board of Directors of the Company with
respect to the investigation made or the procedures followed in preparing and
rendering its opinion. Stockholders should note that the opinion was provided
solely for the use of the Board of Directors of the Company in its evaluation of
the Investment and was not on behalf of, and was not intended to confer rights
or remedies upon Manor Healthcare, any security-holder of the Company or Manor
Healthcare, or any person other than the Company's Board of Directors.
In its review of the Investment, and in arriving at its opinion, Hambrecht &
Quist, among other things, (i) reviewed the publicly available consolidated
financial statements of the Company for recent years and interim periods to date
(including fiscal 1992 through the second quarter ended March 1995) and certain
other relevant financial and operating data of the Company (including recent
operating projections and operating and geographic segment data) made available
to Hambrecht & Quist from the internal records of the Company; (ii) discussed
with certain members of the management of the Company the business, financial
condition and prospects of the Company; (iii) reviewed certain financial and
operating information, including certain projections provided by the management
of the Company, relating to the Company, and discussed such projections with
certain members of the management of the Company; (iv) reviewed publicly
available consolidated financial statements of Manor Healthcare for recent years
and interim periods to date (including fiscal 1992 through the second quarter
ended March 1995); (v) discussed with certain members of the management of Manor
Healthcare the business, financial condition and prospects of Manor Healthcare;
(vi) reviewed the recent reported prices and trading activity for the Common
Stock of the Company and Manor Care, Inc. and compared such information and
certain financial information of the Company and Manor Care, Inc. with similar
information for certain other companies engaged in businesses Hambrecht & Quist
considered comparable to those of the Company and Manor Healthcare; (vii)
discussed with parties other than Manor Healthcare the possibility of a
transaction or series of transactions involving a business combination with the
Company; (viii) reviewed the terms, to the extent publicly available, of certain
comparable transactions; (ix) reviewed the Purchase Agreement; and (x) performed
such other analyses and examinations and considered such other information,
financial studies, analyses and investigations and financial, economic and
market data as Hambrecht & Quist deemed relevant.
Hambrecht & Quist did not assume any responsibility for independent
verification of any of the information concerning the Company or Manor
Healthcare considered in connection with its review of the Investment and, for
purposes of its opinion, assumed and relied upon the accuracy and completeness
of all such information. Hambrecht & Quist did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of the
Company or Manor Healthcare, nor did they conduct a physical inspection of the
properties and facilities of the Company or Manor Healthcare. With respect to
the financial forecasts and projections made available to Hambrecht & Quist and
used
15
<PAGE>
in their analyses, Hambrecht & Quist assumed that they reflected the best
currently available estimates and judgments of the expected future financial
performance of the Company or Manor Healthcare. Hambrecht & Quist assumed that
neither the Company nor Manor Healthcare was a party to any pending
transactions, including external financings, recapitalizations or merger
discussions, other than the Investment and those in the ordinary course of
conducting their respective businesses. Hambrecht & Quist's opinion was
necessarily based upon market, economic, financial and other conditions as they
existed and could be evaluated as of the date of the opinion, and any change in
such conditions would require a reevaluation of such opinion. Hambrecht & Quist
expressed no opinion as to the price at which the Company's Common Stock would
trade subsequent to the Closing.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Accordingly,
in arriving at its opinion, Hambrecht & Quist did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor. No
company or transaction used in Hambrecht & Quist's analyses is identical to the
Company, Manor Healthcare or the Investment. Accordingly, the analyses performed
by Hambrecht & Quist were not purely mathematical; rather they involved complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading values of the companies or company to which they are compared.
Accordingly, Hambrecht & Quist believes that its analyses and the summary set
forth below must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the summary, without
considering all factors and analyses, could create an incomplete view of the
processes underlying the analyses set forth in the Hambrecht & Quist
presentation to the Company's Board and its opinion. In performing its analyses,
Hambrecht & Quist made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of the Company and Manor Healthcare (including the
maintenance of government and private sector reimbursement practices and the
absence of any macroeconomic dislocations as evidenced by unusually high
unemployment or inflation). The analyses performed by Hambrecht & Quist (and
summarized below) are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which businesses
actually may be sold.
COMPARABLE PUBLIC COMPANY ANALYSIS. Hambrecht & Quist compared selected
historical and projected financials, operating and stock market performance data
of the Company to the corresponding data of certain publicly traded health
services companies that Hambrecht & Quist considered comparable based on market
value and strategic focus. Comparisons were analyzed for the following companies
in the home healthcare business (the "Home Healthcare Group"): Abbey Healthcare
Group, Inc., American HomePatient, Inc., Caretenders Health Corp., Homedco
Group, Inc., Hooper Holmes, Inc., Interim Services, Inc., Lincare Holdings,
Inc., Olsten Corp. Pediatric Services of America, Inc., Rotech Medical Corp.,
Staff Builders, Inc., and Transworld Home Healthcare, Inc. For each of the
foregoing companies, Hambrecht & Quist analyzed the equity market value of each
company as a multiple of last twelve months' net income, 1994 net income, 1995
estimated net income, and 1996 forecasted net income, and Hambrecht & Quist
analyzed the enterprise value of each company (calculated as market equity value
plus preferred stock and long-term debt minus cash) as a multiple of each
company's last twelve months' and latest quarter annualized revenues, EBIT
(earnings before interest and taxes) and EBITDAR (earnings before interest,
taxes, depreciation, amortization and rent). All multiples were based on closing
stock prices on April 27, 1995. All forecasted data for such comparable
companies were based on publicly-available independent estimates by selected
investment banking firms. Specifically, the average last twelve months' net
income multiple (25.6x) for the comparable companies implied an equity value for
the Company of less than zero (in view of the Company's historic losses); the
average 1994 net income multiple (23.4x) for the
16
<PAGE>
comparable companies implied an equity value for the Company of $5.8 million;
the average 1995 net income multiple (19.3x) for the comparable companies
implied an equity value for the Company of $35.9 million; and the average 1996
net income multiple (16.3x) for the comparable companies implied an equity value
for the Company of $38.3 million. The average last twelve months' net revenue
multiple (1.6x) implied an enterprise value for the Company of $203.0 million;
the average annualized latest quarter net revenue multiple (1.4x) implied an
enterprise value for the Company of $182.5 million; the average last twelve
months' EBITDAR multiple (10.4x) implied an enterprise value for the Company of
$82.2 million; the average annualized latest quarter EBITDAR multiple (9.7x)
implied an enterprise value for the Company of $105.7 million; the average last
twelve month's EBIT multiple (21.6x) implied an enterprise value for the Company
of $21.6 million; the average annualized latest quarter EBIT multiple (16.2x)
implied an enterprise value for the Company of $66.4 million. Hambrecht & Quist
noted that the Company and the comparable companies tended to trade as a
function of earnings in general and forecasted earnings in particular, thus
making the revenue multiples a less reliable indicia of value. The foregoing
implied values were compared with a valuation of the Company of approximately
$55.2 million as implied by the self-tender price of $3.40 per share and a
valuation of approximately $66.5 million as implied by the purchase by Manor
Healthcare of 16.4 million shares (assuming conversion of the Series A Preferred
Stock) of Common Stock for approximately $41.9 million. Hambrecht & Quist also
noted that the 1995 estimated net income multiples implied a value of $2.22 per
share of the Company's Common Stock based on management's estimates of the
likely results for 1995; Hambrecht & Quist noted that the current trading price
of the Company common stock represented a 24% premium to such implied value and
the self-tender price represented a 53% premium to such implied value.
SELECTED ACQUISITIONS ANALYSIS. Using publicly-available information,
Hambrecht & Quist analyzed the purchase prices and transaction values (as equity
value multiples of net income, tangible book value, cash flow from operations,
and as enterprise value multiples of revenue, EBIT, EBDIT (earnings before
depreciation, interest and taxes), and net operating assets) in the following
selected completed and pending merger and acquisition transactions in the health
services industry in 1994 and 1995: Lincare Holdings, Inc./Coram Healthcare
Corp., Continental Medical Systems, Inc./Horizon Healthcare Corp., Diagnostek,
Inc./Value Health, Inc., Abbey Healthcare Group, Inc./Homedco Group, Inc.,
Caremark, Inc. (infusion)/Coram Healthcare Corp., Hillhaven Corp./Horizon
Healthcare Corp., Southern Health Management Corp./TheraTx, Inc., Mariner Health
Group, Inc./Convalescent Services, Inc., Pharmacy Management Services,
Inc./Beverly Enterprises, Inc., Advacare, Inc./ Medaphis Corp., Salick Health
Care, Inc./Zeneca Group PLC, Medstat Group, Inc./Thomson Corp., American Medical
Holdings Inc./National Medical Enterprises Inc., Healthtrust Inc./Columbia-HCA
Healthcare Corp., CareNetwork Inc./Humana Inc., Relife, Inc./Healthsouth
Rehabilitation Corp., Nichols Institute/Corning, Inc., GenCare Health Systems,
Inc./United HealthCare Corp., Intergroup Healthcare Corp./Foundation Health
Corp., Hallmark Healthcare Corp./Community Health Systems, Inc., Community Care
Network, Inc./Value Health Inc., Allied Clinical Laboratories, Inc./National
Health Laboratories Inc., Home Nutritional Services, Inc./W.R. Grace & Co.,
Ramsay-HMO Inc./ United HealthCare Corp., Providence Health Care Inc./The
Multicare Companies, Inc., Coordinated Medical Services Inc./Healthsource, Inc.,
Complete Health Services Inc./United HealthCare Corp., T2 Medical, Inc./Coram
Healthcare Inc., HealthInfusion, Inc./Coram Healthcare Inc., Curaflex Health
Services, Inc./Coram Healthcare Inc., Medisys, Inc./Coram Healthcare Inc.,
Critical Care America, Inc./Caremark International Inc., TakeCare Inc./FHP
International Corp., EPIC Healthcare Group, Inc./HealthTrust Inc., Pinnacle Care
Corp./Mariner Health Group, Inc., and Mediplex Group Inc./Sun Healthcare Group,
Inc. Specifically, the average last twelve months' net income multiple (28.1x)
for the comparable transactions implied an equity value for the Company of less
than zero (in view of the Company's historic losses); the average tangible book
value multiple (3.7x) for the comparable transactions implied an equity value
for the Company of $85.0 million; the average operating cash flow multiple
(16.4x) for the comparable transactions implied an equity value for the Company
of $16.1 million. The average last twelve months' net revenue multiple (1.6x)
for comparable transactions implied an enterprise value for the Company of
$203.0 million; the average last twelve months'
17
<PAGE>
EBITDA multiple (11.9x) for comparable transactions implied an enterprise value
for the Company of $94.0 million; the average last twelve months' EBIT multiple
(16.4x) for comparable transactions implied an enterprise value for the Company
of $16.4 million; the average net operating asset multiple (2.7x) for comparable
transactions implied an enterprise value for the Company of $92.0 million.
PRIVATE PLACEMENT DISCOUNT ANALYSIS. Hambrecht & Quist reviewed
publicly-available data regarding the private placement of equity securities by
31 publicly-traded companies in 1993 and 1994. It was noted that purchasers of
such private placements typically acquired the securities at an average discount
of 26% (before placement fees) to the public market price at the time of the
purchase and that in many such transactions issuers had undertaken to provide
freely-tradable securities to the purchasers within a short period of time.
Hambrecht & Quist observed that it was unlikely that the Company would have been
capable of privately placing $20 million of equity securities with typical
institutional purchasers in any event, but if it were able to do so the
foregoing data suggested that such equity would have to be freely-tradable in
the near-term and have to be sold at a price ranging from $1.66 to $1.86 per
share. This compared with the purchase price paid by Manor Healthcare of $2.00
per share (on an as-converted basis), which is a premium of 7% to 21% over such
expected range.
WARRANT VALUATION ANALYSIS. Hambrecht & Quist analyzed the Warrant to be
purchased by Manor Healthcare. Under the Black-Scholes option valuation formula
the value of a warrant for a single share of Common Stock would be from $0.37 to
$1.02, assuming a risk-free interest rate of 7.69% and a range of the Company's
Common Stock volatility from 40% to 100%. Thus under the Black-Scholes formula
the value of the Warrant would range from $2.2 million to $6.1 million.
Hambrecht & Quist observed that, since the Warrant would be less liquid than a
typical freely tradeable option, its valuation would likely be lower than the
Black-Scholes formula would indicate.
STOCK TRADING HISTORY ANALYSIS. Hambrecht & Quist examined the history of
the trading prices and volume of the shares of the Common Stock, and the
relationship between movement in the prices of such shares and movements in
certain stock indices and certain indices derived from the Home Healthcare Group
during the period from April 28, 1994 to April 28, 1995. The Home Healthcare
Group consisted of those so specified under the caption "Comparable Public
Company Analysis" above. Such data was used to analyze the historical public
market valuation of the Company as compared with the historic public market
valuation of the companies comprising the Home Healthcare Group. At any given
point in the period, such data indicated whether the Company's value was higher
or lower relative to such blended indices. For such period, the Common Stock
under-performed on a relative basis the public stocks comprising the Home
Healthcare Group and the Nasdaq composite index. Similarly, Hambrecht & Quist
examined the history of the trading prices and volume of the shares of the
Common Stock of Manor Care, Inc., and the relationship between movement in the
prices of such shares and movements in certain stock indices and certain indices
derived from a compilation of comparable nursing and extended care companies
(the "Nursing Group") during the period from April 28, 1994 to April 28, 1995.
Specifically, the Nursing Group consisted of Arbor Health Care Co., Beverly
Enterprises, Inc., Evergreen Healthcare, Inc., Genesis Health Ventures, Inc.,
Grancare Inc., Health Care & Retirement Corp., Hillhaven Corp., Horizon
Healthcare Corp., Living Centers of America, Inc., Manor Care, Inc., Multicare
Cos. Inc., Regency Health Services, Inc., Summit Care Corp., and Sun Healthcare
Group, Inc. Hambrecht & Quist noted that Manor Care, Inc. had appreciated 23%
from January 1, 1994 to April 17, 1995, as compared with an appreciation of 16%
for the Nursing Group; the Company had appreciated 7% from January 1, 1994 to
April 27, 1995, as compared with an appreciation of 75% for the Home Healthcare
Group. Accordingly, Hambrecht & Quist observed that Manor Care, Inc. was
operated in a fashion in which the public market valued it more than comparable
companies and that the Investment may permit the Company to exploit certain
management skills from Manor Healthcare for the benefit of its own stockholders.
GENERAL. The foregoing description of Hambrecht & Quist's opinion is
qualified in its entirety by reference to the full text of such opinion, which
is attached at Appendix III to this Proxy Statement.
18
<PAGE>
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, strategic alliances,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Hambrecht & Quist may in the future provide additional investment banking or
other financial advisory services to the Company.
Pursuant to an engagement letter dated September 19, 1994, as supplemented
by a letter dated May 31, 1995, the Company has agreed to pay Hambrecht & Quist
a retainer of $60,000 and a fee (the "Fairness Opinion Fee") of $250,000 (paid
in connection with the delivery of the Fairness Opinion). The Company has also
agreed to pay Hambrecht & Quist a transaction fee (the "Transaction Fee") upon
the Closing of the Purchase Agreement, of $950,000. The Fairness Opinion Fee
shall be credited against the total Transaction Fee. In addition, pursuant to a
Dealer Manager Agreement dated July , 1995, the Company has engaged Hambrecht
& Quist to act as dealer manager in connection with the Self-Tender Offer and
has agreed to pay Hambrecht & Quist a fee of $250,000 for such services. The
Company has agreed to indemnify Hambrecht & Quist against certain liabilities,
including liabilities under the federal securities laws or relating to or
arising out of Hambrecht & Quist's engagement as financial advisor or services
as dealer-manager and related matters. The Company has also agreed to pay
Hambrecht & Quist a nonaccountable expense allowance of $250,000 in connection
with its services related to the Investment and its fairness opinion and to
reimburse certain accountable expenses related to its services as
dealer-manager.
