<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT
--
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-17490
IN HOME HEALTH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1458213
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CARLSON CENTER, SUITE 500
601 CARLSON PARKWAY
MINNETONKA, MINNESOTA 55305-5214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-449-7500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $ .01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
----
Based on the closing sale price of $1.3125 on the NASDAQ National Market System,
as of November 13, 1997 the aggregate market value of the registrant's common
stock held by nonaffiliates was $12,572,325.
As of November 13, 1997 the number of shares outstanding of the registrant's
common stock, $.01 par value was 16,398,781 shares.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held March 4, 1998, (the "1998 Proxy
Statement"), a definitive copy of which will be filed within 120 days of the
close of the past fiscal year, is incorporated by reference into Part III of
this Form 10-K.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C> <C> <C>
PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 3-9
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders. . . . 9
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters . . . . . . . . . . . . . . . . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 11-16
Item 8. Financial Statements and Supplementary Data . . . . . . . 17-33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 17
PART III Item 10. Directors and Executive Officers . . . . . . . . . . . . 34
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 13. Certain Relationships and Related Transactions . . . . . . 34
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 34-35
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
In Home Health, Inc. (the "Company") specializes in providing
comprehensive health care services to clients of all ages in their homes. The
Company's services include nursing, infusion therapy, hospice, rehabilitation,
personal care and homemaking. The Company currently provides services from 38
offices and four pharmacies in 19 geographic markets located in 14 states under
the trade names "In Home Health" or "Home Health Plus".
The Company was incorporated in Minnesota in 1983 and is the successor
to the business of a non-profit corporation which provided home health services
in Minneapolis-St. Paul beginning in 1977. In October 1995, the Company
consummated transactions with ManorCare Health Services, a wholly owned
subsidiary of Manor Care, Inc., whereby ManorCare Health Services acquired 64%
of the voting power of the Company's voting capital stock and the Company
received net cash proceeds of approximately $18 million. The agreement with
ManorCare Health Services contemplates that the Company will continue to operate
in the lines of business in which it currently engages.
PRODUCTS AND SERVICES
The Company offers its clients a broad range of professional and
support services to meet medical and personal needs at home. All home health
services are provided under a plan of care and orders from the client's
physician. Services are available on a 24-hour a day basis every day of the
year. Office hours are from 7 a.m. to 6 p.m. Monday through Friday, although
personnel are available to respond to emergencies and fulfill service requests
at all times.
In fiscal 1997, approximately 51% of the Company's revenue was derived
from paraprofessional services provided by home health aides and
homemaker/companions, 22% was derived from medical/surgical nursing, 9% was
attributable to rehabilitation services, 5% from infusion pharmacy products, 2%
from critical care nursing, 9% from hospice services and 2% from medical
supplies.
The Company receives payment for its services from various sources.
The following summarizes the Company's revenue by payor source:
SEPTEMBER 30
-------------------------
1997 1996 1995
---- ---- ----
Medicare, cost reimbursement (1) 56% 70% 76%
Insurance and County Governments 19% 14% 12%
Private payors 16% 14% 12%
Medicare Hospice Benefit, per diem based 9% 2% -
--- --- ---
100% 100% 100%
(1) Fiscal 1997 revenue was impacted by the $17,101,000 adjustment to
Medicare reserves. See Note 5 to the financial statements.
The Company's goal is to reduce the cost reimbursement Medicare program
revenue percentage by focusing on increasing the revenue from potentially more
profitable payor sources.
The Company's services are provided by a variety of personnel:
Critical Care Registered Nurses provide specialized nursing such as
pain management, respiratory care and infusion therapy.
Registered Nurses provide a broad range of nursing care including
skilled observation and assessment, teaching and technical procedures.
Licensed Practical/Vocational Nurses perform many technical nursing
procedures, such as injections and dressing changes.
3
<PAGE>
Pharmacists prepare and dispense drug and nutritional therapies by
physician order and monitor the client's treatment.
Home Health Aides provide personal care such as bathing, assistance
with walking, and other procedures that do not require professional
nursing expertise.
Homemakers/Companions assist with meal preparation and housekeeping,
and provide companionship that can help maintain independent living.
Physical Therapists assist clients to restore strength and range of
joint motion for improved function and retrain clients in all areas of
ambulation and mobility.
Occupational Therapists assist clients to become independent in
activities of daily living, such as feeding, dressing, hygiene, and
social activities.
Speech Pathologists retrain clients to deal with speech, swallowing,
language or hearing impediments to improve communication abilities.
Social Workers assist clients and their families to deal with
financial, personal and social concerns resulting from health
problems.
Spiritual Care Counselors coordinate the spiritual needs of clients
and families and provide spiritual services in the home or inpatient
facility as needed.
Nutritionists assist with dietary modifications and therapeutic diets
for clients.
OPERATING DIVISIONS
The Company has 38 office locations consisting of 28 branches and 10
satellites. Each of the Company's branches has two divisions, a Visit Division
and an Extended Hours Division. In addition, 24 branches have a Hospice
Division. The Visit Division provides clients with short-term care, usually up
to two hours per visit. The Extended Hours Division provides clients with care
up to 24 hours per day. Hospice provides palliative care through an
interdisciplinary team to the terminally ill client and the client's family.
Hospice services are available to patients at home, in skilled nursing and
assisted living facilities and in the hospital. The Visit Division charges by
the visit, the Extended Hours Division charges by the hour and the Hospice
Division charges by the day.
Each division operates with a registered nurse manager and a staff of
professionals, including one or more home care coordinators who are registered
nurses. The client is assigned to a registered nurse or therapist for case
management. The home care coordinator establishes a plan of care for each
client with the client's physician, supervises the services received by the
client, and assesses the client's response to and need for continued care.
Rehabilitation, nursing and other personnel provide services according to the
physician's plan of care.
The Company also provides pharmaceutical drugs, fluids and supplies
through its infusion pharmacies. The Company operates four infusion pharmacies
which operate with one or more full time pharmacists who collaborate with the
client's physician, nurse and other health care providers.
The Company's pharmacists prepare and dispense drug and nutritional
therapies by physician order and monitor the client's response to treatment.
The pharmacist is available to the client's physician and the Company's nurses
24 hours a day, 7 days a week, to answer questions regarding drug actions and
interactions, dosage requirements and interpretation of laboratory data. The
pharmacist and nurse may jointly visit clients in their home to evaluate their
response to treatment. The pharmacist is responsible for complying with State
and Federal regulations regarding the operation of an infusion pharmacy.
Pharmacy quality assurance procedures are followed to assure all therapies are
appropriate and that Company standards are being followed.
QUALITY ASSURANCE
In addition to the basic requirements necessary for licensure and
certification, the Company has implemented several practices to help assure high
quality home care service. Clients are sent evaluation surveys bi-monthly to
detect and correct weaknesses.
4
<PAGE>
Survey results are reviewed quarterly, along with a sampling of client charts,
by a committee of physicians, nurses and therapists. This committee determines
if the medical needs were identified and addressed in the plan of care. Each
branch has an advisory board composed of consumers and business and health
professionals that meets at least annually to review programs and developments
and to make recommendations to the management team. The Company has a Code of
Ethics and Client Bill of Rights that are provided to all employees and clients.
MARKETING
Home health providers are usually referred to potential clients by
other health care professionals. The Company seeks to build strong
relationships with these professionals. The Company has identified many
potential referral sources for home health services. These referral sources
include physicians, hospitals, nursing homes, managed care organizations,
community organizations, and other home care agencies. Word of mouth is also
responsible for a significant number of home care referrals. One of the
Company's goals is to broaden the referral base among managed care
organizations, hospitals, nursing homes, physicians and health insurance payors
by establishing and maintaining strong working relationships with them.
In each geographic area in which the Company operates, account
representatives are responsible for establishing and maintaining relationships
with referral sources. They contact physicians, hospitals, nursing homes,
managed care organizations and other health care providers to explain the
services provided by the Company. Other health care professionals within the
Company, such as pharmacists or nurse specialists, may accompany the account
representatives to offer clinical or technical expertise. The account
representatives are backed by a professional health care liaison team consisting
of home care coordinators that are primarily registered nurses. The team takes
referrals, assesses clients and identifies their needs, emphasizes the benefits
of the Company's services, coordinates care and communicates with the referral
source. Each market is responsible for making contractual arrangements with
hospitals, HMOs, governments, clients and large physician groups.
COMPETITION
The home health care business has become highly competitive. There
are three different types of providers involved in home health services:
INSTITUTIONS: Hospitals and public health agencies typically provide
only short term, intermittent care. Some larger institutions have
entered into the extended hours, hospice and home infusion markets.
NATIONAL SPECIALIZED HOME CARE PROVIDERS: These companies typically
provide specialized care; for example, hospice or infusion therapy, in
multiple geographic markets. In the area of infusion therapy there
are many significant competitors, although one provider is estimated
to serve 40% of the home infusion therapy market.
OTHER INDEPENDENT HOME CARE COMPANIES: These are generally locally
owned and specialize in home care. Some of these organizations
provide only homemaker and chore-person services, while others provide
a broad range of home care services.
The Company believes that the primary competitive factors are the
price of the services and quality considerations such as responsiveness, the
technical ability of the professional staff and the ability to provide
comprehensive services.