DESCRIPTION OF THE INVESTMENT BY MANOR HEALTHCARE
COMMON STOCK INVESTMENT BY MANOR HEALTHCARE. Pursuant to the terms of the
Purchase Agreement and as part of the Investment, Manor Healthcare will purchase
for $3.40 per share approximately 6,440,000 shares of Common Stock for a total
purchase price of approximately $21.9 million. The Investment is contingent upon
a minimum of 5,635,000 shares of Common Stock being tendered to and repurchased
by the Company in the Self-Tender Offer. If the Company repurchases the minimum
number of shares, the Manor Healthcare investment would be reduced by $2.7
million to approximately $39.2 million, with an equivalent reduction in the
proceeds to be used by the Company to fund the Self-Tender Offer. The terms and
conditions of the Common Stock purchase by Manor Healthcare are as set forth in
the Purchase Agreement attached to this Proxy Statement as Appendix I.
COMPANY SELF-TENDER OFFER. In connection with the Investment, the Company
is conducting the Self-Tender Offer for approximately 6,440,000 shares of its
Common Stock at an offering price of $3.40 per share. In the event that an
amount of shares of Common Stock less than or greater than 6,440,000 shares is
tendered in the Self-Tender Offer, the Company and Manor Healthcare will
mutually determine whether the Company will accept for purchase such lesser
number of shares or all or any portion of such greater number of shares. To the
extent that the number of shares accepted for purchase in the Self-Tender Offer
is greater than or less than 6,440,000 shares, the number of shares of Common
Stock to be purchased by Manor Healthcare in the Investment will increase or
decrease accordingly. The Company and Manor Healthcare have agreed that the
tendering of at least 5,635,000 shares of Common Stock in the Self-Tender Offer
will be sufficient to permit them to make the mutual determination to proceed
with the completion of the Self-Tender Offer and the concurrent Closing of the
Purchase Agreement. Some officers and directors of the Company may tender all or
a portion of their shares in connection with the Self-Tender Offer. The
Company's Self-Tender Offer will be funded out of the proceeds of the purchase
of Common Stock by Manor Healthcare. The terms of the Self-Tender Offer are
described in a Tender Offer Statement dated [DATE], 1995, being mailed to the
stockholders of the Company on or about [DATE], 1995.
PURCHASE OF SERIES A PREFERRED STOCK. The Company has authorized 1,000,000
shares of preferred stock, $1.00 par value per share, none of which is currently
outstanding. Pursuant to the terms of the Purchase Agreement, Manor Healthcare
will purchase 200,000 shares of the Series A Preferred Stock
19
<PAGE>
for a purchase price of $20 million. The Board of Directors of the Company has
adopted a Certificate of Designation reserving 200,000 shares of the authorized
preferred stock as Series A Preferred Stock. As a condition to the Closing of
the Purchase Agreement, the Company will cause the Certificate of Designation to
become effective. The rights and preferences of the Series A Preferred Stock are
indicated below.
RANK. With respect to the payment of dividends and the distribution of
assets on liquidation, dissolution and winding up of the Company, the Series A
Preferred Stock ranks senior to the Common Stock and on a parity with or senior
to each other series of preferred stock thereafter issued by the Company.
LIQUIDATION VALUE. The liquidation value of the Series A Preferred Stock is
equal to $100 per share.
DIVIDENDS. Holders of Series A Preferred Stock are entitled to receive when
and as declared by the Board of Directors, cumulative dividends at the rate of
12% of the Liquidation Value per annum, per share, payable in equal quarterly
payments on the business day preceding the last business day of each March,
June, September and December (each, a "Quarterly Dividend Payment Date"),
commencing with the first Quarterly Dividend Payment Date following the Closing.
Dividends shall accrue on a daily basis and shall cumulate from the date of
original issue of the Series A Preferred Stock. Accrued but unpaid dividends
shall accrue as of the Quarterly Dividend Payment Date on which they first
became payable and may be paid in the form of either cash or shares of common
stock having a market value equal to the dividend amount. However, if any
quarterly dividend, redemption payment, repurchase payment, or accrued and
unpaid dividend payment due upon conversion of the Series A Preferred Stock is
not paid when due, then the holders of the Series A Preferred Stock shall be
entitled to additional dividends which shall accrue in respect of such payments
at the rate of 12% of the Liquidation Value per annum, compounded quarterly and
shall be added to such payments. No dividends may be paid to or declared or set
aside for the benefit of holders of any class or series of stock ranking on a
parity with the Series A Preferred Stock in the payment of dividends if at the
time there shall be any current or accumulated cash dividends payable to the
Series A Preferred Stock, unless at the same time a like proportionate dividend,
pro rata based on the annual dividend rates of the Series A Preferred Stock and
such parity stock, shall at the same time be paid to or declared and set aside
for the benefit of holders of the Series A Preferred Stock entitled to receive
such dividend.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of the Company, holders of Series A Preferred Stock will be entitled
to receive in preference to holders of any stock ranking junior to the Series A
Preferred Stock, the Liquidation Value of $100 per share plus an amount equal to
all accrued but unpaid dividends thereon on the date of final distribution to
such holders. If, upon any liquidation, dissolution or winding up of the
Company, such payment shall not have been made in full to the holders of all
outstanding shares of Series A Preferred Stock, the holders of Series A
Preferred Stock and all other classes or series of stock of the Company ranking
on a parity therewith in the distribution of assets, shall share ratably in any
distribution of assets in proportion to the full amounts to which they would
otherwise be respectively entitled.
VOTING RIGHTS. The holders of Series A Preferred Stock shall have, in
addition to any voting rights provided by law, the right to vote as a single
class with the Common Stock on an as-if-converted basis. The effect of this
provision is that holders of Series A Preferred Stock will be entitled to cast
50 votes for each share of Series A Preferred Stock, subject to adjustment, as
described below. The holders of shares of Series A Preferred Stock shall have
the right to vote as a separate class on (i) all matters as to which the holders
are entitled to vote under the Minnesota Business Corporation Act; (ii) any
amendment, alteration or repeal of any provision of the Company's Articles of
Incorporation or Certificate of Designation that would adversely affect the
rights, powers or preferences of the Series A Preferred Stock; and (iii) any
proposed creation of a class or series of preferred stock ranking on a parity
with the Series A Preferred Stock as to dividends or on liquidation.
Authorization of any of
20
<PAGE>
the foregoing actions requires the affirmative vote of the holders of at least
two-thirds of the outstanding shares of the Series A Preferred Stock. In
addition, the holders of shares of Series A Preferred Stock shall have the right
to vote as a class with the holders of Common Stock on all matters as to which
the holders of Common Stock are entitled to vote. The number of votes per share
which the holders of Preferred Stock may cast shall be adjusted, upon any change
in the Conversion Price as described below, to equal the number of shares of
Common Stock into which it would then be convertible (whether or not such
conversion is restricted or prohibited for any reason).
CONVERSION. Each share of Series A Preferred Stock shall be convertible
(subject to the anti-dilution provisions thereof) at any time at the option of
the holder thereof, unless previously redeemed, into a number of shares of
Common Stock of the Company calculated as described below, initially 50 shares.
This conversion number shall be obtained by calculating (to the nearest 1/100 of
a share) the number of shares of Series A Preferred Stock to be converted
multiplied by a fraction, the numerator of which shall be equal to the
Liquidation Value for each share of Series A Preferred Stock and the denominator
of which shall be the Conversion Price (initially $2.00 per share of Common
Stock), subject to adjustment and as defined in the Company's Certificate of
Designation. If the Company shall default on the applicable payment date in the
payment of any redemption or repurchase price, as the case may be, the right of
conversion shall continue until the Series A Preferred Stock is redeemed or
repurchased.
The Series A Preferred Stock provides for adjustments upon the occurrence of
certain events including, but not limited to, stock dividends, stock
subdivisions or reclassifications or combinations, issuance of rights or
warrants to holders of Common Stock generally entitling them to purchase Common
Stock at a price less than the then-current market price thereof or
distributions to holders of Common Stock generally of evidences of indebtedness
or assets (other than those described in the preceding clause). In addition,
upon the occurrence of any merger or combination or similar transaction, the
Series A Preferred Stock is convertible into the consideration received by the
holders of the Common Stock in such merger, combination or similar transaction.
REDEMPTION PROVISIONS. The Series A Preferred Stock is not redeemable prior
to the fifth anniversary date after issuance (the "Redemption Date"). On and
after such date, the Series A Preferred Stock shall be redeemable in cash, at
the option of the Company, in whole at any time or in part from time to time,
upon no less than 30 days and no more than 60 days prior written notice by the
Company to the holders thereof. Conversions shall be permitted until the close
of business on the business day immediately preceding the Redemption Date. The
redemption price for the Series A Preferred Stock is $100 per share, plus an
amount equal to all accrued and unpaid dividends thereon.
REPURCHASE PROVISIONS. The Series A Preferred Stock is not repurchasable
prior to the fifth anniversary date after issuance (the "Repurchase Date"). On
and after the Repurchase Date and unless such shares have been previously
converted, the holders of the Series A Preferred Stock may require the Company
to repurchase all or a portion of such holder's Series A Preferred Stock for
cash, at the option of the Company, in whole at any time or in part from time to
time, upon no less than 30 days and no more than 60 days prior written notice to
the Company. Conversions of shares shall be permitted until the close of
business on the business day immediately preceding the Repurchase Date. The
repurchase price for the Series A Preferred Stock is $100 per share, plus an
amount equal to all accrued and unpaid dividends thereon.
No shares of Common Stock, preferred stock issued on a parity with the
Series A Preferred Stock, or Series A Preferred Stock may be purchased, redeemed
or otherwise acquired for value by the Company unless all dividends accrued on
the Series A Preferred Stock shall have been paid or declared and funds for
payment of the dividends set aside.
STOCK PURCHASE WARRANT. Pursuant to the terms of the Purchase Agreement,
the Company will issue to Manor Healthcare a three-year Common Stock Purchase
Warrant allowing the holder to purchase up to 6,000,000 shares of Common Stock
of the Company at an exercise price of $3.75 per
21
<PAGE>
share (the "Warrant"). The exercise price of the Warrant is subject to the same
anti-dilution provisions as are applicable to the Series A Preferred Stock. See
"Description of the Investment by Manor Healthcare -- Purchase of Series A
Preferred Stock -- Conversion."
REGISTRATION RIGHTS AGREEMENT. Pursuant to the Purchase Agreement, on the
Closing Date the Company and Manor Healthcare will enter into a Registration
Rights Agreement covering the securities being purchased by Manor Healthcare.
Manor Healthcare will have the right to require the Company to use its best
efforts to register under the Securities Act of 1933, at the Company's expense,
all or any portion of the Common Stock, the Common Stock purchasable upon
exercise of the Warrant, or the Common Stock into which the Series A Preferred
Stock, directly or indirectly, is convertible ("Registrable Securities") for
sale in an underwritten public offering. The Company will not be entitled to
sell its securities in any such registration for its own account without the
consent of Manor Healthcare. In addition, if the Company at any time seeks to
register under the Securities Act of 1933 for sale to the public any of its
securities, the Company must include, at Manor Healthcare's request, Manor
Healthcare's Registrable Securities in the registration statement, subject to
underwriter cutback provisions.
DESCRIPTION OF THE PURCHASE AGREEMENT
PURCHASE AND SALE OF SECURITIES. The Purchase Agreement provides for Manor
Healthcare to purchase approximately 6,440,000 shares of Common Stock, $.01 par
value, of the Company, 200,000 shares of Series A Preferred Stock and the
Warrant to purchase up to 6,000,000 additional shares of Common Stock of the
Company. The aggregate purchase price for the Common Stock, the Warrant and the
Series A Preferred Stock is approximately $41.9 million. The Investment is
contingent upon a minimum of 5,635,000 shares of Common Stock being tendered to
and repurchased by the Company in the Self-Tender Offer. If the Company
repurchases the minimum number of shares, the Manor Healthcare investment would
be reduced by $2.7 million to approximately $39.2 million, with an equivalent
reduction in the proceeds to be used by the Company to fund the Self-Tender
Offer. Certain terms and conditions of the Purchase Agreement are summarized
below. See "Description of the Investment by Manor Healthcare."
CONDITIONS TO CLOSING. The Purchase Agreement contains certain conditions
which must be met or waived prior to the Closing of the Purchase Agreement,
including the following:
CONSUMMATION OF THE COMPANY SELF-TENDER OFFER. The Company must complete
the Self-Tender Offer to purchase at least 5,635,000 shares of Common Stock at a
purchase price of $3.40 per share.
COMPANY STOCKHOLDER APPROVAL. The stockholders of the Company are required
to approve and adopt the Purchase Agreement and related Investment by Manor
Healthcare, including the amendments to the Company's Articles of Incorporation
and Stock Option Plans included herein as Proposals Two and Three, respectively.
NO ORDER. There shall be no statute, rule, regulation or other restriction
in effect promulgated by a governmental or regulatory authority or federal or
state court of competent jurisdiction which would prohibit or otherwise limit
the consummation of the transactions contemplated by the Purchase Agreement.
AMENDMENT TO ARTICLES OF INCORPORATION. An amendment to the Articles of
Incorporation of the Company effecting the amendment described herein as
Proposal Two shall have been filed with the Minnesota Secretary of State, to
become effective on the Closing Date.
COMPANY CONSENTS AND PERMITS. The Company shall have obtained all necessary
consents, approvals and other authorizations required to effect the transactions
contemplated by the Purchase Agreement, principally consisting of the following:
(1) the Company must receive consent to the transaction from its lender, which
has preliminarily granted its consent and extended the Company's credit
agreement until December 31, 1995; (2) substantially all of the Company's leases
and various insurance contracts of the Company require consent of the other
party to a change in control or
22
<PAGE>
material change in the Company's ownership; and (3) notification or consent to
maintain state licensure will be required in all 14 states where the Company is
licensed for home care and/or hospice. Consents are also required pursuant to
the Company's pharmacy license requirements, and the Medicare program requires
various notifications and re-approvals.
MANOR HEALTHCARE CONSENTS. Manor Healthcare and its parent company, Manor
Care, Inc., must obtain waivers from their lenders under a certain Competitive
Advance and Multi-Currency Revolving Credit Facility Agreement, dated as of
November 30, 1994, as to (i) the applicability of the covenants in such
agreement to the Company and (ii) any requirement that the Company provide a
guaranty of the obligations under such agreement. This condition has been
fulfilled.
REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement described
above under "Registration Rights Agreement" shall have been executed.
There can be no assurance that each of the conditions to the Closing will be
satisfied or waived. If the Closing does not occur on or prior to the Closing
Date, the Purchase Agreement will terminate without any action by the Company or
Manor Healthcare. In the event one or more of these conditions are not met or
waived, the Purchase Agreement may be terminated. See "Termination" below.
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION. The Purchase Agreement
contains extensive representations and warranties given by the Company to Manor
Healthcare, designed to provide Manor Healthcare with adequate and complete
disclosure regarding such matters as the Company's participation in the Medicare
and Medicaid programs, compliance with various laws and environmental matters,
the accuracy of the Company's financial statements, payment of taxes by the
Company and any pending or threatened litigation involving the Company, among
other things. Under the terms of the Purchase Agreement, the representations and
warranties contained therein will survive until December 31, 1996. The Company
has agreed to indemnify Manor Healthcare and its affiliates from and against any
losses they may suffer as a result of any breach of such representations or
warranties or any material misstatement contained in this Proxy Statement or in
documents delivered to stockholders in connection with the Self-Tender Offer
(the "Tender Offer Documents") or material omission from this Proxy Statement or
the Tender Offer Documents, provided that Manor Healthcare gives written notice
to the Company of such a claim on or prior to December 31, 1996.
COVENANTS. The Purchase Agreement contains certain covenants including the
following:
HART-SCOTT-RODINO FILING. The applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") with
respect to the transactions contemplated by the Purchase Agreement shall have
expired or been terminated prior to Closing. To the extent applicable, the
Company and Manor Healthcare shall make all filings and furnish all information
required by the HSR Act with respect to the transactions contemplated by the
Purchase Agreement and shall use their best efforts to obtain the early
termination of the waiting period under the HSR Act provided that neither the
Company nor Manor Healthcare shall be required to agree to dispose of or hold
separate any portion of its business or assets. The required filings under the
HSR Act have been made and the applicable waiting period has terminated.