Many of the Company's competitors are large and established
organizations with significantly greater resources than the Company. Large
hospital systems may enjoy a particular competitive advantage due to their ready
access to a large client base.
REGULATION
As a provider of health care services, the Company is subject to laws
and regulations administered by the various states. As a result of their
certification in the Medicare program, the Company's branches are subject to
certain federal laws and regulations. The Company's provision of
pharmaceuticals and other supplies for home infusion therapy subjects the
Company to additional regulation, such as the need for licensing as a pharmacy
and the need to comply with various federal and state laws and regulations
governing pharmacies and the handling of pharmaceuticals. The Company has all
necessary licenses and permits for its current operations.
Providers of home health services may be subject to increasing
regulation in the future. Compliance with laws and
5
<PAGE>
regulations could increase the cost and time necessary to allow the Company to
operate successfully and may affect the Company in other respects not presently
foreseeable.
In order to receive Medicare reimbursement, the Company must satisfy
conditions for participation established by the United States Department of
Health and Human Services relating to standards of medical care. Loss of
certification in the Medicare program would result in the loss of a significant
portion of the Company's revenues.
As a provider of services under the Medicare and Medicaid programs,
the Company is subject to the Medicare and Medicaid anti-kickback statute, also
known as "fraud and abuse laws." These laws prohibit any offer, payment,
solicitation or receipt of any form of remuneration to induce the referral of
business reimbursable under Medicare or state health programs or in return for
the purchase, lease or order of items or services covered by Medicare or state
health programs. Violations of the fraud and abuse laws can result in the
imposition of substantial civil and criminal penalties and, potentially,
exclusion from Medicare and state health programs. In addition, several states
in which the Company operates have laws that prohibit certain direct or indirect
payments or fee-splitting arrangements between health care providers if such
arrangements are designed to induce or to encourage the referral of patients to
a particular provider.
Congress adopted legislation in 1989, known as the "Stark"
legislation, that generally prohibits or restricts a physician from referring a
Medicare beneficiary's clinical laboratory services to any entity in which such
physician (or a member of his immediate family) has an ownership or individual
interest or with which such physician has a financial relationship, and
prohibits such entity from billing for or receiving reimbursement on account of
such referral, unless a specified exemption is available. Additional
legislation became effective as of January 1, 1993 known as "Stark II,"
expanding the Stark legislation to referrals of services eligible for Medicaid
reimbursement and "designated health services," including home health services,
durable medical equipment and outpatient prescription drugs. Pursuant to Stark
II, physicians who own an interest in the Company or who are compensated by the
Company will be prohibited from seeking reimbursement for services rendered to
such patients unless an exception applies. Ownership interests are excepted if
the interest held is a publicly traded security in a company having
shareholders' equity of at least $75 million.
Several of the states in which the Company conducts business have
enacted statutes similar in scope and purpose to the federal fraud and abuse
laws and the Stark laws. There is no authority interpreting the state fraud and
abuse laws in a manner that applies to the Company's operations. These laws are
generally based upon the federal fraud and abuse law, so that the interpretation
of the federal law may govern the application of the state laws.
The federal government has increased significantly the financial and
human resources allocated to enforcing the fraud and abuse laws. In May 1995,
the Clinton Administration instituted Operation Restore Trust ("ORT"), a health
care fraud and abuse initiative focusing on nursing homes, home health care
agencies and durable medical equipment companies located in the five states with
the largest Medicare populations. The states initially targeted included
California, Florida, Illinois, New York and Texas. ORT has been responsible for
millions of dollars in civil and criminal restitution, fines, recovery of
overpayments and the exclusion of a number of individuals and corporations from
the Medicare program. ORT has been expanded to all fifty states, with a
specific concentration on twelve states including Arizona, Colorado, Georgia,
Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee,
Virginia and Washington. Private insurers and various state enforcement
agencies also have increased their scrutiny of health care providers' practices
and claims, particularly in the home health and durable medical equipment areas.
No assurance can be given that the practices of the Company, if reviewed, would
be found to be in compliance with such laws or with any future laws, as such
laws ultimately may be interpreted.
Additionally, the Health Care Financing Administration of the U.S.
Department of Health and Human Services ("HCFA"), the federal agency responsible
for the rules governing Medicare and Medicaid, has implemented "Wedge Surveys"
in at least 13 states, including Connecticut, Floridan, Tennessee, Illinois,
Indiana, Massachusetts, Minnesota, Ohio, Oklahoma, Texas, Utah, Virginia and
Wyoming. In these surveys, HCFA completes ORT-type surveys on a much smaller
scale. Generally, HCFA reviews a small, limited number of claims over a
two-month period and extrapolates the percentage which was paid in error to all
claims paid for the period under review. Assuming the reviewer uncovered
nothing significant, the home health agency then has the option to repay the
amount determined by HCFA or undergo a broader review of its claims. If the
survey uncovers significant problems, the matter may be referred for further
review.
While the Company believes that it is in material compliance with the
fraud and abuse laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. It is the
Company's policy to monitor its compliance with such requirements and to take
appropriate actions to ensure such compliance.
6
<PAGE>
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Although
Congress has failed to pass comprehensive health care reform legislation, the
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery and payment systems and will in the
future propose and adopt legislation effecting fundamental changes in the health
care delivery system. Legislative debate regarding changes to the health care
delivery system and payment systems is expected to continue in the future. The
recently passed Balanced Budget Act of 1997 ("Budget Act") contains numerous
changes in reimbursement to health care providers and is expected to have a
significant impact on the health care industry. Additionally, the level of net
revenues and profitability of the Company, like those of other health care
providers, will also be effected by the continuing efforts of other payors to
contain or reduce the costs of health care by lowering reimbursement rates,
increasing case management review of services, negotiating reduced contract
pricing and capitation arrangements.
Congress passed the Budget Act as part of its plan to reduce the
growth in Medicare expenditures to health care providers. The Budget Act
contains provisions which impact a number of types of health care providers.
The following provisions, which apply to home health care providers are a few of
the provisions, discussed in further detail below, which are expected to effect
the Company in the future: (i) implementation of a prospective payment system
for home nursing services by October 1999 and (ii) reductions in cost limits and
implementation of a per-patient cap for home nursing services.
Currently, Medicare reimburses participating Medicare-certified home
health agencies for the reasonable costs incurred to provide covered visits to
eligible beneficiaries, subject to certain cost limits which vary according to
geographic regions of the country. The Budget Act requires HCFA to implement a
prospective payment system for home health agencies by October 1, 1999, with up
to a four-year phase-in period. Prospective rates determined by Health and
Human Services ("HHS") would reflect a 15% reduction to the cost limits and
per-patient limits as of September 30, 1999. In the event the implementation
deadline is not met, the reduction will be applied to the reimbursement system
then in place. The impact of such a change, if implemented, on the Company's
results of operations cannot be predicted with any certainty at this time and
would depend, to a large extent, on the reimbursement rates for home nursing
established on an interim basis and under the prospective payment system. There
can be no assurances that such reimbursement rates, if enacted, would cover the
costs incurred by the Company to provide home nursing services. Two of the
Company's markets are participating in a test program related to proposed
legislation to amend the current cost reimbursement program.
Until prospective payment takes effect on October 1, 1999, the Budget
Act sets up an interim payment system ("IPS") that provides for lowering of
reimbursement limits for home health visits. As amended, cost limit increases
for fiscal 1995 and 1996 were eliminated. In addition, for cost reporting
periods beginning on October 1, 1997, home health agencies cost limits will be
determined as the lesser of (i) their actual costs (ii) cost limits based on
105% of median costs of freestanding home health agencies or (iii) an
agency-specific per-patient cost cap, based on 98% of 1994 costs adjusted for
inflation. The Company is unable to determine the effect of the IPS until HCFA
finalizes related regulatory guidance on the implementation of the IPS. The new
cost limits will apply to the Company for the cost reporting period beginning
October 1, 1997. A reduction in these cost limits could have a significant
effect on the Company's results of operations; however, the effect of such
reductions cannot be predicted with any level of certainty.
Various other provisions included in the Budget Act may have an impact
on the Company's business and results of operations. Venipuncture will no
longer be considered a covered home care service unless it is performed in
connection with other skilled nursing services. The Company is currently
assessing the potential impact on this provision; however, the effect of such
reductions cannot be predicted with any level of certainty at this time.
Additionally, the Company will be required to have surety bonds of at least
$50,000 for each Medicare-certified nursing agency.
INSURANCE
General and professional liability insurance is maintained by the
Company which includes coverage up to $100,000,000 per location. There can be
no assurance that the Company will not be subject to claims in excess of its
insurance coverage or that such insurance will continue to be available. To
date, the Company has had no professional liability losses.
SERVICE MARKS AND TRADEMARKS
The Company operates under the names "In Home Health" and "Home Health
Plus", which are registered service marks. The Company believes that because
its business derives principally from referrals by other health care providers,
it is not materially dependent on any trademarks or service marks.
7
<PAGE>
EMPLOYEES
On September 30, 1997, the Company employed 1,250 persons on a
full-time basis and approximately 2,250 persons on a part-time basis.