PRE-CLOSING ACTIVITIES. From and after the date of the Purchase Agreement
until the Closing, the Company and Manor Healthcare shall act with good faith
towards, and shall use their best efforts to consummate, the transactions
contemplated by the Purchase Agreement, and neither the Company nor Manor
Healthcare will take any action that would prohibit or impair its ability to
consummate the transactions contemplated by the Purchase Agreement.
ACQUISITION PROPOSALS. The Company has agreed in the Purchase Agreement
that prior to the Closing neither the Company nor any of its officers, directors
or employees will, and the Company will direct and use its best efforts to cause
its employees, agents and representatives (including, without limitation, any
consultant, financial advisor, attorney or accountant retained by the Company)
not to initiate, solicit or encourage, directly or indirectly, any inquiries or
the making of any proposal or offer to stockholders, or make any public
announcement regarding the same, with respect to (i) a tender
23
<PAGE>
offer or exchange offer for any securities of the Company; (ii) a merger,
consolidation, business combination or similar transaction; (iii) any purchase,
lease, exchange, pledge, mortgage, transfer or other disposition of at least 20%
of the assets of, or any equity securities of, the Company (an "Acquisition
Proposal") or engage in negotiations, provide information or discuss an
Acquisition Proposal with any person, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal.
Nothing contained in the Purchase Agreement, however, prohibits the Company
and its directors from making to the stockholders any recommendation and related
filing with the Securities Exchange Commission, as required by Rules 14d-9 and
14e-2 under the Securities Exchange Act of 1934, with respect to any tender
offer, or from informing the stockholders of the Company in the proxy materials
with respect to the meeting of stockholders called to consider the transactions
contemplated by the Purchase Agreement of information that is material to the
vote with respect to such transactions, or from changing or withdrawing the
recommendation of the directors with respect to such transactions if the
directors conclude that such change or withdrawal is required by their fiduciary
duties (as determined in good faith by the Board of Directors of the Company
upon the advice of counsel).
CONDUCT OF BUSINESS PENDING CLOSING. The Company has agreed, among other
things, that as and after the date of the Purchase Agreement and up to the date
of Closing, the Company will use its best efforts to conduct its business in the
ordinary course pursuant to ordinary business terms and consistent with past
practice. The Company has further agreed that, without Manor Healthcare's prior
written consent it will not, among other things: (i) sell, pledge, dispose of,
lease or encumber any of its assets; (ii) amend its Articles of Incorporation or
bylaws; (iii) split, combine or reclassify its shares or declare any dividends
on its capital stock; (iv) redeem any of its own shares (other than pursuant to
the Self-Tender Offer); (v) effect any plan of liquidation, dissolution, merger,
recapitalization or other reorganization; or (vi) create or otherwise acquire or
fund any new subsidiary. The Company has also agreed that it will not: (i)
issue, pledge or dispose of any shares of capital stock (except for shares
issuable upon the exercise of outstanding options), or issue any additional
options, warrants or rights to purchase shares of its capital stock; (ii)
acquire or invest in another business; (iii) incur any indebtedness, either
directly or through the guaranty of the debt of others; (iv) effect any change
in its capitalization; (v) change any assumption underlying, or method of
calculating, any bad debt, contingencies, provisions or other reserves; (vi)
pay, discharge or satisfy any claims, liabilities or obligations or collect,
accelerate the collection of, any amounts owed, other than in the ordinary
course of business; (vii) waive, release or transfer any rights of value or
modify or change in any material respect an existing license, lease, contract or
other document; or (viii) make any tax election or settle or compromise any
income or other tax liability. Moreover, the Company may not effect any change
in any form of employee benefit plan or other benefits granted to its employees
or former employees, except for increasing the compensation or fringe benefits
of non-officer employees in the ordinary course of business and consistent with
past practice or as otherwise required by law.
TERMINATION. At any time prior to the Closing, the Purchase Agreement and
the transactions contemplated thereby may be terminated (i) by mutual written
agreement of the Company and Manor Healthcare; (ii) if the Closing shall not
have been consummated on or before September 15, 1995; (iii) if any law,
regulation or non-appealable final order or judgment is effected that makes
consummation of the transactions contemplated by the Purchase Agreement illegal
or otherwise prohibited; (iv) if the Company's stockholders fail to approve the
Purchase Agreement; (v) by Manor Healthcare upon certain material breaches or
defaults by the Company; or (vi) by the Company upon certain material breaches
or defaults by Manor Healthcare.
COMPANY PAYMENTS IN THE EVENT OF TERMINATION. The Company has agreed to pay
Manor Healthcare $1,300,000 for Manor Healthcare's costs associated with
entering into the Purchase Agreement in the event the Purchase Agreement is
terminated (a) by Manor Healthcare due to (i) a breach by the Company of its
"no-shop" or conduct of business obligations of Sections 7.9 and 7.13 of the
Purchase Agreement; (ii) a willful breach by the Company of the Purchase
Agreement which is not cured within 10 days after notice thereof from Manor
Healthcare; (iii) withdrawal or modification of certain
24
<PAGE>
documents delivered to Manor Healthcare prior to execution of the Purchase
Agreement, including the resignation letters submitted by Messrs. Finkle and
Lieberbaum, the resolutions adopted by the Company's Board of Directors
approving the Purchase Agreement and the Investment and a legal opinion
delivered by Lindquist & Vennum P.L.L.P. as to the effect of certain aspects of
the Minnesota Business Corporation Act on the Investment; (iv) withdrawal or
modification of the Board of Directors' approval or recommendation of the
Purchase Agreement, the Investment or related transactions; (v) withdrawal or
modification by the Special Committee of the Board of Directors of its approval
of the Purchase Agreement, the Investment or related transactions; or (vi) a
recommendation of the Board of Directors to its stockholders to accept an
Acquisition Proposal or a failure by the Company's Board of Directors to
recommend to its stockholders that they not tender shares into any such
Acquisition Proposal, or the acquisition by any person other than Manor
Healthcare or its affiliates of the right to acquire beneficial ownership of 20%
or more of the Company's outstanding Common Stock; or (b) by the Company if its
Board of Directors fails to make or withdraws its recommendation that
stockholders approve the Purchase Agreement if there is an Acquisition Proposal
at such time or if the Board recommends that its stockholders accept or approve
an Acquisition Proposal.
EFFECTS OF THE INVESTMENT ON THE COMPANY
USE OF PROCEEDS. On the date of the initial purchase of the Company's
Common Stock and Series A Preferred Stock under the Purchase Agreement (the
"Closing"), the Company will receive approximately $41.9 million in cash from
Manor Healthcare in consideration for the issuance to Manor Healthcare of
approximately 6,440,000 shares of Common Stock, 200,000 shares of Series A
Preferred Stock, and a three-year Warrant to purchase up to 6,000,000 additional
shares of Common Stock for $3.75 per share. Substantially all of the proceeds
from the sale of the Common Stock will be used to fund the Self-Tender Offer.
The $20 million in proceeds from the issuance of the Series A Preferred Stock
and the Warrant, net of the transaction expenses (such net proceeds are referred
to herein as the "Transaction Proceeds"), will be invested in interest bearing
securities pending application as described below. Expenses of the transaction,
to be borne by the Company, are estimated to be $2 million.
The Transaction Proceeds will be available to the Company for general
corporate purposes. The Company anticipates that it will principally utilize the
Transaction Proceeds to invest in the expansion of Company operations into the
eight geographic areas where Manor Healthcare is present and the Company is not
and to finance the Company's continued operations. Except as described above,
the Company does not currently have any commitments or understandings regarding
the use of the Transaction Proceeds. The Company believes that its cash flow
from current operations is sufficient to meet its current cash needs.
There can be no assurance that the Company will be successful in its efforts
to utilize the Transaction Proceeds in a manner that contributes to the
profitable growth of the Company's business or that the Transaction Proceeds
will not be used in such a way as to dilute the per share earnings or equity of
the Company after giving effect to the purchase of shares of Series A Preferred
Stock by Manor Healthcare.
If the Warrant is exercised in full, the Company would receive an additional
$22.5 million in proceeds. Since it is not known if or when the Warrant might be
exercised, it is uncertain how the additional proceeds would be applied.
However, it is the Company's current expectation that the additional proceeds,
if received, would be used to fund growth in the Company's business and
expansion into additional geographic areas.
PRO FORMA FINANCIAL EFFECT. The Investment will have the effect of
increasing the Company's cash and equity (net of estimated transaction expenses)
by approximately $18 million. Because the Series A Preferred Stock bears a
dividend, the pro forma effect of the Series A Preferred Stock would be to
reduce earnings per share, on both a primary and fully-diluted basis. The
following Pro Forma Balance Sheet as of March 31, 1995 and Pro Forma Statements
of Income for the year ended
25
<PAGE>
September 30, 1994 and the six month period ended March 31, 1995 reflect these
changes. The Pro Forma Statements of Income assume that the Investment occurred
on October 1, 1993 and on October 1, 1994, respectively.
IN HOME HEALTH, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
At March 31, 1995
(Unaudited)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
--------- -------------- -----------
<S> <C> <C> <C>
CURRENT ASSETS........................................................ $ 18,091 $ (21,900)(1) $ 36,091
41,900(2)
(2,000)(3)
PROPERTY, NET......................................................... 11,620 11,620
OTHER ASSETS.......................................................... 21,551 21,551
--------- -------------- -----------
TOTAL ASSETS.......................................................... $ 51,262 $ 18,000 $ 69,262
--------- -------------- -----------
--------- -------------- -----------
CURRENT LIABILITIES................................................... $ 15,520 $ 15,520
LONG-TERM DEBT........................................................ 2,719 2,719
DEFERRED ITEMS........................................................ 3,663 3,663
REDEEMABLE PREFERRED STOCK -- authorized 1,000 shares................. $ 18,500(2) 18,500
SHAREHOLDERS' EQUITY:
Common stock -- authorized 40,000 shares............................ 160 (64)(1) 160
64(2)
Additional paid-in capital.......................................... 23,862 (21,836)(1) 23,362
21,836(2)
1,500(2)
(2,000)(3)
Retained earnings................................................... 5,338 5,338
--------- -------------- -----------
Total shareholders' equity.......................................... 29,360 (500) 28,860
--------- -------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................................................... $ 51,262 $ 18,000 $ 69,262
--------- -------------- -----------
--------- -------------- -----------
<FN>
- ------------------------
(1) Represents the Company's Self-Tender Offer for the purchase and retirement
of approximately 6,440 shares of the Company's outstanding Common Stock at
$3.40 per share. If the minimum of 5,635 shares of Common Stock is
tendered, the impact is a reduction of $2,700 in the cash used to
repurchase, and received for the issuance of, the Common Stock. There is no
net impact to the pro forma financial statements above.
(2) Represents gross proceeds to the Company upon consummation of Manor
Healthcare's investment in the Company as follows: (i) issuance to Manor
Healthcare of 200 shares of the Company's redeemable Preferred Stock (fair
value of $18,500) and a Warrant (fair value of $1,500) to purchase an
additional 6,000 shares of the Company's Common Stock (gross proceeds of
$20,000) and (ii) issuance of approximately 6,440 shares of the Company's
Common Stock at $3.40 per share. Pursuant to the terms of the Purchase
Agreement, the Common Stock to be sold to Manor Healthcare equals the
number of shares of Common Stock repurchased by the Company (gross proceeds
of $21,900). See "Description of the Investment by Manor Healthcare -- Pur-
chase of Series A Preferred Stock" and "Investment Proposals -- Background
of the Investment Proposals" and "-- Reasons for the Purchase Agreement
Transactions" for a description of the conversion of the Preferred Stock
and a discussion of the initial $2.00 conversion price.
(3) Represents estimated transaction expenses of $2,000 which include Hambrecht
& Quist's transaction and tender offer fees, legal and accounting fees and
printing costs.
</TABLE>
26
<PAGE>
IN HOME HEALTH, INC.
PRO FORMA STATEMENT OF INCOME
For the Fiscal Year Ended September 30, 1994
(Unaudited)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
REVENUE............................................................... $ 120,485 $ 120,485
OPERATING EXPENSES:
Direct costs of revenue............................................. 69,411 69,411
General, administrative and selling expenses........................ 49,721 49,721
----------- -----------
Total operating expenses............................................ 119,132 119,132
----------- -----------
INCOME FROM OPERATIONS................................................ 1,353 1,535
----------- -----------
INTEREST EXPENSE, NET................................................. 669 669
----------- -----------
INCOME BEFORE INCOME TAXES............................................ 684 684
INCOME TAX EXPENSE.................................................... 437 437
----------- -----------
NET INCOME............................................................ 247 247
REDEEMABLE PREFERRED STOCK DIVIDENDS AND ACCRETION.................... $ (2,700)(1) (2,700)
----------- ------------ -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK.......................... $ 247 $ (2,700) $ (2,453)
----------- ------------ -----------
----------- ------------ -----------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary............................................................. $ 0.02 $ (0.15)
----------- -----------
----------- -----------
Fully Diluted....................................................... $ 0.02 $ (0.15)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary............................................................. 16,013 16,013
----------- -----------
----------- -----------
Fully Diluted....................................................... 16,013 16,013
----------- -----------
----------- -----------
<FN>
- ------------------------
(1) Represents an assumed dividend on the redeemable Preferred Stock of $2,400
and redeemable Preferred Stock accretion of $300. The redeemable Preferred
Stock is assumed to accrete over five years from its fair value of $18,500
on the date of issuance to its redeemable value of $20,000 as of the
mandatory redemption date.
</TABLE>
27
<PAGE>
IN HOME HEALTH, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended March 31, 1995
(Unaudited)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------- ----------
<S> <C> <C> <C>
REVENUE................................................................ $ 64,927 $ 64,927
OPERATING EXPENSES:
Direct costs of revenue.............................................. 36,735 36,735
General, administrative and selling expenses......................... 26,179 26,179
---------- ----------
Total operating expenses............................................. 62,914 62,914
---------- ----------
INCOME FROM OPERATIONS................................................. 2,013 2,013
INTEREST EXPENSE, NET.................................................. 449 449
---------- ----------
INCOME BEFORE INCOME TAXES............................................. 1,564 1,564
INCOME TAX EXPENSE..................................................... 721 721
---------- ----------
NET INCOME............................................................. 843 843
REDEEMABLE PREFERRED STOCK DIVIDENDS AND ACCRETION..................... $ (1,350)(1) (1,350)
---------- ------------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK........................... $ 843 $ (1,350) $ (507)
---------- ------------- ----------
---------- ------------- ----------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary.............................................................. $ 0.05 $ (0.03)
---------- ----------
---------- ----------
Fully Diluted........................................................ $ 0.05 $ (0.03)
---------- ----------
---------- ----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary.............................................................. 16,205 16,205
---------- ----------
---------- ----------
Fully Diluted........................................................ 16,245 16,245
---------- ----------
---------- ----------
<FN>
- ------------------------
(1) Represents an assumed dividend on redeemable Preferred Stock of $1,200 and
redeemable Preferred Stock accretion of $150. The redeemable Preferred
Stock is assumed to accrete over five years from its fair value of $18,500
on the date of issuance to its redeemable value of $20,000 as of the
mandatory redemption date.
</TABLE>
REQUIRED CONSENTS. As described under "Description of the Purchase
Agreement -- Conditions to Closing," consummation of the transactions
contemplated by the Purchase Agreement will require consent or notification of a
number of parties. The Company anticipates that there will be no significant
financial effect from obtaining any required consents.
PERCENTAGE OWNERSHIP BY MANOR HEALTHCARE AFTER CLOSING. Upon consummation
of the transactions contemplated by the Purchase Agreement, Manor Healthcare
will directly own approximately 6,440,000 shares of the Common Stock of the
Company and 200,000 shares of the Series A Preferred Stock, representing
approximately 63% of the then existing voting power of the Company. In the event
of full exercise of the Warrant to acquire up to an additional 6,000,000 shares
of the Common Stock of the Company, Manor Healthcare would own approximately 70%
of the Company's total voting power, of which approximately 20% would be
represented by Common Stock purchased directly by Manor
28
<PAGE>
Healthcare under the Purchase Agreement, 31% would be represented by the Series
A Preferred Stock, and 19% would be represented by the additional 6,000,000
shares of Common Stock issued upon exercise of the Warrant.