Substantially all of the part-time employees were in direct health care. None
of the Company's employees are represented by unions.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 "Earnings Per Share" which is
effective for reporting periods ending after December 15, 1997. Earlier
adoption is not permitted. The Company does not expect the new standard to have
a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No.131 "Disclosures about Segments of
an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Company has not determined the impact of
adoption of the standard.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and members of the Board of Directors for the
Company are as follows:
NAME AGE POSITION(S) HELD
---- --- ----------------
Wolfgang von Maack (4) 57 Chief Executive Officer,
President and Director
Thomas R. Gross 44 Chief Financial Officer
Kari K. Schell 38 Vice President - Treasurer
and Corporate Secretary
James J. Lynn 55 Director
Joseph R. Buckley (1)(2)(3) 50 Director and Chairman
James H. Rempe (1)(2)(3) 67 Director
Donald C. Tomasso (1)(3) 52 Director
(1) Messrs. Buckley, Rempe and Tomasso were elected as members of the
Board of Directors effective October 24, 1995.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Mr. von Maack was elected to the Board of Directors effective
June 6, 1997.
Mr. von Maack has served as President and Chief Executive Officer of
the Company since May 1997. He has also been Senior Vice President, Healthcare
Services of ManorCare Health Services, Inc. since June 1990 and was Vice
President, Operations of ManorCare Health Services, Inc. from March 1988 to June
1990.
Mr. Gross has served as Vice President - Controller of the Company
since September 1993 and has been Chief Financial Officer since March 1997.
Previously he was employed by Honeywell Inc. for fifteen years in various
management, analyst and accounting positions in its Space and Aviation, Home and
Building Control, Research and Development and Corporate Financial Business
Units.
Ms. Schell has served as Vice President - Treasurer and Corporate
Secretary since March 1997, Treasurer from March 1996 to March 1997, and General
Accounting Manager from November 1992 to March 1996. Previously she was
employed by Super Valu Stores, Inc. for two years and by Deloitte & Touche LLP
for nine years in various management and accounting positions.
8
<PAGE>
Mr. Lynn has been a director of the Company since 1987 and has served
as Director of Management Development of the Company since October 1995. He had
served as Vice President - Marketing and Human Resources of the Company on a
nominal basis from 1986 to 1990. Since 1981 Mr. Lynn has been a principal of
Lynn & Associates, a management consulting company of which Mr. Lynn is the
founder and President.
Mr. Buckley has served as Executive Vice President of ManorCare Health
Services, Inc. and Manor Care, Inc. since March 1996, Director of Vitalink
Pharmacy Services, Inc. since July 1996, and was President, Assisted Living
Division of ManorCare Health Services, Inc. from February 1995 to March 1996,
and 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.
Mr. Rempe has served as Senior Vice President, General Counsel and
Secretary of Manor Care, Inc. since August 1981. He has served in the same
capacity with ManorCare Health Services, Inc. since December 1980 and with
Choice Hotels International, Inc. and its predecessors from February 1981 until
November 1996. He is a Director of Vitalink Pharmacy Services, Inc. and served
as its Secretary from January 1983 to January 1997.
Mr. Tomasso is an Executive Vice President of Manor Care, Inc. and
President of ManorCare Health Services, Inc. since September 1996, and
previously as President, Long Term Care Division, of ManorCare Health Services,
Inc. from February 1995 to August 1996, as President and Chief Operating Officer
of ManorCare Health Services, Inc. from May 1991 to February 1995 and as a
Director of ManorCare Health Services, Inc. since June 1991. He was Chairman
and Chief Executive Officer of Vitalink Pharmacy Services, Inc. from February
1995 to February 1997 and 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 its Roy Rogers
Division.
ITEM 2. PROPERTIES
The Company's executive offices are located in Minnetonka, Minnesota,
a suburb of Minneapolis, in approximately 27,900 square feet of leased space.
The Company's 38 office locations each lease approximately 2,000 to
7,000 square feet of office space in their respective locations. The Company's
leased properties are suitable and adequate for its current needs and additional
space is expected to be available as needed at competitive rates.
ITEM 3. LEGAL PROCEEDINGS
The Company has several cases pending before the U.S. District Court
and the U.S. Department of Human Services' Provider Reimbursement Review Board
("PRRB") concerning reimbursement from Medicare for community liaison employee
costs in other years, the costs of physical therapists employed by the Company,
pharmacy indirect expenses, the allocation of administrative and general costs
to branch operations and certain corporate expenses. See Note 5 of the
financial statements for discussion of the Medicare cost reimbursement disputes.
The Company is also a party to various other claims and legal
proceedings which management believes are in the normal course of business and
will not involve any material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is traded on the NASDAQ National Market
System under the symbol "IHHI". As of November 13, 1997 there were
approximately 1,221 record holders of the common stock.
The closing sale price for the common stock as reported by NASDAQ for
each quarter of the two most recent fiscal years were:
Year Ended September 30
-------------------------------------
1997 1996
---------------- ----------------
High Low High Low
------ ----- ------ -------
First Quarter $2 3/16 $1 11/16 $3 1/8 $2 1/16
Second Quarter 2 1/8 1 5/8 2 3/4 2 3/16
Third Quarter 1 3/4 1 1/16 2 1/2 1 7/8
Fourth Quarter 1 15/16 1 1/4 2 5/16 1 3/4
These prices do not include retail markups, markdowns or commissions and may not
represent actual transactions.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars and Shares in Thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenue $ 110,139 $ 125,086 $ 129,816 $ 120,485 $ 103,761
Income (loss) from operations (1) (22,467) (1,814) 3,774 1,353 2,432
Income (loss) before income taxes (21,937) (1,165) 3,007 684 1,952
Net income (loss) (20,157) (982) 1,621 247 1,015
Income (loss) applicable to
common stock (22,852) (3,501) 1,621 247 1,015
Income (loss) per common and
common equivalent share (1.40) (.21) .10 .02 .06
Weighted average common and
common equivalent shares
outstanding - primary 16,348 16,465 16,304 16,013 16,056
(1) Income (loss) from operations is net of restructuring charges of $2,476,000
for fiscal 1997.
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
September 30
----------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Current assets $ 34,004 $ 44,053 $ 21,394 $ 23,926 $ 28,975
Current liabilities 25,008 33,170 21,289 20,707 19,457
Total assets 50,224 82,683 57,559 56,726 54,379
Long-term debt 278 1,080 2,443 3,304 4,740
Redeemable convertible preferred stock 19,061 18,766 - - -
Shareholders' equity 3,588 26,758 30,509 28,482 27,459
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table indicates the percentage relationship of income
and expense items to revenue as set forth in the Company's consolidated
statements of operations and the percentage changes from year to year.
<TABLE>
<CAPTION>
Percent of Revenues Percent Change
- ---------------------------------------------------------------------------------------------------------------
1996 1995
1997 1996 1995 to 1997 to 1996
---- ---- ---- ------- -------
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100 % 100 % 100% (12)% (4)%
Direct Costs of Revenue 64 54 57 5 % (9)%
--- --- ---
Gross Profit 36 46 43 (32)% 4 %
General, Administrative and
Selling Expenses 54 47 40 0 % 15 %
Restructuring Charge 2 - - - -
--- --- --- ------ ----
Income (Loss) From Operations (20)% (1)% 3% 1,139 % (148)%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Revenue for 1997 decreased 12% as a result of an increase in the
Medicare reserve, which is reported as a deduction from revenue. Medicare
reserves totaled $17,101,000 in 1997, principally as a result of various
decisions received from the Medicare fiscal intermediary, the Provider
Reimbursement Review Board and the U.S. District Court. See Note 5 of the
financial statements for discussion of the Medicare cost reimbursement disputes.
Revenue for 1996 decreased 4%. 1996 revenue increased 4% as a result of pricing
and mix changes and 4% as a result of increased volume from Extended Hours,
Infusion and Hospice services. This was offset by a 12% decrease as a result of
reduced volume in the Visit division.
The breakdown by division of the Company's total revenue is as
follows:
- --------------------------------------------------------------------------------
Year Ended September 30
1997 1996 1995
---- ---- ----
- --------------------------------------------------------------------------------
Extended Hours Division 27% 21% 19%
Visit Division 59% 72% 78%
Infusion Pharmacy 5% 4% 3%
Hospice Division 9% 3% 0%
- --------------------------------------------------------------------------------
Extended Hours Division revenue increased 12% and 7% in 1997 and 1996,
respectively. Hospice revenue increased 235% and 1,054% in 1997 and 1996,
respectively. The increase is a result of thirteen additional markets providing
the hospice service in 1996. Visit Division revenue declined 28% in 1997 as a
result of the Medicare reserve of $17,101,000 and a 9% drop in Visit volume.
Visit Division revenue declined 11% in 1996 as a result of a drop in Visit
volume. Infusion Pharmacy revenue increased 4% and 33% in 1997 and 1996,
respectively. The increases in extended hours, infusion product and hospice
revenue are due to the Company's focus on increasing non-Medicare business
lines. These increases were offset by reduced volume in the Visit Division.
Direct costs of revenue, as a percentage of sales, were 64%, 54% and
57% in 1997, 1996 and 1995, respectively. The change in 1997 was principally a
result of additions to the Medicare reserve. Direct costs, as a percentage of
revenue before Medicare reserves, were 55%, 53% and 56% in 1997, 1996 and 1995,
respectively. The change in 1996 was due to an increase in visit division
revenue resulting from the reimbursement impact of the increase in general,
administrative and selling expenses.