CHANGES TO COMPANY MANAGEMENT
BOARD OF DIRECTORS. Pursuant to the terms of the Purchase Agreement and
effective immediately following Closing of the Purchase Agreement, the Company's
Board of Directors will be expanded from five to seven members, four of whom
will be nominees of Manor Healthcare. In connection therewith, S. Marcus Finkle
and Sheldon Lieberbaum have submitted their resignations as Directors of the
Company to take effect immediately upon Closing of the Purchase Agreement.
Certain of the amendments to the Stock Option Plans set forth in Proposal Three
herein are designed to allow the outstanding options held by Messrs. Finkle and
Lieberbaum to be immediately vested in full notwithstanding their resignations.
Messrs. Finkle and Lieberbaum currently hold options to purchase 35,000 shares
each, of which 14,100 shares each are currently vested.
The four nominees of Manor Healthcare who will be elected to fill the
newly-created vacancies as directors of the Company are set forth below:
MARK L. GILDEA, age 43, has served as President, Alternate Site Services
Division of Manor Healthcare since December 1994. Previously he served as
Vice President of Managed Care of Manor Healthcare from December 1993 to
December 1994. Prior to joining Manor Healthcare, he was employed as
Executive Vice President of Option Care, Inc. from October 1992 to December
1993. He was previously employed by Caremark, Inc. for over 10 years,
including as Area Vice President.
DONALD C. TOMASSO, age 50, has served as President, Long Term Care Division,
of Manor Healthcare since February 1995, as Chief Operating Officer of Manor
Healthcare from May 1991 to February 1995, and as a Director of Manor
Healthcare since June 1991. He has been Chairman and Chief Executive Officer
of Vitalink Pharmacy Services, Inc. since February 1995 and was its Vice
Chairman from September 1991 to February 1995. Mr. Tomasso was previously
employed by Marriott Corporation for more than five years, including as
Executive Vice President/General Manager of the Roy Rogers Division.
JOSEPH BUCKLEY, age 47, has served as President, Assisted Living Division of
Manor Healthcare since February 1995 and was Senior Vice President --
Information Resources and Development of Manor Care, Inc. from June 1990 to
February 1995. He previously served as Vice President -- Information
Resources of Manor Care, Inc. from July 1989 to June 1990 and as Vice
President -- Real Estate of Manor Care, Inc. from September 1983 to July
1989.
JAMES H. REMPE, age 65, has served as Senior Vice President, General Counsel
and Secretary of Manor Care, Inc. since August 1981. He has served in the
same capacities with Choice Hotels International, Inc. since February 1981
and with Manor Healthcare since December 1980. He has been Secretary of
Vitalink Pharmacy Services, Inc. since January 1983 and was its Senior Vice
President and a Director from January 1983 to September 1991.
It is anticipated that each of the foregoing individuals will be able to serve
as directors effective immediately following the closing of the Purchase
Agreement. However, one or more other individuals may be substituted for the
foregoing nominees if specified by Manor Healthcare in writing prior to the
closing of the Purchase Agreement, provided that any such substitutions must be
agreed to by the Company.
As a result of the foregoing, Manor Healthcare will effectively control the
actions of the Company's Board of Directors following the closing of the
Purchase Agreement. In addition, Manor Healthcare will control approximately 63%
of the voting power of the stockholders of the Company immediately following the
Investment. As such, Manor Healthcare will be able to effectively control the
outcome of any stockholder votes, including the election of directors, following
the Closing of the
29
<PAGE>
Purchase Agreement. However, Manor Healthcare has agreed in the Purchase
Agreement that so long as Judy Figge and Kenneth Figge are employed by the
Company, Manor Healthcare will vote, or cause to be voted, all shares of Common
Stock beneficially owned by them in favor of their election to the Board of
Directors. In addition to the Figges, James Lynn will continue to serve as a
director following the Closing of the Purchase Agreement.
MANAGEMENT PERSONNEL. Pursuant to the terms of the Purchase Agreement and
effective upon Closing of the Purchase Agreement, Mark L. Gildea will be elected
as Chief Executive Officer of the Company. The terms of the Purchase Agreement
require that Mr. Gildea devote at least approximately 75% of his entire working
time to the affairs of the Company, while the balance of his working time will
be devoted to Manor Healthcare and its affiliates other than the Company. The
Company will be responsible for the payment of his compensation, but will be
reimbursed by Manor Healthcare for 25% of the costs associated with the
employment of Mr. Gildea by the Company.
EMPLOYMENT AGREEMENTS. Concurrent with the execution of the Purchase
Agreement, the Company executed employment agreements with Judy Figge and
Kenneth Figge, which agreements are contingent upon and will be made effective
following the closing of the Purchase Agreement. Each of these employment
agreements expire by their terms on September 30, 1997, unless earlier
terminated or extended beyond that date. Ms. Figge's employment agreement
specifies that she will serve the Company as its President and Chairperson of
the Board of Directors, reporting to the Chief Executive Officer of the Company.
Ms. Figge will be paid a base salary of $300,000 per annum until September 30,
1996 and $315,000 per annum from October 1, 1996 to September 30, 1997. Mr.
Figge's employment contract specifies that he will serve the Company as its
Chief Financial Officer, receiving a base salary of $226,000 per annum until
September 30, 1996 and $237,000 per annum from October 1, 1996 to September 30,
1997. Each of Ms. Figge and Mr. Figge will be reimbursed for all reasonable
travel, hotel, entertainment or other expenses, including a monthly automobile
allowance, cellular phone, the use of a personal computer and facsimile machine
at their home and life insurance premiums on policies owned by the Figges. The
automobiles currently leased by the Company for use by the Figges will be
assigned to the Figges as soon as practicable after the closing of the Purchase
Agreement. The Figges will also be entitled to participate in all of the benefit
plans or programs of the Company, and will be eligible to receive annual bonuses
in accordance with the current management incentive compensation plan of the
Company, wherein cash bonuses may be awarded based on a designated percentage up
to 75% of base salary depending on the Company's performance.
Under their employment agreements, Ms. Figge and Mr. Figge will also be
granted stock options to purchase 300,000 shares and 200,000 shares,
respectively, of Common Stock pursuant to an amendment to the Company's 1995
Stock Option Plan described in Proposal Three. These options will have an
exercise price equal to the fair market value of the Common Stock on the date of
the Closing, will be immediately vested upon the grant thereof (but will not be
exercisable until after January 1, 1997) and will have a term of ten years from
the date of grant, although they will expire on the later of (i) March 31, 1997,
or (ii) the date that is 90 days after the termination of employment. These
options will also be subject to forfeiture in their entirety in the event that,
on or prior to December 31, 1996, the Board of Directors of Manor Healthcare or
of the Company shall have (a) formed in good faith a belief that Ms. Figge or
Mr. Figge, as the case may be, had actual conscious knowledge that a
representation or warranty included in the Purchase Agreement or any schedule,
exhibit or appendix thereto was materially untrue at the time of Closing of the
Purchase Agreement and (b) commenced an action in a court of competent
jurisdiction with respect to such believed material representation and such
court determines that Manor Healthcare's or the Company's belief was correct. If
such court determines that such belief was incorrect, the options will be
exercisable until the date that is the later of 90 days after (x) the
termination of employment or (y) the date of the court's decision.
Pursuant to the terms of the Purchase Agreement, the Company will also offer
employment agreements to James Lynn, Cathy Reeves and Margaret Maxon under the
terms provided in the Purchase Agreement. If executed, Mr. Lynn's employment
agreement extends for a period of two years following the closing of the
Purchase Agreement and requires Mr. Lynn to provide 60 to 80 hours of
30
<PAGE>
human resources/training services for the Company each month, for which he will
be compensated at a rate of $90,000 per annum. Mr. Lynn will also be eligible to
receive annual bonuses based on the Company's financial performance up to a
maximum amount equal to 50% of his base salary. Mr. Lynn will also be entitled
to participate in the Company's benefit plans or programs otherwise available to
executives of the Company. Mr. Lynn's employment agreement contemplates the
granting of options to Mr. Lynn to purchase 50,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. These options will be immediately vested upon the grant thereof, will be
exercisable immediately and will have a term of 10 years from the date of grant,
provided, however, that the options will expire within three months after
termination of employment.
The employment agreements to be offered to Ms. Reeves and Ms. Maxon will
extend for a term of one year following the closing of the Purchase Agreement
and contemplate that each will serve the Company as an officer-employee. Ms.
Reeves is currently the Vice President of Operations and Chief Operating Officer
of the Company and Ms. Maxon is the Vice President of Customer Relations. These
employment agreements contemplate a base salary of $137,500 per annum for Ms.
Reeves and $129,250 per annum for Ms. Maxon. Each will be eligible to receive
bonuses in accordance with the Company's management incentive compensation plan
and each will be entitled to participate in the Company's benefit plans
generally available to its executives. Each of Ms. Reeves and Ms. Maxon will be
granted options to purchase 50,000 shares of Common Stock at an exercise price
equal to the fair market value of the Common Stock on the date of grant. Each of
these options will be immediately vested upon the grant thereof, will be
exercisable immediately and will have a term of ten years from the date of
grant, provided, however, that such options will expire within three months
after termination of employment.
Each of the employment agreements with Ms. Figge, Mr. Figge, Mr. Lynn, Ms.
Reeves and Ms. Maxon has severance provisions designed to pay to the employee
severance payments equal to the amount due for the remaining term of the
applicable employment agreement if such employee's employment is terminated due
to death, disability or resignation or retirement of the employee for "Good
Reason". "Good Reason" is defined to include any request that the employee
permanently relocate to a location not in the Minneapolis, Minnesota
metropolitan area or a failure or refusal by the Company to provide duties for
the employee to perform which are consistent with such employee's position. Each
of the employment agreements, other than Mr. Lynn's, also contains agreements
not to compete with the Company during the term of the employment agreement and
for a period of one year following termination, in the case of Ms. Figge and Mr.
Figge, or for the greater of six months or the remaining term of the employment
agreement in the case of Ms. Reeves and Ms. Maxon.
POST-CLOSING COVENANTS. Manor Healthcare has agreed that, for a period of
two years following the Closing of the Purchase Agreement, the Company's
corporate headquarters will be maintained in the Minneapolis, Minnesota
metropolitan area (unless otherwise unanimously approved by the Board of
Directors); the Common Stock of the Company will continue to be publicly traded;
and the Company will continue to operate in the lines of business in which it
currently engages.
FUTURE ARRANGEMENTS. Subsequent to the Closing, the Company and Manor
Healthcare may determine to discuss entering into, or enter into, agreements or
arrangements which they deem prudent and mutually beneficial for the provisions
of services between them on terms that are fair to each party. Such services may
include, without limitation, administrative services, financial or treasury
management services, reimbursement matter services, legal services, accounting
services and other similar types of services.
SOURCE OF FUNDS
Manor Healthcare has informed the Company that the approximately $41.9
million to be used to make the Investment will come from its operating cash flow
and existing lines of credit available to it.
31
<PAGE>
INFORMATION CONCERNING MANOR HEALTHCARE
Manor Healthcare is a subsidiary of Manor Care, Inc., a publicly held
corporation with consolidated revenues of $1.2 billion in its fiscal year ended
May 31, 1994, of which approximately 79% was derived from health care related
services. Manor Healthcare owns, operates or manages 172 nursing centers
(including 10 medical and physical rehabilitation centers and 15 assisted living
centers) which provide high acuity services, skilled nursing care, intermediate
nursing care, custodial care and assisted living services, principally for
residents over the age of 65. Manor Healthcare also owns approximately 82.3% of
Vitalink Pharmacy Services, Inc., a public company that operates 17
institutional pharmacies in five states. Manor Healthcare also owns and operates
an acute care general hospital and five nursing assistant training schools.
Manor Healthcare's nursing centers generally provide five types of services:
high acuity services for persons who require complex medical and physical
rehabilitation services; skilled nursing care for persons who require 24
hour-a-day professional services of a registered nurse or a licensed practical
nurse; intermediate care for persons needing less intensive nursing care;
custodial care for persons needing a minimum level of care; and assisted living
for persons needing some supervision and assistance with personal care.
Substantially all of Manor Healthcare's nursing centers are currently
certified to receive benefits provided under Medicare and under programs
administered by the various states to provide medical assistance to the
medically indigent ("Medicaid"). However, Manor Healthcare attempts to locate
and operate its nursing centers in a manner designed to attract patients who pay
directly to the facilities for services without benefit of any government
assistance program. Patients seeking the services of the nursing centers come
from a variety of sources and are principally referred by hospitals and
physicians.
Certain other information regarding Manor Healthcare, as supplied by Manor
Healthcare to the Company, is contained in Appendix IV -- Manor Healthcare Corp.
Information Statement.
Manor Healthcare's principal executive offices are located at 10750 Columbia
Pike, Silver Spring, Maryland 20901 and its telephone number is (301) 681-9400.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
The following table sets forth, for the periods indicated, the Company's
results of operations as a percent of revenue:
<TABLE>
<CAPTION>
PERCENT CHANGE
PERCENT OF REVENUES ------------------------
------------------------------------- 1993 1992
1994 1993 1992 TO 1994 TO 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue.................................................. 100% 100% 100% 16% 38%
Direct Costs of Revenue.................................. 58 55 55 22% 39%
--- --- ---
Gross Profit............................................. 42 45 45 9% 38%
General, Administrative and Selling Expenses............. 41 43 40 12% 47%
--- --- ---
Income From Operations................................... 1% 2% 5% (44%) (37%)
</TABLE>
Revenue for 1994 increased 16% over 1993. Revenue increased 17% as a result
of increased services provided in geographic markets in which the Company
operated at the beginning of the prior year ("existing markets"), and 5% as a
result of acquisitions. This is offset by a 6% decrease in revenue as a result
of the Medicare reserve (4%) and pricing and mix changes (2%). In 1993 revenue
increased 38% over 1992. 1993 revenue increased 23% as a result of increased
services in existing markets, 15% as a result of acquisitions, and 1% as a
result of pricing and mix adjustments. This was offset by a 1% decrease due to
the Medicare reserve. The Company's growth within existing markets is the result
of industry growth, the Company's marketing efforts, improved name recognition
and the growth of infusion operations. In 1994 the Company entered the Toledo
and San Antonio markets through acquisitions and expanded into the Greensboro
market utilizing a Certificate of Need acquired in 1993. In 1993 the Company
entered the Raleigh-Durham, Dallas and Norfolk geographic markets, all of which
were through acquisitions.
The breakdown by division of the Company total revenue is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Extended Hours Division.......................................................... 18% 20% 25%
-- -- --
-- -- --
Visit Division -- Service........................................................ 78% 77% 71%
Infusion Products................................................. 4% 3% 4%
-- -- --
82% 80% 75%
-- -- --
-- -- --
</TABLE>
While Extended Hours Division revenue increased 7% and 9% in 1994 and 1993,
respectively, Visit Division revenue increased 18% and 48% in the comparable
periods, increasing its relative contribution to total revenue. Within the Visit
Division, infusion product revenue growth was 32% and 18% in 1994 and 1993,
respectively. This change in revenue mix is the result of stronger market demand
for Visit Division services, which are primarily Medicare reimbursed, along with
acquisitions of primarily visit-based businesses and the growth of infusion
products revenue. The reductions in the rate of the Company's growth were due
primarily to cash constraints resulting from disputes with Medicare fiscal
intermediaries which are discussed under "Liquidity and Capital Resources" and
Note 5 to the Financial Statements.
Direct costs of revenue, as a percentage of sales, were 58% in 1994 as
compared to 55% in 1993 and 1992. The change in 1994, resulting from an increase
of direct costs of 22% over 1993, whereas revenues increased only 16%, was due
to volume increase, fewer and smaller acquisitions and reductions in operational
support staff resulting in a smaller relative increase in general,
administrative
33
<PAGE>
and selling expense. In 1993, the increase in the less profitable Visit Division
services resulted in a slightly higher percentage increase for direct costs, as
contrasted with the revenue increase, compared to 1992.
Total operating expenses as a percentage of revenue have increased 18% in
1994 and 42% in 1993, which exceeded the increase in revenues of 16% in 1994 and
38% in 1993. The greater percentage increases in total operating costs, as
compared to the revenue increases, were due to the growth in the less profitable
Visit Division services and the increases in reserves for disputed costs (which
reduce the magnitude of the increase in revenues).
With the growth in the Company's operations, revenues and direct costs of
revenues in 1994 have grown at a greater pace than general, administrative and
selling expenses (see table above). The disproportionate increases in these
elements, combined with the greater increase in direct costs of revenue (22%) in
relation to the increase in revenue (16%), resulted in a decrease in gross
profit in 1994 to 42%, as compared to 45% in 1993. The gross profit percentage
was 45% for both 1993 and 1992. Although general, administrative and selling
expenses in 1993 increased at a greater rate than direct costs (which ordinarily
would result in an increase in the gross profit percentage), the change in the
mix of services and revenue sources (to a higher volume of the less profitable
Visit Division services) resulted in no change in the gross profit percentage.
Management's plans to address the decline in operating profit include
increasing the volume of the more profitable Extended Hours Division through
increased marketing and contracting efforts. In addition, the Company will
pursue an increase in its more profitable infusion products revenue.
General, administrative and selling expenses as a percent of revenue
decreased to 41% of revenue in 1994, compared to 43% and 40% in 1993 and 1992,
respectively. The decrease in 1994 was due to revenue growth at locations
acquired in prior years without related growth in expenses, as well as a
conscious effort to control expense. The increase from 40% in 1992 to 43% in
1993 was due to additional overhead associated with the acquisition and
integration of new branch offices and geographic markets and start-up expenses
associated with a new management information system.
Net interest expense increased $189,000 in 1994 over 1993 and $356,000 in
1993 over 1992. The increase was the result of greater borrowing under long-term
equipment leases and reduced short-term investments.
Income taxes in 1995 were 64% of pretax income, compared to 44% in 1993 and
38% in 1992. The increase in 1994 in the effective tax rate was due to
non-deductible expenses being a higher proportion of pretax earnings. The
increase in 1993 in the effective tax rate was the result of the Company
adopting Statement of Financial Accounting Standard ("SFAS") No. 109,
"Accounting for Income Taxes" and higher non-deductible expenses relative to
lower pretax income.
Net income was $247,000, $1,015,000, and $2,303,000 for the years 1994, 1993
and 1992, respectively. The primary reason for the reduction in profitability
was the addition of reserves related to the Medicare payment dispute which is
discussed below and in Note 5 to the Financial Statements. Additions to the
Medicare reserves totaled $3,861,000 in 1994 and $1,100,000 in 1993.
SIX MONTHS ENDED MARCH 31, 1995 AND 1994
Revenue for the three and six months ended March 31, 1995 increased by 8%
over the same periods in the prior year. The increase is the result of industry
growth, the Company's marketing efforts and improved name recognition.
Direct costs of revenue, as a percentage of sales, were 57% for the three
and six month periods ended March 31, 1995, as compared to 57% and 56%,
respectively, for the comparable prior year periods. The change was due to
increased volume which resulted in a larger increase in direct costs relative to
the increase in general, administrative and selling expenses.
34
<PAGE>
With the growth of the Company's operations, revenues and direct costs of
revenues have grown at a greater pace than general, administrative and selling
expenses. The disproportionate increases in these elements, combined with the
greater increase in direct costs of revenue in relation to the increase in
revenue, resulted in a decrease in gross profit for the six months ended March
31, 1995 to 43%, as compared to 44% the comparable prior year period. The gross
profit percentage for the three months ended March 31, 1995 was unchanged from
the comparable prior year period.
General, administrative and selling expenses, as a percent of revenue,
remained unchanged at 40% for the three and six months ended March 31, 1995 and
1994. For the six months ended March 31, 1995 and 1994, respectively, the
Company has recorded income tax expense at 46% and 47% of income before income
taxes.
Net income for the three months and six months ended March 31, 1995 was
$421,000 and $843,000 compared to $410,000 and $1,056,000 in the same periods
during the previous year. The change in year-to-date net income was principally
due to the increase in the Medicare revenue reserves combined with costs
exceeding reimbursement ceilings in one of the new markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $2,170,000 for the year
ended September 30, 1994 and increased $954,000 to $1,865,000 for the six months
ended March 31, 1995. Accounts receivable classified as current decreased from
$18,346,000 at September 30, 1993 to $16,503,000 at September 30, 1994 and to
$13,199,000 at March 31, 1995. These changes relate to disputes concerning
payment for services to Medicare beneficiaries. Approximately 74% and 76% of
revenue for the year ended September 30, 1994 and for the six months ended March
31, 1995, respectively, was derived from services provided to Medicare
beneficiaries. Payment for these services is made by the Medicare program based
on reimbursable costs incurred in rendering the services. Payments are made via
an interim payment rate as services are rendered. The Company files cost reports
with Medicare on an annual basis, which are subject to audit and retroactive
adjustment by Medicare. The Company records revenue only for those costs that it
believes are reasonably assured of recovery under the applicable Medicare
statutes and regulations. When the Company becomes aware of new information that
indicates that recovery of the amount of recorded revenues is not reasonably
assured, an adjustment is recorded via a revenue deduction (reserve) for such
amount.
Over the years, Medicare, in connection with its retrospective audit
process, has taken certain positions with respect to certain types of costs,
claiming that they are not reimbursable and thus not recoverable by the Company
from the Medicare program. These positions are based on regulations or
interpretations promulgated after the period covered by the cost reports and
applied retroactively, on interpretations of cost reimbursement principles that
are contrary to the Company's interpretations, or on what the Company believes
to be misapplications of specific reimbursement principles that could not have
been foreseen. These positions taken by Medicare are usually determined from
Medicare's Notice of Program Reimbursement ("NPR") which typically is not
received until two to three years after the services are rendered. Upon receipt
of an NPR that contains denial of certain costs as reimbursable, the Company
decides as to whether to accept it or appeal the denial of reimbursement of
specific costs. In those situations where the Company decides not to challenge
the NPR, any revenue relating to costs for which Medicare has denied
reimbursement (unless written off or provided for earlier) is written off as a
revenue reduction at that time. In those situations where the Company decides to
appeal a denial of reimbursable costs, those costs are categorized as disputed
costs. Also, any such disputed costs are extrapolated to other cost reporting
years for all of the Company's operations. The Company then makes a detailed
analysis of disputed costs. In making this analysis, the Company considers
applicable statutes and regulations, administrative and judicial decisions, and
consults with independent industry experts and legal counsel.
Based on this analysis, which is updated periodically based on any
developments that may occur relating to the disputed costs, the Company assesses
the probability of its success in challenging the
35
<PAGE>
position taken by Medicare. When the Company becomes aware of new information
via this analysis that may indicate that recovery of the amount of recorded
revenue is not reasonably assured, the Company provides a reserve (by means of a
revenue reduction) for such amounts.
At September 30, 1994 and March 31, 1995 there were a total of approximately
$20,000,000 and $24,000,000, respectively, in Company costs in several cost
categories that have been disputed in Medicare audits of past fiscal years, or
which would be challenged if the fiscal intermediaries take the same position as
to the same cost items in other fiscal years. The major cost category in
dispute, accounting for approximately half of total disputed costs, is the
treatment of certain personnel costs relating to community liaison positions,
which Medicare alleges are unreimbursable patient solicitation costs; other
costs in dispute relate to the cost of physical therapists employed by the
Company, administration and general costs allocated to branch operations,
certain corporate expenses, and cost transfers among branch operations.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries and the Health Care Financing Administration and is vigorously
pursuing these matters through administrative and legal channels. The Company
has filed two suits against the U.S. Department of Health and Human Services
(HHS) and several members of the Blue Cross Association which HHS uses as fiscal
intermediaries to administer the Medicare program. The two suits allege that the
defendants have unjustly withheld payments that are owed to the Company for
services it provided to Medicare beneficiaries from 1988 through fiscal 1994.
The Company, based on its analysis and assessment of the issues, believes
that recovery of $4,961,000 and $5,532,000 of such disputed costs may not be
reasonably assured and, accordingly, has established a reserve in that amount as
of September 30, 1994 and March 31, 1995, respectively. The remaining net amount
of disputed costs has been included in revenues in the respective years in which
services were rendered and, to the extent not paid to the Company, is included
in accounts receivable. However, in view of the expectation that resolution of
the disputed costs will not likely be accomplished within the next twelve
months, related net receivables of $9,979,000 and $14,568,000 have been
classified as a non-current asset as of September 30, 1994 and March 31, 1995,
respectively.
Operating activities provided $982,000 and $2,316,000 in cash for the year
ended September 30, 1994 and the six month period ended March 31, 1995,
respectively, compared to providing $951,000 and using $1,464,000 during the
comparable prior year periods, respectively. Accounts receivable have grown by a
lesser amount due to less revenue growth during the current year. The average
age of accounts receivables increased from 73 to 80 days as of September 30,
1994 and was essentially unchanged as of March 31, 1995.
Investing activities used $1,519,000 and $356,000 in cash for the year ended
September 30, 1994 and six month period ended March 31, 1995, respectively,
compared to $3,152,000 and $719,000 during the comparable prior year periods,
respectively. The Company acquired two companies during 1994, which acquisitions
were made with $341,000 in cash, issuance of 10,000 shares of Common Stock and
the assumption of $264,000 in notes payable. In connection with its acquisitions
and expansion of branches, the Company acquired property and developed software,
which was funded by $995,000 in cash and $753,000 of capitalized leases in 1994
and $2,466,000 in cash and $3,713,000 of capitalized leases in 1993. There were
no acquisitions during the six months ended March 31, 1995.
Financing activities used $1,633,000 and $1,006,000 in cash during the year
ended September 30, 1994 and the six month period ended March 31, 1995,
respectively, principally to make scheduled payments of long-term debt.
Financing activities provided $1,198,000 in cash during the six month period
ended March 31, 1994 due to borrowing of $2,000,000 under the bank line of
credit agreement, which was offset in part by payment of long-term debt.
The Company has a line of credit with a commercial bank that will expire in
December 1995. Under the credit line, the Company may borrow or obtain letters
of credit, all of which in the aggregate may not exceed the lesser of $7,500,000
or a borrowing base (which was $7,795,000 at
36
<PAGE>
March 31, 1995) that consists of 80% of eligible accounts receivable.
Substantially all the Company's receivables and general intangible assets are
pledged to secure the credit line. As of March 31, 1995 the Company had no
outstanding borrowings and had utilized $4,260,000 of the credit facility as the
basis for a letter of credit. The credit agreement obligates the Company to,
among other things, maintain certain financial ratios and limits the payment of
dividends. As of March 31, 1995 the Company was not in compliance with a
covenant of the credit agreement, but has obtained a waiver of this
non-compliance. The bank has advised the Company that it does not intend to
renew the line of credit agreement beyond the expiration date. The bank has also
advised the Company that the letter of credit must be replaced by December 15,
1995 or the bank will draw upon the line of credit to fund a collateral account
to accommodate any cash requirements of the letter of credit. The Company is
currently considering possible alternative sources of financing, which may
include establishment of a line of credit with a new lender or other financing
of certain accounts receivable and fixed assets.
Because of the pending Medicare disputes and their effect on liquidity, the
Company has significantly reduced its efforts to expand its business. This
posture is expected to continue until new capital is found or a significant
portion of the Medicare cost disputes are resolved, and it is uncertain when
either of these will occur. The Company continues to lease the majority of its
capital additions (primarily office furniture and equipment). Currently the
Company has no other material commitments which will require a significant use
of cash.
37
<PAGE>
PROPOSAL ONE
APPROVAL OF PURCHASE AGREEMENT
REASONS FOR APPROVAL
The Board of Directors of the Company has unanimously approved the Purchase
Agreement for the reasons described above in this Proxy Statement and is
submitting the Purchase Agreement to the stockholders of the Company for
approval. Schedule D of the Bylaws of the National Association of Securities
Dealers Inc. requires stockholder approval for consummation of the Investment.
CONTROL SHARE ACQUISITION ACT APPROVAL
The Minnesota Control Share Acquisition Act (the "Act") requires that any
party making a "control share acquisition" must obtain the approval of the
stockholders of the issuing public corporation. A control share acquisition is
defined as any acquisition that would cause the acquiring person to exceed
certain thresholds of voting power in the election of directors (20%, 33 1/3% or
50%). Any direct purchase of shares from the issuer is excluded from the
definition of "control share acquisition." Thus, the Company believes the
Investment by Manor Healthcare does not constitute a control share acquisition,
even though the Investment will result in Manor Healthcare beneficially owning
shares exceeding the applicable threshold of voting power of the Company.
However, if the Investment were deemed to be a control share acquisition and
the requisite stockholder approval were not obtained under the Act, Manor
Healthcare would be unable to vote the shares exceeding the thresholds set forth
in the Act, and such shares would be subject to redemption upon the terms set
forth in the statute. In order to avoid any claim that the Investment
constitutes a control share acquisition which has not obtained the requisite
stockholder approval, the Company and Manor Healthcare intend that the approval
of Proposal One will also constitute the stockholder approval that would be
required under the specific requirements of the Act. As required by the Act,
Manor Healthcare has delivered to the Company an information statement regarding
the terms of the acquisition. This information statement is attached as Appendix
IV to this Proxy Statement.
REQUIRED VOTE
Approval of Proposal One requires the affirmative vote of (i) the holders of
a majority of the shares of the Company's Common Stock outstanding on the Record
Date and entitled to vote at the Special Meeting, provided that the total vote
cast on the proposal represents over 50% in interest of all Common Stock
entitled to vote on the proposal, and (ii) a majority of such outstanding shares
excluding all "interested" shares. The term "interested shares" includes any
shares held by officers of the Company, directors who are also employees of the
Company or by Manor Healthcare. Manor Healthcare does not currently own any
shares of the Company's voting stock. The number of shares currently held by
officers and employee-directors of the Company, which would be excluded from the
vote contemplated in clause (ii) above, is 966,066 shares. If not otherwise
specified, properly executed proxies will be voted in favor of approval of the
Purchase Agreement.
Approval of Proposal One is conditioned on the approval of Proposals Two and
Three.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF PROPOSAL ONE.
38
<PAGE>
PROPOSAL TWO
AMENDMENT TO ARTICLES OF INCORPORATION
REASONS FOR THE AMENDMENT
The Board of Directors of the Company has unanimously approved an amendment
to Article III of the Articles of Incorporation of the Company to provide that
the Directors, in designating the voting rights of any series of preferred stock
of the Company, may provide that each share of preferred stock has voting rights
equal to the number of shares of Common Stock into which the shares of preferred
stock are convertible (the "Amendment"). The Board of Director's resolution
approving the Amendment states:
NOW, THEREFORE, BE IT RESOLVED, that Article III of the Company's
Articles of Incorporation be, and it hereby is, amended subject to
approval by the Company's shareholders and contingent upon the closing
of the Investment Agreement, by adding the following sentence to the
existing text of Article III:
"In addition, as to any series of Preferred Stock which may have
voting rights fixed by resolution of the Board of Directors, the
Board of Directors is authorized to provide in the resolution
fixing the voting rights of any series of Preferred Stock that
each share of such Preferred Stock has voting rights equal to the
number of shares of Common Stock in to which each such share of
Preferred Stock may be convertible at any time."
The Board of Directors believes that adoption of the Amendment clarifies the
power of the Board to provide that preferred stock may have voting rights on an
as-if-converted basis. Adoption of the Amendment is a condition to consummation
of the Investment and related transactions. The Board of Directors has concluded
that adoption of the Amendment, individually and together with the amendments
set forth in Proposals One and Three, is in the best interests of the Company
for the reasons set forth above in "Investment Proposals -- Background of the
Investment Proposals" and "-- Reasons for the Purchase Agreement Transactions."
REQUIRED VOTE
The affirmative vote of the holders of a majority of shares of the Company's
Common Stock outstanding on the Record Date and entitled to vote at the Special
Meeting is necessary to approve the Amendment. If not otherwise specified,
properly executed proxies will be voted in favor of the Amendment.