11
<PAGE>
General, administrative and selling expenses as a percent of revenue
increased to 54% in 1997 compared to 47% in 1996 and 40% in 1995. The increase
in percentage in 1997 was principally a result of additions to the Medicare
reserve which lowered total revenue. General, administrative and selling
expenses as a percentage of revenue before Medicare reserves, were 47%, 47% and
40% in 1997, 1996 and 1995, respectively. The increases in 1997 and 1996 over
1995 were principally due to the addition of certain management personnel
necessary to achieve strategic plans, increased costs associated with the
expansion of the Hospice Division, the loss of revenue due to reduced volume,
increased bad debt expense in fiscal 1997 and a settlement with the Company's
former President and former Chief Financial Officer in fiscal 1996.
During fiscal 1997, the Company recorded $2,476,000 of restructuring
charges as a result of the implementation of a plan to restructure its field
operations and reduce the Company's cost structure. The charge included
$1,820,000 of costs associated with lease costs and related equipment write-offs
associated with the closing of eight pharmacies, the consolidation of seven
sites in multi-site markets and the relocation of eight other sites to more
economical locations and $361,000 of severance costs related to administrative
staff reductions. As a result of the restructuring, the Company anticipates a
reduction in future general and administrative expenses including rent and
personnel charges. The restructuring plan is expected to be completed by the
end of the third quarter of fiscal year 1998.
Net interest income for 1997 was $530,000 and for 1996 was $649,000
compared to net interest expense of $767,000 in 1995. Interest income is a
result of earnings on the cash proceeds from the investment by ManorCare Health
Services on October 24, 1995 (see Note 10 to the accompanying financial
statements).
Income tax benefit was 8% of the loss before tax in 1997 and 16% of
the loss before tax in 1996. Income taxes were 46% of pretax income for 1995.
The 1997 tax rate was impacted by a valuation allowance against the Company's
net operating loss carry forward and certain other deferred tax assets. Tax
rates for 1996 and 1995 were impacted by changes in the proportion of
non-deductible expenses to pretax income or loss.
Income (loss) applicable to common shareholders was ($22,852,000),
($3,501,000) and $1,621,000 for the years 1997, 1996 and 1995, respectively.
The principal reason for the increased loss from 1996 to 1997 was the increase
in Medicare reserves and the restructuring charge of $2,476,000 in 1997.
Additions to the Medicare reserves totaled $17,101,000 in 1997, $2,067,000 in
1996 and $1,435,000 in 1995. The primary reasons for the change from 1995 to
1996 are dividend and accretion expenses on preferred stock issued to ManorCare
Health Services (see Note 6 to the financial statements) of $2,519,000,
settlements totaling $1,600,000 to the Company's former President and former
Chief Financial Officer, other relocation and severance expenses and volume
declines within the Visit Division.
LIQUIDITY & CAPITAL RESOURCES
During fiscal 1997 the Company's cash and cash equivalents decreased
$4,764,000 to $13,853,000 at September 30, 1997. The decrease in cash was
principally a result of the payment of preferred stock dividends (see Note 6 to
the financial statements).
Approximately 65%, 72% and 76% of revenue for the years ended
September 30, 1997, 1996 and 1995, respectively, was derived from services
provided to Medicare beneficiaries. Payments for these services are made by the
Medicare program based on reimbursable costs incurred in rendering the services.
Medicare makes interim payments as services are rendered, and the Company files
cost reports on an annual basis which are subject to audit and retroactive
adjustment by Medicare. The Company reports revenue only for those costs that
it believes are probable (as defined in Statement of Financial Accounting
Standards No. 5) of recovery under the applicable Medicare statutes and
regulations and reports its accounts receivable balances at net realizable
value. The Company utilizes an extensive system of internal controls to attempt
to ensure such proper reporting of revenues. The Company employs personnel with
significant Medicare reimbursement experience to prepare its cost reports and to
monitor its operations on an ongoing basis to identify and seek to minimize
those costs which are not reimbursed. As a part of its system of internal
controls, the Company uses a detailed analysis process in calculating its
Medicare revenue at the time services are rendered. This process considers the
nature and amounts of the disputed costs (as described in more detail below)
along with several authoritative, legal and historical sources of information
including:
- - Applicable statutes and regulations, such as those contained in the Title
XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A)
"Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care",
Health Care Financing Administration ("HCFA") Publication 11 "Health
Insurance Manual", applicable sections of HCFA Publication 15-1 "Provider
Reimbursement Manual" and intermediary letters and program memoranda issued
by HCFA.
12
<PAGE>
- - Administrative decisions and rulings on related issues by the Department of
Health and Human Services' Provider Reimbursement Review Board ("PRRB") and
Administrative Law Judges.
- - Judicial decisions from Federal District Courts on relevant cases.
- - Consultation with independent industry experts such as Medicare cost
reimbursement consultants.
- - Opinions of outside legal counsel who specialize in dealing with Medicare
reimbursement issues.
- - Historical knowledge gained internally from past Medicare audits.
- - Meetings and other communication with Medicare Intermediaries, the Blue
Cross Association and HCFA.
This detailed analysis process is updated on a quarterly basis, taking
into account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs. Results of this detailed analysis process are extrapolated to other
unaudited cost reporting years, including operations that have not yet been
audited by Medicare, to estimate the gross amount of reimbursement that would be
affected. The Company, through this ongoing control and monitoring process,
provides a reserve (by means of a revenue reduction) for any costs incurred
which the Company believes are not probable of recovery. This reserve is
reported as a reduction of accounts receivable for disputed costs for which the
Company may not ultimately receive payment. The Company also reports as a
liability disputed costs for which it has received payment, but which may have
to be returned to Medicare. Accordingly, the Company believes that its accounts
receivable are stated at net realizable value, and that it has recorded all
probable liabilities for repayment of disputed costs.
Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process, taken
certain positions with respect to certain types of costs, claiming that they are
not reimbursable and thus not recoverable by the Company from the Medicare
program. These positions are based on interpretations promulgated after the
period covered by the cost reports and applied retroactively, on interpretations
of cost reimbursement principles that are contrary to the Company's
interpretations, or on what the Company believes to be misapplications of
specific reimbursement principles, that could not have been foreseen at the time
services were rendered and revenue recorded. These positions taken by Medicare
fiscal intermediaries are usually determined from Medicare's Notices of Program
Reimbursement ("NPR"), which typically are not received until two to three years
after the services are rendered. In those situations where the Company decides
to not challenge an NPR finding, any revenue relating to these costs, as well as
the extrapolated impact, if any, on other open costs reporting years, if not
written off or provided for earlier, is written off as a revenue reduction at
that time. The results of all NPRs are included in the analysis process in
calculating net Medicare revenue as described above.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and HCFA, and is vigorously pursuing these matters
through administrative and legal channels. The normal Medicare administrative
appeal process may take several years to resolve these types of disputes. The
Company has established a reserve for the portion of these costs not considered
probable of recovery. As additional costs are incurred, the Company is
increasing the reserve to cover such additional costs that are not considered
probable of recovery. Since the reserves have been established, the Company has
continued to review whether the level is appropriate.
The Company currently has NPRs challenging $15.2 million of costs as
of September 30, 1997. There was an additional $4.5 million of costs at
September 30, 1997 related to open cost reporting years that are similar to the
costs that have been challenged on NPRs. Together these amounts ($19.7 million
at September 30, 1997) comprise the total amount the Company considers to be
disputed costs. The major cost categories in dispute are the treatment of
certain personnel costs relating to the Company's community liaison positions,
pharmacy indirect expenses, the cost of physical therapists employed by the
Company and certain other branch and corporate expenses.
During fiscal 1997, the Company settled various disputed NPRs and
received decisions from the PRRB and the U.S. District Court regarding the
community liaison and other disputed costs. In the fourth quarter of fiscal
1997 the Company was also notified by HCFA that pharmacy expenses retroactive to
fiscal 1995 would be challenged. As a result, a Medicare reserve of $14.0
million was recorded during the third quarter of fiscal 1997 and $2.8 million
was recorded during the fourth quarter of fiscal 1997.
In August 1997, the Company received two rulings in which it was
determined that community liaison costs are reimbursable to the degree that they
are documented clearly enough to establish a differentiation between
reimbursable and non-reimbursable activities. The rulings were from the U.S.
District Court and from the PRRB. The U.S. District Court ruled that the
Company was not entitled to Medicare reimbursement of community liaison costs
incurred by some of its offices prior to June 1992 due to insufficient
documentation, but was entitled to partial reimbursement of the costs by those
offices for the period from June through September 1992, based on daily activity
records. The PRRB also ruled that a portion of community liaison costs incurred
by
13
<PAGE>
some of its offices from fiscal 1991 through 1993 should be reimbursed. The
PRRB specifically concluded that the costs for intake coordination activities
are allowable, and that the costs for assessment/evaluation, patient status and
coordination are allowable where patient names are provided. The PRRB found,
with respect to education activities and the provision of information to
referral sources, that repeat visits to the same referral sources would be
viewed as marketing and patient solicitation, which is unallowable. In each of
these decisions, the Medicare intermediaries' determinations that all community
liaison costs are non-reimbursable was reversed, and it was ordered that the
matter be remanded for further action or audit. Because the decisions of the
Court and the PRRB clarified the definition of allowable activities and the
required documentation to support allowable activities, the Company has changed
its determination of recoverability on all community liaison costs. Of the
total disputed costs of $8,324,000 at September 30, 1997 regarding the community
liaison issues, the Company has established reserves of $7,118,000. The Company
believes that in applying the decisions of the U.S. District Court and the PRRB,
the remaining $1,206,000 of costs are recoverable.