Approval of Proposal Two is conditioned on the approval of Proposals One and
Three.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF PROPOSAL TWO.
39
<PAGE>
PROPOSAL THREE
AMENDMENT OF STOCK OPTION PLANS
The Board of Directors of the Company has unanimously approved amendments to
the Company's 1987 and 1995 Stock Option Plans (the "Plans") to: (i) provide
that the options of non-employee directors of the Company will vest upon a
change in control of the Company and that upon a change of control, the Board
may grant certain options that depart from the terms of the Plans; (ii) increase
the total number of shares available under the 1995 Stock Option Plan from
650,000 to 1,300,000 in order to permit the granting of options under the Plan,
in the aggregate amount of 650,000 shares, to five officers or employees of the
Company as of the Closing Date; and (iii) impose a limit of 300,000 shares that
can be issued to any participant under each Plan during any fiscal year. The
Board of Directors believes that adoption of these amendments is in the best
interests of the stockholders of the Company and recommends that stockholders of
the Company vote in favor of Proposal Three.
REASONS FOR THE AMENDMENTS
The Company's 1987 Stock Option Plan (the "1987 Plan") was adopted by the
Board of Directors and approved by the stockholders on April 15, 1987. The
Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the Board of
Directors and approved by the stockholders on November 8, 1994 and January 20,
1995, respectively. The 1987 Plan and 1995 Plan (the "Plans") allow issuance of
options covering up to 2,500,000 shares and 650,000 shares, respectively, of
Common Stock. If an option expires without being exercised, the shares covered
by that option again become available for issuance under the new options.
As described under "Investment Proposals -- Changes to Company Management --
Management Personnel -- Employment Agreements," concurrently with the Closing of
the Purchase Agreement, the Company shall grant to the following officers and
employees pursuant to the 1995 Plan options to purchase an aggregate 650,000
shares of Common Stock: Ms. Figge, 300,000 shares; Mr. Figge, 200,000 shares;
Mr. Lynn, 50,000 shares; Ms. Reeves, 50,000 shares; and Ms. Maxon, 50,000
shares.
In connection with the approval of the Investment and related transactions,
on May 2, 1995 the Board of Directors of the Company approved an amendment to
the 1995 Plan to increase the number of shares available under the 1995 Plan by
650,000 shares to a total of 1,300,000 shares. The purpose of this amendment is
to permit the Company to grant the options to purchase 650,000 shares of Common
Stock as contemplated by the Purchase Agreement, without depleting the reserve
of shares available for issuance under the 1995 Plan. These shares can be used
by the Board of Directors in the future to attract and retain employees.
On May 2, 1995, the Board of Directors also approved an amendment to each of
the Plans, subject to stockholder approval, by changing the title of Article
XIII to "Merger, Consolidation or Change of Control" and adding a new Section
13.2 reading as follows:
"13.2 CHANGE IN CONTROL. In the event that the Company closes and
consummates any transaction which has been approved by the Company's
stockholders which, while not a merger or consolidation, involves a
change in control of the Company, then, notwithstanding any other
provision of the Plan, (i) the Board or the Committee may grant as a
part of such transaction Options which are not subject to the
termination provisions of Article IX and having such other terms and
provisions as the Board or the Committee deems appropriate, and (ii) any
outstanding Option held by non-employee members of the Board of
Directors shall be immediately vested in full."
Clause (i) of this amendment permits the granting of the options to the five
individuals described above with terms that depart from the terms of the 1995
Plan. The effect of clause (ii) of this amendment is to cause the options held
by non-employee directors to become vested in full as of the Closing Date of the
Purchase Agreement, which will permit Messrs. Finkle and Lieberbaum to obtain
40
<PAGE>
vesting of all of their stock options as of the Closing Date, which will also be
the effective date of their resignations. Messrs. Finkle and Lieberbaum each
hold options to purchase 35,000 shares of Common Stock which were granted
pursuant to the 1987 Plan.
In 1993, Section 162(m) was added to the Internal Revenue Code of 1986 (the
"Code"). The inclusion of this section limits the Company's deduction for
federal income tax purposes of compensation in excess of $1 million per
individual paid to the Company's Chief Executive Officer and its four highest
paid executive officers. Compensation plans which are performance based within
the requirements of Code Section 162(m), are approved by the Company's
stockholders, and granted by a committee consisting solely of two or more
outside directors as defined in Code Section 162(m) will not be subject to the
deduction limit. Stock options awarded under a plan that satisfies the
conditions of Code Section 162(m) qualify as performance based compensation.
Therefore, in order to satisfy one of the conditions of Code Section 162(m), on
May 31, 1995 the Board of Directors of the Company adopted the following
amendment to the Plans:
ARTICLE VII, TERMS OF STOCK OPTION. A new Section 7.8 shall be
added at the end thereof, to read as follows:
"ANNUAL LIMIT ON ALL STOCK OPTIONS. No eligible person shall be
granted any stock options for more than 300,000 shares of stock in
the aggregate during any fiscal year period, subject to
adjustments pursuant to Section 5.3. For this purpose, each fiscal
year period shall begin each October 1 and shall end on the
following September 30."
The addition of Section 7.8 imposes a limitation on the number of shares
that may be issued to any employee. This change is necessary to bring the Plans
into compliance with the requirements of Code Section 162(m). The options to Ms.
Figge, Mr. Figge, Mr. Lynn, Ms. Reeves and Ms. Maxon described above will be
granted by the Compensation Committee of the Board which will, immediately upon
the consummation of the transactions for which stockholder approval is being
sought, consist of at least three persons who will qualify as outside directors
as defined in Code Section 162(m). By adopting this change, the Company may
deduct any compensation expense resulting from the grant or exercise of options
issued under the Plans without regard to the limitations under Code Section
162(m), including the options to the individuals described above. For the
foregoing reasons, as well as those set forth above in "Investment Proposals --
Background of the Investment Proposals" and "-- Reasons for the Purchase
Agreement Transactions", the Board of Directors of the Company believes that
adoption of this Amendment, individually and together with the amendments set
forth in Proposals One and Two, is in the best interests of the stockholders and
the Company.
SUMMARY OF THE PLANS
The purpose of the Plans is to promote the interests of the Company and its
stockholders by aiding in attracting, retaining, and motivating Company
employees. All Company employees (approximately 5,000 persons) are eligible for
options. Each option qualifying as an incentive stock option must have an
exercise price not less than 100% (110% for a 10% or more stockholder) of the
fair market value of the Common Stock on the day the option is granted.
Generally the fair market value is the closing sale price reported on the Nasdaq
National Market on the date of grant. On , 1995, the last day for
which information was available at the time this Proxy Statement was printed,
the closing sale price was $ per share.
41
<PAGE>
Effective on closing of the Purchase Agreement, the Company will have
executed employment agreements with certain of its executive officers and
directors which will provide for the granting of stock options under the
Company's 1995 Plan. The following table sets forth the shares to be granted to
such persons pursuant to the 1995 Plan and concurrent with Closing of the
Purchase Agreement:
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
1995 STOCK OPTION PLAN (1)
------------------------------------
NUMBER OF UNITS
NAME AND POSITION DOLLAR VALUE ($) (COMMON STOCK)
- ------------------------------------------------------------------ ------------------- ---------------
<S> <C> <C>
Judy M. Figge, President and Chief Executive Officer (2) (3) 300,000
Kenneth J. Figge, Executive Vice President and Secretary (2) (3) 200,000
James J. Lynn (2) (3) 50,000
Cathy R. Reeves, Vice President -- Operations and Chief Operating (3) 50,000
Officer
Margaret L. Maxon, Vice President -- Customer Relations (3) 50,000
Executive Group (3) 600,000
Non-Executive Director Group (4) (3) 50,000
Non-Executive Officer Employee Group --
<FN>
- ------------------------
(1) There are currently options to purchase approximately 75,000 shares
outstanding under the 1995 Plan. The maximum number of shares issuable
under the 1995 Plan, on adoption of the proposed amendment set forth in
Proposal Three of this Proxy Statement, is 1,300,000.
(2) Director of the Company
(3) The exercise price of the shares issuable under the options will be the
fair market value on the date of grant, which is the date of Closing.
(4) This group does not include Messrs. Gildea, Rempe, Tomasso and Buckley,
directors nominated by Manor Healthcare, who will take office concurrent
with Closing of the Purchase Agreement.
</TABLE>
The Plans allow the Board of Directors to designate any option at the time
of grant as either an "incentive stock option" or a "nonqualified option" for
tax purposes. The Board of Directors also designates at the time of grant the
number of shares covered, exercise price, vesting schedule and expiration date
of each option. No option may be exercised more than ten years after the date of
grant.
Generally speaking, if an option holder's employment by the Company
terminates for a reason other than death or disability, options held by that
person will expire if not exercised within three months following termination of
employment. If an option holder dies or becomes permanently disabled, his
options will generally expire in one year if not exercised by his estate or
legal representative.
The number, kind and price of the shares subject to each outstanding option
will be adjusted in the event of stock splits, stock dividends, or similar
changes in the Company's outstanding securities. In the event of a
reorganization of the Company, appropriate provision will be made for the
continuation of any outstanding options, or the substitution of new options, on
an equitable basis. In addition, the Plans grant broad discretion to the Board
of Directors to take such action as it may deem necessary or advisable and fair
and equitable to optionees in the event of a change in control of the Company, a
tender or exchange offer for all or part of the Common Stock of the Company, a
merger or consolidation of the Company or a sale of all or substantially all of
the Company's assets, including authority to provide for earlier, later,
extended or additional terms for the exercise of the whole or any installments
of outstanding options, alternate forms of payment or other modifications.
42
<PAGE>
The 1987 Plan and 1995 Plan expire on April 15, 1997 and November 8, 2004,
respectively. The Board of Directors may terminate or amend either Plan. Any
amendment to increase the number of shares covered by either Plan, change the
class of eligible employees, or reduce the minimum option price for incentive
stock options to less than fair market value requires stockholder approval
within twelve months after it is adopted by the Board of Directors in order to
become effective. The Board of Directors may delegate its plenary authority to
administer either Plan to a committee of not fewer than three directors, two of
which may or may not be eligible to receive options under either plan.
GRANTS OF OPTIONS
There are currently options to purchase approximately 75,000 shares
outstanding under the 1995 Plan. During the last three fiscal years (October 1,
1991 to September 30, 1994) the Company has granted under the 1987 Plan options
to purchase a total of 330,000 shares to executive officers at an average price
of $3.61 per share and options for a total of 693,000 shares to other employees
at exercise prices ranging from $1.88 to $5.94 per share.
The following table sets forth options granted under the Company's 1987 and
1995 Stock Option Plans, and the number of shares issuable thereunder, from
fiscal year 1992 to the Record Date and on the Closing Date. The table sets
forth options granted to the Company's executive officers, directors, nominee
directors, any associate of any of such directors, executive officers or
nominees, persons who received or will receive 5% of such options, and all
employees, including non-executive officers.
<TABLE>
<CAPTION>
STOCK OPTION PLANS (1)(2)
---------------------------------------------------
OPTIONS GRANTED
---------------------------------------------------
OCTOBER 1991 TO RECORD CLOSING DATE
DATE (1995 STOCK OPTION
NAME AND POSITION (1987 STOCK OPTION PLAN) PLAN)
- ---------------------------------------------- -------------------------- -----------------------
<S> <C> <C>
Judy M. Figge, President and Chief Executive 190,000 300,000
Officer (3)
Kenneth J. Figge, Exec. Vice President and CFO 115,000 200,000
(3)
Cathy R. Reeves, Vice Pres. -- Operations and 50,000 50,000
Chief Operating Officer
Margaret L. Maxon, Vice-President -- Customer 45,000 50,000
Relations
S. Marcus Finkle (3) 40,000 --
Sheldon Lieberbaum (3) 40,000 --
James J. Lynn (3) 40,000 50,000
Executive Group 400,000 600,000
Non-Executive Director Group (4) 120,000 50,000
Non-Executive Officer Employee Group -- --
<FN>
- ------------------------
(1) During the last three fiscal years (October 1, 1991 to September 30, 1994)
the Company granted under the 1987 Plan options to purchase a total of
330,000 shares to executive officers at an average price of $3.61 per share
and options for a total of 693,000 shares to other employees at exercise
prices ranging from $1.88 to $5.94 per share.
(2) Maximum shares issuable under the 1987 Plan: 2,500,000
(3) Director of the Company
(4) This group does not include Messrs. Gildea, Rempe, Tomasso and Buckley,
directors nominated by Manor Healthcare, who will take office concurrent
with Closing of the Purchase Agreement.
</TABLE>
43
<PAGE>
FEDERAL INCOME TAX TREATMENT
Generally the grant of either an incentive stock option or a nonqualified
option under the Plans will not cause recognition of income by the optionee or
entitle the Company to an income tax deduction. Upon exercise of an option the
tax treatment will generally vary depending on whether the option is an
incentive stock option or a nonqualified option. The exercise of an incentive
stock option will generally not cause recognition of income by the optionee or
entitle the Company to a tax deduction. However, the amount by which the fair
market value of the shares obtained exceeds the exercise price on the day of
exercise is an item of tax preference to the optionee for alternative minimum
tax purposes.
The exercise of a nonqualified option will generally cause the optionee to
recognize taxable income equal to the difference between the exercise price and
the fair market value of the stock obtained on the day of exercise. The Company
must then in most cases obtain from the optionee funds to meet tax withholding
requirements arising from that income recognition. The exercise of a
nonqualified option will also generally entitle the Company to an income tax
deduction equal to the amount of the income recognized by the exercising option
holder. The deduction by the Company may be denied unless the Plan also
satisfies the requirements of Code Section 162(m).
The foregoing discussion of the federal income tax treatment of options is
necessarily general and any option holder should consult his tax advisor as to
his own particular circumstances and applicable laws and regulations.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the Company's Common
Stock present and entitled to vote on this matter at the Special Meeting is
necessary to approve the proposed amendments to the Plans. If not otherwise
specified, properly executed proxies will be voted in favor of these amendments.
However, if the shares present and entitled to vote on Proposal Three would not
constitute a quorum for the transaction of business at the Special Meeting, then
Proposal Three must be approved by a majority of the voting power of the minimum
number of shares that would constitute such a quorum.
Approval of Proposal Three is conditioned on the approval of Proposals One
and Two.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF PROPOSAL THREE.
STOCKHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
Stockholders are advised that any proposals of stockholders intended to be
presented at the 1996 Annual Meeting of Stockholders must be received by the
Company on or before September 17, 1995 for inclusion in the Company's proxy
statement and form of proxy relating to that meeting. In addition, the bylaws of
the Company establish an advance notice requirement for any proposal of business
to be considered at an annual meeting of stockholders that is not made by or at
the recommendation of a majority of the directors then in office. In general,
written notice must be delivered to the Secretary of the Company at its
principal executive office, Carlson Center, Suite 500, 601 Lakeshore Parkway,
Minnetonka, Minnesota 55305-5214, within certain time periods in advance of the
meeting and must contain specified information concerning the matter to be
brought before the meeting and the stockholder proposing the matter. Any
stockholder desiring a copy of the bylaws of the Company will be furnished one
without charge upon written request to the Secretary of the Company.
OTHER MATTERS
Under Minnesota law and the bylaws of the Company, no other business may be
transacted at the Special Meeting.