The Company received, in March 1996, a favorable ruling by the PRRB on
the physical therapist issue. In May 1996, this ruling was reversed by the HCFA
Administrator. The Company appealed the decision to the U.S. Federal District
Court in Minneapolis. During the second quarter of fiscal 1997, the Company was
notified that the U.S. District Court granted the Company's motion to set aside
the decision by HCFA which denied the Company reimbursement of some of its costs
for providing physical therapy services provided in 1992. The Court found that
HCFA had provided an insufficient explanation of its decision, and therefore,
the decision was arbitrary and capricious. The Court remanded the matter to the
Secretary of the Department of Health and Human Services for further proceeding
consistent with its Order. In October 1997, HCFA, in response to the U.S.
District Court's Order, issued its revised decision in which it again ruled that
the physical therapist costs at issue are not reimbursable by Medicare. The
Company, based on its assessment and the opinion of legal counsel, continues to
believe this position is without merit and that the Company will ultimately be
reimbursed for the disputed physical therapy case.
As of September 30, 1997, the Company, based on its analysis process,
believes that recovery of $16,800,000 of total disputed costs (including the
extrapolated impact) may not be probable and, accordingly, has established
reserves which totaled that amount as of September 30, 1997. Total accounts
receivable (net of reserves) due from Medicare at September 30, 1997 were
$9,813,000, including the receivables (net of reserves) for disputed costs of
$2,891,000. As of September 30, 1997 the Company had received $6,789,000 in
payments from Medicare for disputed costs. Medicare may seek repayment for such
amounts and accordingly, the potential liability for repayments is recorded as
Accrued Liabilities - Third Party. The Company believes it is probable that it
has not incurred any other liability to repay disputed costs. In view of the
expectation that resolution of the disputed costs will not likely be
accomplished within the next twelve months, related net receivables of
$2,891,000 as of September 30, 1997 have been classified as a non-current asset.
The ultimate settlement of the $6,789,000 liability for payments for
Medicare for disputed costs will impact the Company's cash flow depending on
when settlement is reached and the method of repayment. The Company intends to
meet both its short and long term liquidity needs with its current cash balances
and future cash flows from operations.
Operating activities used $781,000 in cash during 1997 and provided
$2,747,000 and $5,135,000 in cash during 1996 and 1995, respectively. Total
accounts receivable (current and long-term) decreased 59% during 1997, increased
31% during 1996 and decreased 7% during 1995. The decrease during 1997 was due
primarily to the additions to the Medicare reserve of $17,101,000. The increase
in 1996 was due primarily to the increase in disputed costs. The decrease
during 1995 was due to improved collection efforts and timing of payments from
Medicare.
Investing activities provided $253,000 in cash during 1997. Investing
activities used $1,695,000 and $772,000 in cash during 1996 and 1995,
respectively. In connection with expansion of the Company's operations, the
Company acquired property and purchased software, which was funded by $97,000 of
cash in 1997, $1,494,000 in cash and $148,000 of capitalized leases in 1996, and
$785,000 in cash and $1,256,000 of capitalized leases in 1995.
During 1997, financing activities principally used $1,480,000 in cash
for the payment of long-term debt and $2,400,000 for the payment of preferred
dividends. Financing activities generated $17,719,000 in cash during 1996 as a
result of issuance of preferred stock and warrants (as mentioned in Note 10 to
the financial statements). Issuance of stock in 1996 was offset by payments of
preferred dividends of $2,253,000 and repayments of long-term debt of
$2,097,000. Financing activities used $1,609,000 in cash during 1995,
principally for repayment of long-term debt.
The Company has letter of credit facilities for $3,127,000. The
letters of credit are collateralized by secured investments and will expire in
1997 and 1998.
14
<PAGE>
FORWARD LOOKING INFORMATION
The Company faces a number of risks. Information contained in this
section is forward looking and involves risks and uncertainties that could
significantly effect expected results. The Company's outlook for fiscal 1998 is
predominantly based upon its interpretation of what it considers key economic
assumptions.
Currently, Medicare reimburses participating Medicare-certified home
health agencies for the reasonable costs incurred to provide covered visits to
eligible beneficiaries, subject to certain cost limits which vary according to
geographic regions of the country. The Budget Act requires HCFA to implement a
prospective payment system for home health agencies by October 1, 1999, with up
to a four-year phase-in period. Prospective rates determined by HHS would
reflect a 15% reduction to the cost limits and per-patient limits as of
September 30, 1999. In the event the implementation deadline is not met, the
reduction will be applied to the reimbursement system then in place. The impact
of such a change, if implemented, on the Company's results of operations cannot
be predicted with any certainty at this time and would depend, to a large
extent, on the reimbursement rates for home nursing established on an interim
basis and under the prospective payment system. There can be no assurances that
such reimbursement rates, if enacted, would cover the costs incurred by the
Company to provide home nursing services.
Until prospective payment takes effect on October 1, 1999, the Budget
Act sets up an interim payment system (the "IPS") that provides for lowering of
reimbursement limits for home health visits. Cost limit increases for fiscal
1995 and 1996 have been eliminated. In addition, for cost reporting periods
beginning on October 1, 1997, home health agencies cost limits will be
determined as the lesser of (i) their actual costs (ii) cost limits based on
105% of median costs of freestanding home health agencies or (iii) an
agency-specific per-patient cost cap, based on 98% of 1994 costs adjusted for
inflation. The Company is unable to determine the effect of the IPS until HCFA
finalizes related regulatory guidance on the implementation of the IPS. The new
cost limits will apply to the Company for the cost reporting period beginning
October 1, 1997. A reduction in these cost limits could have a significant
affect on the Company's results of operations; however, the effect of such
reductions cannot be predicted with any level of certainty.
Various other provisions included in the Budget Act may have an impact
on the Company's business and results of operations. Venipuncture will no
longer be a covered skilled nursing home care service unless it is performed in
connection with other skilled nursing services. The Company is currently
assessing the potential impact of this provision, however, the effect of such
reductions cannot be predicted with any level of certainty at this time.
Additionally, the Company will be required to have surety bonds of at least
$50,000 for each Medicare-certified nursing agency.
In May 1995, the Clinton Administration instituted ORT, a health care
fraud and abuse initiative focusing on nursing homes, home health care agencies
and durable medical equipment companies located in the five states with the
largest Medicare populations. The states initially targeted included
California, Florida, Illinois, New York and Texas. ORT has been responsible for
millions of dollars in civil and criminal restitution, fines, recovery of
overpayments and the exclusion of a number of individuals and corporations from
the Medicare program. ORT has been expanded to all fifty states, with a
specific concentration on twelve states including Arizona, Colorado, Georgia,
Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee,
Virginia and Washington. Private insurers and various state enforcement
agencies also have increased their scrutiny of health care providers' practices
and claims, particularly in the home health and durable medical equipment areas.
No assurance can be given that the practices of the Company, if reviewed, would
be found to be in compliance with such laws or with any future laws, as such
laws ultimately may be interpreted.
Additionally, HCFA has implemented "Wedge Surveys" in at least 13
states, including Connecticut, Florida, Tennessee, Illinois, Indiana,
Massachusetts, Minnesota, Ohio, Oklahoma, Texas, Utah, Virginia and Wyoming. In
these surveys, HCFA completes ORT-type surveys on a much smaller scale.
Generally, HCFA extrapolates the percentage which was paid in error to all
claims paid for the period under review. Assuming the reviewer uncovered
nothing significant, the home health agency then has the option to repay the
amount determined by HCFA or undergo a broader review of its claims. If the
survey uncovers significant problems, the matter may be referred for further
review.
While the Company believes that it is in material compliance with the
fraud and abuse laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. It is the
Company's policy to monitor its compliance with such requirements and to take
appropriate actions to attempt to ensure such compliance. Although the Company
does not believe it has violated any fraud and abuse laws, there can be no
assurance that future related legislation, either health care or budgetary,
related regulatory changes or interpretations of such regulations, will not have
a material adverse effect on the future operations of the Company.
15
<PAGE>
The Company is also effected by settlements which may be reached with
the Department of Health and Human Services regarding cost reports and its
ability to establish and maintain close working relationships with referral
sources, including payors, hospitals, physicians and other health care
professionals.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
Consolidated Statements of Operations . . . . . . . . . 18
Consolidated Balance Sheets . . . . . . . . . . . . . . 19-20
Consolidated Statements of Shareholders' Equity . . . . . 21
Consolidated Statements of Cash Flows . . . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . 23-32
Independent Auditors' Report . . . . . . . . . . . . . . 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenue (net of Medicare reserves of
$17,101, $2,067 and $1,435 in 1997,
1996 and 1995, respectively) $ 110,139 $ 125,086 $ 129,816
------- ------- -------
Operating Expenses:
Direct costs of revenue (primarily payroll related costs) 70,570 67,108 74,082
General, administrative and selling expenses 59,560 59,792 51,960
Restructuring charge 2,476 - -
------- ------- -------
Total operating expenses 132,606 126,900 126,042
------- ------- -------
Income (loss) from operations (22,467) (1,814) 3,774
Interest:
Interest expense (265) (450) (790)
Interest income 795 1,099 23
------- ------- -------
Net interest income (expense) 530 649 (767)
Income (loss) before income taxes (21,937) (1,165) 3,007
Income tax expense (benefit) (1,780) (183) 1,386
------- ------- -------
Net income (loss) $ (20,157) $ (982) $ 1,621
------- ------- -------
------- ------- -------
Income (loss) applicable to common stock $ (22,852) $ (3,501) $ 1,621
------- ------- -------
------- ------- -------
Income (loss) per common and
common equivalent share $ (1.40) $ (.21) $ .10
------- ------- -------
------- ------- -------
Weighted average common and
common equivalent shares
outstanding - primary 16,348 16,465 16,304
------- ------- -------
------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(DOLLARS AND SHARES IN THOUSANDS)
ASSETS
1997 1996
---- ----
Current Assets:
Cash and cash equivalents $ 13,853 $ 18,617
Accounts receivable, net of allowances
of $2,029 and $802 in 1997 and 1996,
respectively 14,125 19,418
Prepaid income tax 3,907 1,037
Deferred income tax 1,540 3,389
Prepaid expenses and other current assets 579 1,592
------ ------
Total current assets 34,004 44,053
------ ------
Property:
Furniture and equipment 9,621 9,954
Computer equipment and software 7,506 8,561
Leasehold improvements 727 823
------ ------
Total 17,854 19,338
Accumulated depreciation (10,501) (9,437)
------ ------
Property - net 7,353 9,901
------ ------
Other Assets:
Accounts receivable, long-term 2,891 22,018
Goodwill, net 5,432 5,590
Other assets 544 1,121
------ ------
Total other assets 8,867 28,729
------ ------
Total Assets $ 50,224 $ 82,683
------ ------
------ ------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
IN HOME HEATH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
---- ----
Current Liabilities:
Current maturities of long-term debt $ 777 $ 1,455
Accounts payable 4,255 3,662
Accounts payable - related party 59 1,006
Accrued liabilities:
Third party 6,789 13,568
Compensation 4,034 6,859
Insurance 6,704 6,133
Restructuring 1,807 -
Other 583 487
------ ------
Total current liabilities 25,008 33,170
------ ------
Long-Term Debt 278 1,080
Deferred Revenue 398 820
Deferred Rent Payable 248 267
Deferred Income Tax 1,643 1,822
Commitments and Contingencies - -
Redeemable Convertible Preferred Stock - $1.00
par value, $20,000 redemption value, authorized
200 shares; issued and outstanding 1997 - 200
shares; 1996 - 200 shares 19,061 18,766
Shareholders' Equity:
Preferred stock - authorized 800 shares - -
Common stock - $.01 par value:
authorized - 40,000 shares; issued and
outstanding - 1997 - 16,399 shares,
1996 - 16,541 shares 164 165
Additional paid-in capital 23,661 23,978
Retained earnings (deficit) (20,237) 2,615
------ ------
Total shareholders' equity 3,588 26,758
------ ------
Total Liabilities and Shareholders' Equity $50,224 $82,683
------ ------
------ ------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Retained
--------------------- paid-in earnings
Shares Amount capital (deficit)
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Balance - September 30, 1994 15,944 $ 159 $23,828 $ 4,495
Common stock issued for:
Employee stock plans 442 5 685 -
Exchange for options (109) (1) (283) -
Net income - - - 1,621
------ ------ ------ ------
Balance - September 30, 1995 16,277 163 24,230 6,116
Common stock issued for:
Employee stock plans 270 2 541 -
Exchange for options (6) - (12) -
Offering costs - - (2,281) -
Issuance of warrants - - 1,500 -
Net loss - - - (982)
Preferred dividends - - - (2,253)
Preferred stock accretion - - - (266)
------ ------ ------ ------
Balance - September 30, 1996 16,541 165 23,978 2,615
Common stock issued for:
Employee stock plans 103 1 185 -
Repurchase from former officers (245) (2) (502) -
Net loss - - - (20,157)
Preferred dividends - - - (2,400)
Preferred stock accretion - - - (295)
------ ------ ------ ------
Balance - September 30, 1997 16,399 $ 164 $23,661 $(20,237)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
Net income (loss) $(20,157) $ (982) $ 1,621
Adjustments:
Depreciation and amortization 3,344 3,227 3,226
Accounts receivable 24,420 (9,714) (760)
Prepaid expenses and other assets (2,133) (582) (833)
Accounts payable 593 (806) 647
Accounts payable - related party (947) 1,006 -
Accrued liabilities (7,130) 12,267 3,478
Deferred revenue (422) (422) (390)
Deferred rent payable (19) (84) (165)
Deferred income tax 1,670 (1,163) (1,689)
------ ------ ------
Net cash provided (used) by operating
activities (781) 2,747 5,135
------ ------ ------
Cash Flows From Investing Activities:
Acquisition of property (97) (1,494) (785)
Repayments (advances) to officers and
employees 350 (201) 13
------ ------ ------
Net cash provided (used) by investing
activities 253 (1,695) (772)
------ ------ ------
Cash Flows From Financing Activities:
Payment of long-term debt (1,480) (2,097) (2,015)
Issuance of preferred stock and warrants - 17,719 -
Preferred dividends paid (2,400) (2,253) -
Issuance (repurchase) of common stock (356) 531 406
------ ------ ------
Net cash provided (used) by financing
activities (4,236) 13,900 (1,609)
------ ------ ------
Cash and Cash Equivalents:
Net increase (decrease) (4,764) 14,952 2,754
Beginning of year 18,617 3,665 911
------ ------ ------
End of year $ 13,853 $ 18,617 $ 3,665
------ ------ ------
------ ------ ------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - In Home Health, Inc. specializes in high-quality health
services to clients in their own homes, including infusion therapy,
high-tech nursing, hospice, 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The book value of accounts
receivable; cash and cash equivalents; accounts payable and accrued
liabilities approximates fair value due to the short-term nature of these
balances.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
NOTES RECEIVABLE FROM OFFICERS - Included in prepaid expenses and other
current assets are advances to officers of the Company in the amount of
$342,000 as of September 30, 1996. There were no advances to officers at
September 30, 1997.
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, 1996 and 1995 was $148,000 and $1,256,000,
respectively. There was no property acquired under capitalized leases for
the year ended September 30, 1997.
GOODWILL - Costs in excess of net assets of acquired businesses have been
capitalized and are being amortized over 40 years. Accumulated
amortization was $895,000 and $737,000 at September 30, 1997 and 1996,
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 includes in
reimbursable costs the amount of expenditures in the year they were
incurred. 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 $573,000 and $1,186,000 as of September 30,
1997 and 1996, 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 - Deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities in accordance with SFAS No. 109 "Accounting for Income Taxes".
Valuation allowances are established when necessary to reduce deferred tax
assets to amounts which are more likely than not to be realized.
23
<PAGE>
REVENUE RECOGNITION - Revenues are recognized at the time the service is
provided to the client. 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.
2. INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary income (loss) per common and common equivalent share is computed by
dividing net income (loss), as adjusted for the dividends and accretion on
the preferred stock (see Note 6) by the weighted average number of shares
of common stock and common stock equivalents, consisting of dilutive stock
options and warrants, outstanding during the period. Income (loss) per
share assuming full dilution would be substantially the same.
Primary income (loss) per share for the years ended September 30, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Shares outstanding (in thousands):
Weighted average outstanding 16,325 16,340 16,062
Shares issuable in connection with stock
options and warrants less shares
purchasable from proceeds 23 125 242
------- ------- -------
Adjusted outstanding 16,348 16,465 16,304
------- ------- -------
------- ------- -------
Adjusted income (loss) applicable to
common stockholders (in thousands):
Net income (loss) $ (20,157) $ (982) $ 1,621
Dividends on preferred stock (2,400) (2,253) -
Preferred stock accretion (295) (266) -
------- ------- -------
Income (loss) applicable to common
stock $ (22,852) $ (3,501) $ 1,621
------- ------- -------
------- ------- -------
Income (loss) per common and common
equivalent share $ (1.40) $ (.21) $ .10
------- ------- -------
------- ------- -------
</TABLE>
3. RESTRUCTURING CHARGE
During fiscal 1997, the Company has recorded $2,476,000 in restructuring
charges as a result of the implementation of a plan to restructure its
field operations and reduce the Company's cost structure. The charge
includes $1,820,000 of costs associated with lease costs and related
equipment write-offs associated with the closing of eight pharmacies, the
consolidation of seven sites in multi-site markets, the relocation of eight
other sites to more economical locations and $361,000 of severance costs
related to administrative staff reductions.
As of September 30, 1997, $1,807,000 of costs, comprised of lease costs and
related equipment write-offs associated with vacated sites remain to be
paid out, are included in other current liabilities. The restructuring
plan is expected to be completed by the end of the third quarter of fiscal
year 1998.