44
<PAGE>
Under Minnesota law, if the shares present and entitled to vote on an item
of business would not constitute a quorum for the transaction of business at the
meeting, then the item must be approved by a majority of the voting power of the
minimum number of shares that would constitute such a quorum. Votes cast by
proxy or in person at the Special Meeting will determine whether or not a quorum
is present. Abstentions will be treated as shares that are present and entitled
to vote for purposes of determining the presence of a quorum, but as unvoted for
purposes of determining the approval of the matter submitted to the
stockholders. Therefore abstentions are effectively a vote against the proposal.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
By Order of the Board of Directors,
Kenneth J. Figge, SECRETARY
45
<PAGE>
IN HOME HEALTH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Independent Auditors' Report....................................... F-3
Consolidated Balance Sheets........................................ F-4 to F-5
Consolidated Statements of Income.................................. F-6
Consolidated Statements of Shareholders' Equity.................... F-7
Consolidated Statements of Cash Flows.............................. F-8
Notes to Consolidated Financial Statements......................... F-9 to F-18
</TABLE>
F-1
<PAGE>
(This page has been left blank intentionally.)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
In Home Health, Inc.:
We have audited the accompanying consolidated balance sheets of In Home
Health, Inc. as of September 30, 1994 and 1993 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1994. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and 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, such consolidated financial statements present fairly, in
all material respects, the financial position of In Home Health, Inc. as of
September 30, 1994 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements, effective
October 1, 1992 the Company changed its method of accounting for income taxes.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 18, 1994, except for the
second paragraph of Note 3 and
Note 10, as to which the date is June 29, 1995.
F-3
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1993
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 911 $ 3,081
Accounts receivable (net of allowances of $1,029 and $859 in 1994
and 1993, respectively)............................................ 16,503 18,346
Prepaid income tax.................................................. 459 538
Deferred income tax................................................. 800 1,017
Prepaid expenses and other current assets........................... 1,438 1,044
------- -------
Total current assets.............................................. 20,111 24,026
------- -------
Property:
Furniture and equipment............................................. 9,007 8,581
Leasehold improvements.............................................. 654 574
Computer equipment and software..................................... 7,057 6,310
------- -------
Total............................................................. 16,718 15,465
Accumulated depreciation............................................ (4,993) (2,940)
------- -------
Property -- Net................................................... 11,725 12,525
------- -------
Other Assets:
Accounts receivable................................................. 9,979 3,849
Goodwill............................................................ 5,906 5,307
Covenants not to compete............................................ 128 491
Deposits............................................................ 559 509
Other assets........................................................ 652 842
------- -------
Total other assets................................................ 17,224 10,998
------- -------
Total Assets.......................................................... $49,060 $47,549
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1993
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt................................ $ 2,286 $ 2,214
Accounts payable.................................................... 3,821 3,913
Accrued liabilities:
Compensation...................................................... 3,486 2,671
Insurance......................................................... 2,960 3,446
Other............................................................. 488 383
------- -------
Total current liabilities....................................... 13,041 12,627
------- -------
Long-Term Debt........................................................ 3,304 4,740
Deferred Revenue...................................................... 1,632 --
Deferred Rent Payable................................................. 516 536
Deferred Income Tax................................................... 2,085 2,187
Commitments and Contingencies......................................... -- --
Shareholders' Equity:
Preferred stock -- authorized 1,000 shares.......................... -- --
Common stock -- $.01 par value: authorized -- 40,000 shares; issued
and outstanding -- 1994 -- 15,944 shares 1993 -- 15,518 shares..... 159 155
Additional paid-in capital.......................................... 23,828 23,056
Retained earnings................................................... 4,495 4,248
------- -------
Total shareholders' equity...................................... 28,482 27,459
------- -------
Total Liabilities and Shareholders' Equity............................ $49,060 $47,549
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Revenue............................................................... $120,485 $103,761 $75,072
-------- -------- -------
Operating Expenses:
Direct costs of revenue (primarily payroll related costs)........... 69,411 57,059 41,111
General, administrative and selling expenses........................ 49,721 44,270 30,121
-------- -------- -------
Total operating expenses.......................................... 119,132 101,329 71,232
-------- -------- -------
Income From Operations................................................ 1,353 2,432 3,840
-------- -------- -------
Interest:
Interest expense.................................................... 698 575 417
Interest income..................................................... (29) (95) (293)
-------- -------- -------
Net interest expense.............................................. 669 480 124
-------- -------- -------
Income Before Income Taxes............................................ 684 1,952 3,716
Income Tax Expense.................................................... 437 865 1,413
-------- -------- -------
Income Before Cumulative Effect of Change in
Accounting Principle................................................. 247 1,087 2,303
Cumulative Effect of Change in Accounting Principle................... -- 72 --
-------- -------- -------
Net Income............................................................ $ 247 $ 1,015 $ 2,303
-------- -------- -------
-------- -------- -------
Net Income Per Common and Common Equivalent Share:
Primary............................................................. $ .02 $ .06 $ .15
-------- -------- -------
-------- -------- -------
Fully diluted....................................................... $ .02 $ .06 $ .14
-------- -------- -------
-------- -------- -------
Weighted Average Common and Common Equivalent
Shares Outstanding:
Primary............................................................. 16,013 16,056 15,780
-------- -------- -------
-------- -------- -------
Fully diluted....................................................... 16,013 16,056 15,913
-------- -------- -------
-------- -------- -------
</TABLE>
Net income per share impact of the cumulative effect of the change in accounting
principle is less than $.01.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balance -- September 30, 1991......................................... 11,603 $116 $12,826 $ 930
Common stock issued for:
Class C warrant exercise............................................ 2,726 27 7,446 --
Underwriter warrant exercise........................................ 34 1 48 --
Private warrant exercise............................................ 140 1 86 --
Employee stock plans................................................ 528 5 617 --
Acquisitions........................................................ 120 1 569 --
Net income............................................................ -- -- -- 2,303
------ ------ ---------- --------
Balance -- September 30, 1992......................................... 15,151 151 21,592 3,233
Common stock issued for:
Employee stock plans................................................ 194 2 521 --
Acquisitions........................................................ 173 2 943 --
Net income............................................................ -- -- -- 1,015
------ ------ ---------- --------
Balance -- September 30, 1993......................................... 15,518 155 23,056 4,248
Common stock issued for:
Employee stock plans................................................ 266 3 745 --
Acquisitions........................................................ 10 -- 28 --
Exchange for warrants............................................... 150 1 (1) --
Net income............................................................ -- -- -- 247
------ ------ ---------- --------
Balance -- September 30, 1994......................................... 15,944 $159 $23,828 $4,495
------ ------ ---------- --------
------ ------ ---------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income.......................................................... $ 247 $ 1,015 $ 2,303
Adjustments:
Depreciation and amortization..................................... 3,233 2,146 1,513
Accounts receivable............................................... (4,172) (4,232) (8,305)
Prepaid expenses and other assets................................. (210) (141) (206)
Accounts payable.................................................. (216) 545 1,329
Accrued liabilities............................................... 360 1,073 1,387
Deferred revenue.................................................. 1,632 -- --
Deferred rent payable............................................. (20) 139 245
Deferred income tax............................................... 128 406 699
------- ------- -------
Net cash provided (used) by operating activities................ 982 951 (1,035)
------- ------- -------
Cash Flows From Investing Activities:
Acquisition of businesses........................................... (389) (699) (803)
Acquisition of property............................................. (995) (2,466) (1,961)
Advances to officers and employees.................................. (135) 13 161
------- ------- -------
Net cash used by investing activities........................... (1,519) (3,152) (2,603)
------- ------- -------
Cash Flows From Financing Activities:
Payment of long-term debt........................................... (2,381) (2,741) (1,834)
Proceeds from issuance of common stock.............................. 748 523 8,231
------- ------- -------
Net cash provided (used) by financing activities................ (1,633) (2,218) 6,397
------- ------- -------
Cash and Cash Equivalents:
Net increase (decrease)............................................. (2,170) (4,419) 2,759
Beginning of year................................................... 3,081 7,500 4,741
------- ------- -------
End of year..................................................... $ 911 $ 3,081 $ 7,500
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- In Home Health specializes in high-quality health services to
clients in their own homes, including infusion therapy, high-tech nursing,
rehabilitation and personal care.
BASIS OF CONSOLIDATION -- The consolidated financial statements include the
accounts of In Home Health, Inc. and its subsidiaries (the "Company"). All
material intercompany accounts and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS -- Securities which are readily convertible into cash with
original maturities of three months or less are considered cash equivalents.
NOTES RECEIVABLES FROM OFFICER -- Included in prepaid expenses and other
current assets are advances to an officer of the Company in the amount of
$150,000 as of September 30, 1994. There were no advances to officers at
September 30, 1993.
PROPERTY AND PROPERTY UNDER CAPITALIZED LEASES -- Property and property
under capitalized leases are stated at cost and depreciated or amortized over
estimated useful lives (from three to twelve years) using the straight-line
method. Property acquired by capital lease for the years ended September 30,
1994, 1993 and 1992 was $753,000, $3,713,000 and $3,848,000, respectively.
GOODWILL -- Costs in excess of net assets of acquired businesses have been
capitalized and are being amortized over 40 years. Accumulated amortization was
$420,000 and $268,000 at September 30, 1994 and 1993, respectively.
COVENANTS NOT TO COMPETE -- Covenants not to compete are being amortized
over the terms of the various agreements (from two to five years). Accumulated
amortization was $579,000 and $1,326,000 at September 30, 1994 and 1993,
respectively.
DEFERRED REVENUE -- Deferred revenue relates to the timing difference in
recording certain software development costs for financial statement purposes
and Medicare cost reporting purposes. Incremental costs relating to the
development of software for certain major management information system projects
undertaken during 1992 through 1994 have been capitalized and are included in
computer equipment and software on the balance sheet. For Medicare cost
reimbursement purposes, the Company has filed amended cost reports for prior
years to include in reimbursable costs the amount of expenditures in the year
they were incurred. Accordingly, as of September 30, 1994, the Company has
reported an amount of deferred revenue, representing the Medicare impact of the
difference between the reimbursable costs reported on the Medicare cost reports
and the unamortized balance of capitalized software development costs. The
deferred revenues are being recorded to revenue when the amortization of the
related software development expenses is recorded (over a five year period).
Unamortized software development costs are $2,368,000 and $2,734,000 as of
September 30, 1994 and 1993, respectively.
DEFERRED RENT PAYABLE -- Deferred rent payable has been recorded for
long-term office space operating leases which contain initial rent inducements.
Rental expense is being amortized on a straight-line basis over the terms of the
operating leases.
INCOME TAXES -- The Company adopted Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes" in 1993. Under SFAS No.
109, the deferred tax provision is determined under the liability method. Under
this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
F-9
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION -- The Company records revenue for services to Medicare
beneficiaries at the time the services are rendered and based on the Medicare
cost reimbursement principles. Under those principles, Medicare reimburses the
Company for the reasonable costs (as defined) incurred in providing care to
Medicare beneficiaries. The Company reports as reimbursable costs in the
Medicare cost reports only those costs it believes to be reimbursable under the
applicable Medicare cost reimbursement principles. In determining the amount of
revenue to be recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement principles in
effect at that time. Accordingly, this process results in recording revenue only
for the costs that the Company believes are reasonably assured of recovery.
Refer to Note 5 for additional information.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- Net income per common
and common equivalent share is computed by dividing net income by the weighted
average number of common stock and dilutive common stock equivalents
outstanding. Common stock equivalents result from dilutive stock options and
warrants. Any differences in common stock equivalents for primary and fully
diluted shares are the result of the quoted market price of the Company's common
stock being higher at the end of the period than the average market price during
the period.
F-10
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
2. ACQUISITIONS
The Company acquired all of the issued and outstanding capital stock of two,
three and five home health care companies during the years ended September 30,
1994, 1993 and 1992, respectively. The acquisitions accounted for as purchases
for financial reporting purposes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CONSIDERATION:
CASH
NOTES PAYABLE TOTAL VALUE OF
ACQUISITION ISSUED CONSIDERATION GOODWILL
COMPANY NAME DATE COMMON STOCK PAID RECORDED
<S> <C> <C> <C> <C>
Professional Medical Personnel, Inc. & October, 1991 $ 77 $ 173 $ 240
Professional Medical Personnel -- Home 96
Health Care Division, Inc. --
Meyer Care SF, Inc. October, 1991 $ 500 $ 700 $ 429
100
26 shares
Faust Home Health Care, Inc. & Faust June, 1992 $ 170 $ 205 $ 177
Health Care Network, Inc. 35
--
Professional Home Care of Washington, July, 1992 $ 150 $ 550 $ 1,228
Inc. --
79 shares
CareServices of Raleigh Limited January, 1993 $ 210 $ 569 $ 548
Partnership, CareServices of Raleigh, --
NC, Inc. and CareServices of 58 shares
Greensboro, NC, Inc.
Accent on Care Home Health Services, January, 1993 $ 25 $ 100 $ 155
Ltd. 25
8 shares
Home Care Resources, Inc., HCR February, 1993 $ 205 $ 741 $ 852
Associates, Inc. and Physician Home --
Health Care, Inc. 107 shares
ENS, Inc. January, 1994 $ 41 $ 69 $ 232
--
10 shares
RI Partners and RHC Partners May, 1994 $ 300 $ 300 $ 516
--
--
</TABLE>
The purchase price has been allocated to the net assets acquired, including
intangible assets, based on their fair market values at the acquisition dates.
The net assets acquired in these acquisitions consisted primarily of accounts
receivable and current liabilities. The consolidated statements of operations
include the results of operations of these companies since their respective
acquisition dates. The fair market value of the common stock issued for the
acquisitions in 1994, 1993 and 1992
F-11
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
2. ACQUISITIONS (CONTINUED)
was $28,000, $945,000 and $500,000, respectively. Additional goodwill of
$421,000 was recorded in 1993 related to 1992 acquisitions. Notes payable issued
for the acquisitions in 1993 and 1992 were $25,000 and $231,000, respectively.
The Company incurred $95,000, $264,000 and $390,000 of costs in 1994, 1993 and
1992, respectively, in connection with the acquisitions.
The following table summarizes the Company's unaudited pro forma operating
results as if the 1994 and 1993 acquisitions had occurred at the beginning of
1993 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------
1994 1993
----------- ------------
<S> <C> <C>
Service revenue................................................... $ 121,277 $ 106,602
----------- ------------
----------- ------------
Net income........................................................ $ 250 $ 904
----------- ------------
----------- ------------
Net income per common and common equivalent share -- primary...... $ .02 $ .06
----------- ------------
----------- ------------
</TABLE>
The pro forma operating results for 1992, if the 1993 acquisitions had
occurred at the beginning of 1992, include service revenue of $80,061,000, net
income of $2,227,000 and net income per share -- primary of $.14.
The pro forma operating results do not purport to be indicative of the
results that actually would have been obtained had the combined operations been
conducted during the periods presented and are not intended to be a projection
of future operating results.
VALLEY HOME HEALTH
Effective September 1, 1992, the Company acquired all of the stock of Valley
Home Health, Inc. by issuing 41,204 shares of the Company's common stock.
The Valley Home Health, Inc. acquisition was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements for 1992 have
been restated to include the accounts and operations of Valley Home Health.
Revenues and net income (loss) of the separate companies for the periods
preceding the acquisition were (in thousands):
<TABLE>
<CAPTION>
11 MONTHS ENDED
AUGUST 31, 1992
(UNAUDITED)
----------------
<S> <C>
Revenues:
In Home................................................................... $ 67,010
Valley Home............................................................... 924
--------
Combined.................................................................. $ 67,934
--------
--------
Net Income (Loss):
In Home................................................................... $ 2,131
Valley Home............................................................... (62)
--------
Combined.................................................................. $ 2,069
--------
--------
</TABLE>
F-12
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
3. NOTE PAYABLE -- BANK
The Company has an agreement with a bank which provides for a line of credit
equal to the lesser of $7.5 million or a borrowing base (which was $8,511,000 at
September 30, 1994) that consists of 80% of eligible accounts receivable. As of
September 30, 1994 the Company had utilized $4,130,000 of the facility for an
irrevocable standby letter of credit to secure workers' compensation
commitments. The interest rate on the line of credit is prime plus .75% (8.5% at
September 30, 1994). Borrowings are due at the expiration of the agreement and
are collateralized by accounts receivable and intangibles. The Company had no
bank borrowings at September 30, 1994 and 1993.