24
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of obligations under capitalized leases with
interest rates up to 11.3%, due through July 2000.
Future minimum payments as of September 30, 1997 are as follows (in
thousands):
YEAR ENDING
SEPTEMBER 30
----------------
1998 $ 906
1999 271
2000 65
------
Total minimum payments 1,242
Less amounts
representing interest 187
------
Present value of future
minimum payments 1,055
Less current maturities 777
------
Long-term debt $ 278
------
------
Assets recorded under capital leases are included in property at cost of
$4,631,000 and $7,032,000, and accumulated depreciation of $1,918,000 and
$2,997,000 at September 30, 1997 and 1996, respectively. Interest paid for
the years ended September 30, 1997, 1996 and 1995 was $265,000, $450,000
and $779,000, respectively.
5. MEDICARE COST REIMBURSEMENT
Approximately 65%, 72% and 76% of revenue for the years ended September 30,
1997, 1996 and 1995, respectively, was derived from services provided to
Medicare beneficiaries. Payments for these services are made by the
Medicare program based on reimbursable costs incurred in rendering the
services. Medicare makes interim payments as services are rendered, and
the Company files cost reports on an annual basis which are subject to
audit and retroactive adjustment by Medicare. The Company reports revenue
only for those costs that it believes are probable (as defined in Statement
of Financial Accounting Standards No. 5) of recovery under the applicable
Medicare statutes and regulations and reports its accounts receivable
balances at net realizable value. The Company utilizes an extensive system
of internal controls to attempt to ensure such proper reporting of
revenues. The Company employs personnel with significant Medicare
reimbursement experience to prepare its cost reports and to monitor its
operations on an ongoing basis to identify and seek to minimize those costs
which are not reimbursed. As a part of its system of internal controls,
the Company uses a detailed analysis process in calculating its Medicare
revenue at the time services are rendered. This process considers the
nature and amounts of the disputed costs (as described in more detail
below) along with several authoritative, legal and historical sources of
information including:
- Applicable statutes and regulations, such as those contained in the
Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1)
(A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient
Care", Health Care Financing Administration ("HCFA") Publication 11
"Health Insurance Manual", applicable sections of HCFA Publication
15-1 "Provider Reimbursement Manual" and intermediary letters and
program memoranda issued by HCFA.
- Administrative decisions and rulings on related issues by the
Department of Health and Human Services' Provider Reimbursement Review
Board ("PRRB") and Administrative Law Judges.
- Judicial decisions from Federal District Courts on relevant cases.
- Consultation with independent industry experts such as Medicare cost
reimbursement consultants.
- Opinions of outside legal counsel who specialize in dealing with
Medicare reimbursement issues.
- Historical knowledge gained internally from past Medicare audits.
25
<PAGE>
- Meetings and other communication with Medicare Intermediaries, the
Blue Cross Association and HCFA.
This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to
similar issues) that may affect the determination of the net realizable
value of accounts receivable or of liabilities to repay amounts received
for disputed costs. Results of this detailed analysis process are
extrapolated to other unaudited cost reporting years, including operations
that have not yet been audited by Medicare, to estimate the gross amount of
reimbursement that would be affected. The Company, through this ongoing
control and monitoring process, provides a reserve (by means of a revenue
reduction) for any costs incurred which the Company believes are not
probable of recovery. This reserve is reported as a reduction of accounts
receivable for disputed costs for which the Company may not ultimately
receive payment. The Company also reports as a liability disputed costs
for which it has received payment, but which may have to be returned to
Medicare. Accordingly, the Company believes that its accounts receivable
are stated at net realizable value, and that it has recorded all probable
liabilities for repayment of disputed costs.
Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process,
taken certain positions with respect to certain types of costs, claiming
that they are not reimbursable and thus not recoverable by the Company from
the Medicare program. These positions are based on interpretations
promulgated after the period covered by the cost reports and applied
retroactively, on interpretations of cost reimbursement principles that are
contrary to the Company's interpretations, or on what the Company believes
to be misapplications of specific reimbursement principles, that could not
have been foreseen at the time services were rendered and revenue recorded.
These positions taken by Medicare fiscal intermediaries are usually
determined from Medicare's Notices of Program Reimbursement ("NPR"), which
typically are not received until two to three years after the services are
rendered. In those situations where the Company decides to not challenge
an NPR finding, any revenue relating to these costs, as well as the
extrapolated impact, if any, on other open costs reporting years, if not
written off or provided for earlier, is written off as a revenue reduction
at that time. The results of all NPRs are included in the analysis process
in calculating net Medicare revenue as described above.
The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and HCFA, and is vigorously pursuing these matters
through administrative and legal channels. The normal Medicare
administrative appeal process may take several years to resolve these types
of disputes. The Company has established a reserve for the portion of
these costs not considered probable of recovery. As additional costs are
incurred, the Company is increasing the reserve to cover such additional
costs that are not considered probable of recovery. Since the reserves
have been established, the Company has continued to review whether the
level is appropriate.
The Company currently has NPRs challenging $15.2 million of costs as of
September 30, 1997. There was an additional $4.5 million of costs at
September 30, 1997 related to open cost reporting years that are similar to
the costs that have been challenged on NPRs. Together these amounts ($19.7
million at September 30, 1997) comprise the total amount the Company
considers to be disputed costs. The major cost categories in dispute are
the treatment of certain personnel costs relating to the Company's
community liaison positions, pharmacy indirect expenses, the cost of
physical therapists employed by the Company and certain other branch and
corporate expenses.
During fiscal 1997, the Company settled various disputed NPRs and received
decisions from the PRRB and the U.S. District Court regarding the community
liaison and other disputed costs. In the fourth quarter of fiscal 1997 the
Company was also notified by HCFA that pharmacy expenses retroactive to
fiscal 1995 would be challenged. As a result, a Medicare reserve of $14.0
million was recorded during the third quarter of fiscal 1997 and $2.8
million was recorded during the fourth quarter of fiscal 1997.
In August 1997, the Company received two rulings in which it was determined
that community liaison costs are reimbursable to the degree that they are
documented clearly enough to establish a differentiation between
reimbursable and non-reimbursable activities. The rulings were from the
U.S. District Court and from the PRRB. The U.S. District Court ruled that
the Company was not entitled to Medicare reimbursement of community liaison
costs incurred by some of its offices prior to June 1992 due to
insufficient documentation, but was entitled to partial reimbursement of
the costs by those offices for the period from June through September 1992,
based on daily activity records. The PRRB also ruled that a portion of
community liaison costs incurred by some of its offices from fiscal 1991
through 1993 should be reimbursed. The PRRB specifically concluded that
the costs for intake coordination activities are allowable, and that the
costs for
26
<PAGE>
assessment/evaluation, patient status and coordination are allowable where
patient names are provided. The PRRB found, with respect to education
activities and the provision of information to referral sources, that
repeat visits to the same referral sources would be viewed as marketing and
patient solicitation, which is unallowable. In each of these decisions,
the Medicare intermediaries' determinations that all community liaison
costs are non-reimbursable was reversed, and it was ordered that the matter
be remanded for further action or audit. Because the decisions of the
Court and the PRRB clarified the definition of allowable activities and the
required documentation to support allowable activities, the Company has
changed its determination of recoverability on all community liaison costs.
Of the total disputed costs of $8,324,000 at September 30, 1997 regarding
the community liaison issues, the Company has established reserves of
$7,118,000. The Company believes that in applying the decisions of the
U.S. District Court and the PRRB, the remaining $1,206,000 of costs are
recoverable.
The Company received, in March 1996, a favorable ruling by the PRRB on the
physical therapist issue. In May 1996, this ruling was reversed by the
HCFA Administrator. The Company appealed the decision to the U.S. Federal
District Court in Minneapolis. During the second quarter of fiscal 1997,
the Company was notified that the U.S. District Court granted the Company's
motion to set aside the decision by HCFA which denied the Company
reimbursement of some of its costs for providing physical therapy services
provided in 1992. The Court found that HCFA had provided an insufficient
explanation of its decision, and therefore, the decision was arbitrary and
capricious. The Court remanded the matter to the Secretary of the
Department of Health and Human Services for further proceeding consistent
with its Order. In October 1997, HCFA, in response to the U.S. District
Court's Order, issued its revised decision in which it again ruled that the
physical therapist costs at issue are not reimbursable by Medicare. The
Company, based on its assessment and the opinion of legal counsel,
continues to believe this position is without merit and that the Company
will ultimately be reimbursed for the disputed physical therapy case.
As of September 30, 1997, the Company, based on its analysis process,
believes that recovery of $16,800,000 of total disputed costs (including
the extrapolated impact) may not be probable and, accordingly, has
established reserves which totaled that amount as of September 30, 1997.
Total accounts receivable (net of reserves) due from Medicare at September
30, 1997 were $9,813,000, including the receivables (net of reserves) for
disputed costs of $2,891,000. As of September 30, 1997 the Company had
received $6,789,000 in payments from Medicare for disputed costs. Medicare
may seek repayment for such amounts and accordingly, the potential
liability for repayments is recorded as Accrued Liabilities - Third Party.