The Company is required to maintain certain financial ratios and is limited
to paying dividends equal to 25% of the prior twelve month earnings. As of
September 30, 1994, the Company was out of compliance with certain provisions of
its credit agreement underlying its line of credit and letter of credit
facility. The bank has agreed to waive these covenant violations. The bank has
advised the Company that it does not intend to renew the line of credit
agreement beyond the expiration date. The line of credit, as amended on June 29,
1995, expires on December 31, 1995. The bank has also advised the Company that
the letter of credit must be replaced by December 15, 1995 or the bank will draw
upon the line of credit to fund a collateral account to accommodate any cash
requirements of the letter of credit. The Company is currently considering
possible alternative sources of financing, which may include establishment of a
line of credit with a new lender or other financing of certain accounts
receivable and fixed assets.
4. LONG-TERM DEBT
Following is a summary of long-term debt at September 30 (in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Obligations under capitalized leases, up to 37.2% (primarily 5.5% to 15.9%),
due through July 1999............................................................. $ 5,220 $ 6,523
Installment notes payable, 6.5% to 6.9%, due through December 1995,
secured by property............................................................... 370 431
--------- ---------
Total.............................................................................. 5,590 6,954
Less current maturities............................................................ 2,286 2,214
--------- ---------
Long-term debt..................................................................... $ 3,304 $ 4,740
--------- ---------
--------- ---------
</TABLE>
Future minimum payments as of September 30, 1994 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITALIZED INSTALLMENT
SEPTEMBER 30 LEASES NOTES TOTAL
- -------------------------------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
1995................................................................ $ 2,498 $ 369 $ 2,867
1996................................................................ 2,192 1 2,193
1997................................................................ 1,523 -- 1,523
1998................................................................ 638 -- 638
1999................................................................ 115 -- 115
----------- ----- ---------
Total minimum payments.............................................. 6,966 370 7,336
Less amounts representing interest.................................. 1,746 -- 1,746
----------- ----- ---------
Present value of future minimum payments............................ 5,220 370 5,590
Less current maturities............................................. 1,917 369 2,286
----------- ----- ---------
Long-term debt...................................................... $ 3,303 $ 1 $ 3,304
----------- ----- ---------
----------- ----- ---------
</TABLE>
F-13
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
4. LONG-TERM DEBT (CONTINUED)
Assets recorded under capital leases are included in property at cost of
$7,993,000 and $7,435,000, and accumulated depreciation of $1,854,000 and
$1,356,000 at September 30, 1994 and 1993, respectively. Interest paid for the
years ended September 30, 1994, 1993 and 1992 was $687,000, $546,000 and
$403,000, respectively.
5. MEDICARE COST REIMBURSEMENT
Approximately 74%, 73% and 68% of revenue for the years ended September 30,
1994, 1993 and 1992, respectively, is derived from services provided to Medicare
beneficiaries. Payment for these services is made by the Medicare program based
on reimbursable costs incurred in rendering the services. Payments are made via
an interim payment rate as services are rendered. The Company files cost reports
with Medicare on an annual basis, which are subject to audit and retroactive
adjustment by Medicare. The Company reports revenue only for those costs that it
believes are reasonably assured of recovery under the applicable Medicare
statutes and regulations. When the Company becomes aware of new information that
indicates that recovery of the amount of recorded revenues is not reasonably
assured, an adjustment is recorded via a revenue deduction (reserve) for such
amount.
Over the years, Medicare, in connection with its retrospective audit
process, has taken certain positions with respect to certain types of costs,
claiming that they are not reimbursable and thus not recoverable by the Company
from the Medicare program. These positions are based on regulations or
interpretations promulgated after the period covered by the cost reports and
applied retroactively, on interpretations of cost reimbursement principles that
are contrary to the Company's interpretations, or on what the Company believes
to be misapplications of specific reimbursement principles, that could not have
been foreseen. These positions taken by Medicare are usually determined from
Medicare's Notice of Program Reimbursement (NPR) which typically is not received
until two to three years after the services are rendered. Upon receipt of an NPR
that contains denial of certain costs as reimbursable, the Company decides as to
whether to accept it, or appeal the denial of reimbursement of specific costs.
In those situations where the Company decides to not challenge the NPR, any
revenue relating to costs for which Medicare has denied reimbursement (unless
written off or provided for earlier) is written off as a revenue reduction at
that time. In those situations where the Company decides to appeal a denial of
reimbursable costs, those costs are categorized as disputed costs. Also, any
such disputed costs are extrapolated to other cost reporting years for all of
the Company's operations. The Company then makes a detailed analysis of disputed
costs. In making this analysis, the Company considers applicable statutes and
regulations, administrative and judicial decisions, and consults with
independent industry experts and legal counsel.
Based on this analysis, which is updated periodically based on any
developments that may occur relating to the disputed costs, the Company assesses
the probability of its success in challenging the position taken by Medicare.
When the Company becomes aware of new information via this analysis that may
indicate that recovery of the amount of recorded revenue is not reasonably
assured, the Company provides a reserve (by means of a revenue reduction) for
such amount.
Currently there is a total of approximately $20,000,000 in Company costs in
several cost categories that have been disputed in Medicare audits of past
fiscal years, or which would be challenged if the fiscal intermediaries take the
same position as to the same cost items in other fiscal years. The major cost
category in dispute, accounting for 48% of total disputed costs, is the
treatment of certain personnel costs relating to our community liaison
positions, which Medicare alleges are unreimbursable
F-14
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
5. MEDICARE COST REIMBURSEMENT (CONTINUED)
sales costs; other costs in dispute relate to the cost of physical therapists
employed by the Company, administration and general costs allocated to branch
operations, certain corporate expenses, and cost transfers among branch
operations.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries and the Health Care Financing Administration and is vigorously
pursuing these matters through administrative and legal channels. The Company
has filed two suits against the U.S. Department of Health and Human Services
(HHS) and several members of the Blue Cross Association which HHS uses to
administer the Medicare program. The two suits allege that the defendants have
unjustly withheld payments that are owed to the Company for services it provided
to Medicare beneficiaries from 1988 through fiscal 1994.
The Company, based on its analysis and assessment of the issues, believes
that recovery of $4,961,000 of such disputed costs may not be reasonably assured
and, accordingly, has established a reserve in that amount as of September 30,
1994. The remaining net amount of disputed costs has been included in revenues
in the respective years in which services were rendered and, to the extent not
paid to the Company, is included in accounts receivable. However, in view of the
expectation that resolution of the disputed costs will not likely be
accomplished within the next twelve months, related net receivables of
$9,979,000 have been classified as a non-current asset.
The reserve balance of $4,961,000 at September 30, 1994 has been recorded
during fiscal 1993 ($1,100,000) and 1994 ($3,861,000), based on the timing of
information that was available to make an assessment of assurance of recovery of
the disputed costs. In connection therewith, based on information that became
available in the last fiscal quarters of 1994 and 1993, adjustments to the
Medicare reserves of $2,639,000 and $1,100,000 were recorded in those fiscal
quarters.
Total accounts receivable due from Medicare at September 30, 1994 and 1993
were $20,599,000 and $20,120,000, respectively, including the receivables (net
of reserves) for disputed claims.
6. COMMITMENTS AND CONTINGENCIES
The Company is obligated under several noncancelable operating leases for
office space and equipment. Total rental expense for all operating leases was
$3,666,000, $2,763,000 and $2,007,000, for the years ended September 30, 1994,
1993 and 1992, respectively.
Future minimum rental payments as of September 30, 1994 for operating leases
with noncancelable terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30
- -------------------------------------------------------------------------
<S> <C>
1995..................................................................... $ 3,240
1996..................................................................... 3,065
1997..................................................................... 2,226
1998..................................................................... 2,020
1999..................................................................... 941
Thereafter............................................................... 631
---------
Total minimum payments................................................... $ 12,123
---------
---------
</TABLE>
The Company is a party to various claims and legal proceedings which
management believes are in the normal course of business and will not involve
any material loss.
F-15
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
7. CAPITAL TRANSACTIONS
STOCK OPTION PLAN
The Company has adopted a stock option plan to provide for the granting of
options to purchase up to a maximum of 2,500,000 shares of common stock. The
options are granted at exercise prices equal to the fair market value of the
common stock at the date of grant. The following is a summary of stock option
activity (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------
AVAILABLE
FOR GRANT OUTSTANDING EXERCISE PRICES
----------- ------------- -----------------
<S> <C> <C> <C>
Balance -- September 30, 1991............................... 980 1,459 $ .53 to $3.38
Options granted........................................... (214) 214 $3.63 to $5.38
Options exercised......................................... -- (446) $ .58 to $2.97
Options cancelled......................................... 88 (88) $ .86 to $5.06
--- -----
Balance -- September 30, 1992............................... 854 1,139 $ .53 to $5.38
Options granted........................................... (449) 449 $2.94 to $5.94
Options exercised......................................... -- (76) $ .69 to $4.44
Options cancelled......................................... 109 (109) $1.03 to $5.50
--- -----
Balance-- September 30, 1993................................ 514 1,403 $ .53 to $5.94
Options granted........................................... (360) 360 $1.88 - $4.06
Options exercised......................................... -- (117) $ .54 - $2.69
Options cancelled......................................... 211 (211) $1.03 - $5.94
--- -----
Balance -- September 30, 1994............................... 365 1,435 $ .53 - $5.63
--- -----
--- -----
</TABLE>
At September 30, 1994, options for the purchase of 896,000 shares of common
stock are currently exercisable at prices ranging from $.53 to $5.63 per share.
WARRANTS
As of September 30, 1994, private warrants issued in January 1993 totalling
96,000 and expiring January 1996, are exercisable at $6.00 per share.
In November 1991, 2,726,000 shares of common stock were issued upon the
exercise of Class C warrants which were issued in connection with the Company's
1990 public offering. The Company received proceeds of $7,473,000 upon these
warrant exercises. In April 1994, 150,000 shares of common stock were issued in
exchange for 300,000 private warrants issued in January 1991 and expiring
January 1996.
STOCK PURCHASE PLAN
The Company has a plan whereby eligible employees may purchase the Company's
common stock at the lower of 85% of the market price at the time of grant or the
time of purchase. There are 700,000 shares reserved for this plan of which
144,000 shares were issued on September 30, 1994 at $1.96 per share, 116,000
shares were issued on September 30, 1993 at $3.40 per share, and 82,000 shares
were issued on September 30, 1992 at $3.05 per share.
F-16
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
8. INCOME TAXES
The income tax provision for the years ended September 30, 1994, 1993 and
1992 consisted of (in thousands):
<TABLE>
<CAPTION>
1994 FEDERAL STATE TOTAL
- --------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Current.................................................................... $ 483 $ 46 $ 529
Deferred................................................................... (138) 46 (92)
--------- --------- ---------
$ 345 $ 92 $ 437
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1993 FEDERAL STATE TOTAL
- --------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Current.................................................................... $ 437 $ 94 $ 531
Deferred................................................................... 291 43 334
--------- --------- ---------
$ 728 $ 137 $ 865
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1992 FEDERAL STATE TOTAL
- --------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Current.................................................................... $ 952 $ 225 $ 1,177
Deferred................................................................... 191 45 236
--------- --------- ---------
$ 1,143 $ 270 $ 1,413
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income tax expense differs from the amount computed by applying the
Federal statutory rate to income before income taxes for each of the years ended
September 30, 1994, 1993 and 1992 as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Tax at Federal statutory rate................................................ $ 233 $ 664 $ 1,263
State income taxes, net of Federal benefit................................... 92 90 178
Officers life insurance...................................................... 24 45 27
Goodwill amortization........................................................ 44 44 23
Meals and entertainment...................................................... 32 34 16
Other........................................................................ 12 (12) (94)
--------- --------- ---------
Income tax expense........................................................... $ 437 $ 865 $ 1,413
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax benefit related to the exercise of employee stock options is
recorded as additional paid-in-capital.
Income taxes paid during the years ended September 30, 1994, 1993 and 1992
were $31,000, $1,566,000 and $801,000, respectively.
The Company adopted SFAS No. 109 as of the beginning of fiscal year 1993.
The cumulative effect on prior years of this change in accounting principle
reduced 1993 net income by $72,000, and is reported separately in the
consolidated statement of income for the year ended September 30, 1993.
F-17
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
8. INCOME TAXES (CONTINUED)
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
------------------------ ----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
ASSET LIABILITY ASSET LIABILITY
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Bad debt allowance......................................... $ 397 $ -- $ 320 $ --
Depreciation and amortization.............................. -- 2,047 -- 1,749
Insurance accruals......................................... 225 -- 561 --
Capitalized items expensed for taxes....................... -- 516 -- 437
Vacation................................................... 240 -- 189 --
AMT credit carry forward................................... -- (321) -- --
Other...................................................... (62) (157) (53) 1
----- ----------- --------- -----------
$ 800 $ 2,085 $ 1,017 $ 2,187
----- ----------- --------- -----------
----- ----------- --------- -----------
</TABLE>
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Service revenue.......................................... $ 29,780 $ 30,167 $ 30,591 $ 29,947
Income (loss) from operations............................ 1,375 979 597 (1,598)
Net income (loss)........................................ 646 410 152 (961)
Net income (loss) per share.............................. .04 .03 .01 (.06)
</TABLE>
See Note 5 for a discussion of a fourth quarter adjustment recorded to the
Company's Medicare reserve.
FISCAL 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Service revenue.......................................... $ 23,378 $ 25,613 $ 27,520 $ 27,250
Income (loss) from operations............................ 1,007 944 621 (140)
Net income (loss)........................................ 486 491 286 (248)
Net income (loss) per share.............................. .03 .03 .02 (.02)
</TABLE>
The first quarter of 1993 net income and earnings per share data has been
restated for the cumulative effect of adopting SFAS No. 109 of $72,000.
See Note 5 for a discussion of a fourth quarter adjustment recorded to the
Company's Medicare reserve.
10. SUBSEQUENT EVENTS
On May 2, 1995, the Company entered into an agreement to form a strategic
partnership with Manor Care, Inc. (Manor Care), a national health care and
international lodging firm. Pursuant to this partnership, Manor Care will
purchase up to 6.4 million common shares from the Company for $3.40 in cash per
share. The Company will conduct a cash self-tender for 6.4 million of its shares
(40% of outstanding) at $3.40 per share. In addition, Manor Care will invest $20
million in the Company in
F-18
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
10. SUBSEQUENT EVENTS (CONTINUED)
exchange for voting convertible preferred stock. Manor Care will also receive
three year warrants to purchase an additional 6 million shares of common stock
at an exercise price of $3.75 per share. This transaction is subject to, among
other conditions, the approval of the Company's shareholders and the completion
of the self-tender by the Company.
F-19
<PAGE>
PROXY -- IN HOME HEALTH, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD AUGUST , 1995
The undersigned hereby appoints and
, or either of them, as proxies with full power
of substitution to vote all of the shares of common stock which the undersigned
would be entitled to vote if personally present at the Special Meeting of
Stockholders of In Home Health, Inc. to be held August , 1995 at .m. at
, Minneapolis, Minnesota or at any adjournments
thereof, upon any and all matters which may properly be brought before the
meeting or adjournments thereof, hereby revoking all former proxies.
(1) PROPOSAL TO APPROVE SECURITIES PURCHASE AND SALE AGREEMENT DATED AS OF MAY
2, 1995 BETWEEN IN HOME HEALTH, INC. AND MANOR HEALTHCARE CORP. AND THE
TRANSACTIONS THEREUNDER
/ / FOR / / AGAINST / / ABSTAIN
(2) PROPOSAL TO APPROVE AN AMENDMENT TO ARTICLE III OF THE ARTICLES OF
INCORPORATION OF THE COMPANY
/ / FOR / / AGAINST / / ABSTAIN
(3) PROPOSAL TO APPROVE AMENDMENTS TO THE COMPANY'S 1987 AND 1995 STOCK OPTION
PLANS
/ / FOR / / AGAINST / / ABSTAIN
(4) In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED ON
PROPOSALS (1), (2) AND (3) IN ACCORDANCE WITH THE SPECIFICATIONS
MADE AND "FOR" SUCH PROPOSALS IF THERE IS NO SPECIFICATION.
PLEASE DATE AND SIGN exactly as your name(s) appears below indicating, where
proper, the official position or representative capacity in which you are
signing. When signing as executor, administrator, trustee or guardian, give full
title as such; when shares have been issued in names of two or more persons, all
should sign.
Dated , 1995
-------------------------------
----------------------------------
Signature of Stockholder