The Company believes it is probable that it has not incurred any other
liability to repay disputed costs. In view of the expectation that
resolution of the disputed costs will not likely be accomplished within the
next twelve months, related net receivables of $2,891,000 as of September
30, 1997 have been classified as a non-current asset.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was issued to ManorCare Health
Services, Inc. on October 24, 1995 (see Note 10 to the financial
statements). The preferred shares may be redeemed in cash at the option of
the holder or the Company on and after the fifth anniversary of their
issuance. The redeemable preferred shares have voting rights on an as-if
converted basis, and are initially convertible into 10 million common
shares at an initial conversion price of $2.00 per share. The redeemable
preferred shares bear dividends payable quarterly at 12% per annum. The
redeemable preferred stock is being accreted over five years from its fair
value of $18,500,000 on the date of issuance to its redemption value of
$20,000,000.
7. 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 $4,852,000, $4,237,000 and $4,005,000, for the years ended September
30, 1997, 1996 and 1995, respectively.
Future minimum rental payments as of September 30, 1997 for operating
leases with noncancelable terms in excess of one year are as follows (in
thousands):
27
<PAGE>
YEAR ENDING
SEPTEMBER 30
------------
1998 $ 3,388
1999 2,900
2000 1,878
2001 1,529
2002 634
------
Total minimum payments $10,329
------
------
The Company has letter of credit facilities totaling $3,127,000. The
letters of credit are collateralized by secured investments and will expire
in 1997 and 1998.
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.
8. CAPITAL TRANSACTIONS
STOCK OPTION PLAN
The Company has adopted stock option plans to provide for the granting of
options to purchase up to a maximum of 3,800,000 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>
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 2,065 $2.85 1,485 $2.81 1,435 $2.85
beginning of year
Granted 754 1.82 1,130 2.76 637 2.08
Exercised (10) .53 (118) 1.25 (314) 1.24
Canceled (1,727) 2.70 (432) 2.91 (273) 3.16
----- --- ---
Outstanding at end of 1,082 2.39 2,065 2.85 1,485 2.81
year ----- ----- -----
----- ----- -----
Options exercisable 477 2.88 747 3.24 698 3.17
at year-end
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, there are 1,057,000 shares available for grant.
In fiscal 1995, two officers of the Company surrendered 109,000 shares of
common stock to the Company at fair market value in lieu of cash payment
for the exercise of 194,000 options.
STOCK REPURCHASE
In fiscal 1997, the Company repurchased 245,000 shares of common stock at
fair market value from two former officers as part of a settlement
agreement. All of their outstanding stock options were canceled.
WARRANTS
As of September 30, 1997, private warrants issued in October 1995 to
purchase 6,000,000 shares of common stock and expiring in October 1998
are exercisable at $3.75 per share (see Note 10 to the financial
statements).
28
<PAGE>
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 1,500,000 shares
reserved for this plan of which 93,000 shares were issued on September
30, 1997 at $1.54 per share, 151,000 shares were issued on September 30,
1996 at $1.86 per share and 124,000 shares were issued on September 30,
1995 at $1.96 per share. At September 30, 1997 there were 790,000 shares
available for future offerings.
FAS 123
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-Average
Remaining Exercisable
Outstanding as Contractual Life Weighted-Average as of Weighted-Average
Range of Exercise Prices of 9/30/97 in Years Exercise Price 9/30/97 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.99 556,000 8.3 $1.78 115,000 $1.59
$2.00 - $2.99 282,000 7.8 $2.38 158,000 $2.45
$3.00 - $3.99 145,000 6.3 $3.30 105,000 $3.38
$4.00 - $4.99 84,000 4.9 $4.39 84,000 $4.39
$5.00 - $5.99 15,000 5.2 $5.38 15,000 $5.38
--------- --------
1,082,000 7.6 $2.39 477,000 $2.88
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation", ("SFAS 123") but continues to apply Accounting Principles
Board Opinion No. 25 and related interpretations in the accounting for its
stock option plans. If the Company had adopted the expense recognition
provisions of SFAS No. 123 for purposes of determining compensation expense
related to stock options granted during the years ended September 30, 1997
and 1996, loss applicable to common stock and loss per common and common
equivalent share would have been changed to the pro forma amounts shown
below:
Years Ended September 30,
-------------------------
1997 1996
---- ----
Loss Applicable to Common Stock
As reported $ (22,852,000) $ (3,501,000)
Pro forma $ (23,708,000) $ (4,029,000)
Loss per common and common equivalent share
As reported $ (1.40) $ (.21)
Pro forma $ (1.45) $ (.24)
The fair value of each option granted during 1997 and 1996 was estimated on
the grant date using the Black-Scholes option pricing model with the
following assumptions: no dividend yield; a risk free interest rate of
6.462% and 6.073% during fiscal year 1997 and 1996, respectively; expected
volatility of the market price of the Company's common stock of 68% and
155% during fiscal year 1997 and 1996, respectively; turnover of 37% and
26% during fiscal year 1997 and 1996, respectively, and expected option
life ranging between four and five years. Based upon these assumptions,
the weighted average fair value at grant date of options granted during
fiscal 1997 and 1996 was $1.13 and $2.32, respectively.
The fair value of the employees' stock purchase plan, which was estimated
using the Black-Scholes model with the
29
<PAGE>
following assumptions for 1997 and 1996: no dividend yield; a risk free
interest rate of 6.462% and 6.073% during fiscal year 1997 and 1996,
respectively; expected volatility of the market price of the Company's
common stock of 68% and 155% during fiscal year 1997 and 1996,
respectively; and expected option life of one year. Based upon the
assumptions, the weighted average fair value of the stock purchase rights
granted in 1997 and 1996 was $1.08 and $1.98, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for
future years. SFAS 123 does not apply to awards granted prior to fiscal
year 1996 and additional awards are anticipated in future years.
9. INCOME TAXES
The income tax provision for the years ended September 30, 1997, 1996 and
1995 consisted of (in thousands):
1997 FEDERAL STATE TOTAL
------- ----- -----
Current $(3,308) $(142) $(3,450)
Deferred 1,275 395 1,670
------ ---- ------
$(2,033) $ 253 $(1,780)
------ ---- ------
------ ---- ------
1996 FEDERAL STATE TOTAL
------- ----- -----
Current $ 883 $ 97 $ 980
Deferred (1,026) (137) (1,163)
------ ---- ------
$ (143) $ (40) $ (183)
------ ---- ------
------ ---- ------
1995 FEDERAL STATE TOTAL
------- ----- -----
Current $ 2,505 $ 593 $ 3,098
Deferred (1,380) (332) (1,712)
------ ---- ------
$ 1,125 $ 261 $ 1,386
------ ---- ------
------ ---- ------
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, 1997, 1996 and 1995 as follows (in thousands):
1997 1996 1995
---- ---- ----
Tax (benefit) at Federal
statutory rate $(7,459) $(396) $1,022
State income taxes,
net of Federal benefit (995) 21 231
Officers life insurance 2 35 24
Goodwill amortization 38 41 33
Meals and entertainment 62 106 81
Other (218) 10 (5)
Valuation allowance 6,790 - -
----- ------ ------
Income tax expense (benefit) $(1,780) $(183) $1,386
----- ------ ------
----- ------ ------
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, 1997, 1996 and 1995
were $24,000, $2,257,000 and $2,376,000, respectively.
30
<PAGE>
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
ASSET LIABILITY ASSET LIABILITY
-------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Bad debt allowance $ 757 $ - $ 299 $ -
Depreciation and amortization - 1,215 - 1,275
Insurance accruals 2,817 - 2,464 -
Capitalized items expensed
for taxes - 651 - 955
Deferred revenue - (149) - (306)
Vacation 300 - 341 -
Restructuring reserve 674 - - -
Contract settlement - - 220 -
Benefit of NOL carryforward 3,734 - - -
Other 48 (74) 65 (102)
----- ----- ------ ------
Subtotal 8,330 1,643 3,389 1,822
Less valuation allowance (6,790) - - -
----- ----- ------ ------
$ 1,540 $ 1,643 $ 3,389 $ 1,822
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
Realization of deferred tax assets associated with the net operating loss
carryforwards is dependent upon generating sufficient taxable income prior
to their expiration. Management believes that it is more likely than not
that certain of these net operating loss carryforwards may expire unused
and that other certain tax assets may not be realized and, accordingly, has
established a valuation allowance against them.
As of September 30, 1997, the Company had federal operating loss
carryforwards of $11,000,000 which will expire in 2012.
10. RELATED PARTY TRANSACTIONS
On October 24, 1995, the Company closed an agreement with ManorCare Health
Services, Inc., a wholly owned subsidiary of Manor Care, Inc., a national
health care and international lodging firm. Pursuant to this agreement,
the Company conducted a cash self-tender offer and purchased 6,750,000
shares of its common stock (41% of outstanding) at $3.40 per share and
ManorCare Health Services, Inc. purchased 6,750,000 shares from the Company
at $3.40 per share. In addition, ManorCare Health Services, Inc. invested
$20 million to purchase redeemable convertible preferred shares and a
warrant to purchase 6,000,000 shares of common stock at an exercise price
of $3.75 per share (see Notes 6 and 8).
The Purchase Agreement with ManorCare Health Services, Inc. also
contemplated that the Company and ManorCare Health Services, Inc. would
enter into agreements or arrangements which they deem prudent and mutually
beneficial for the provision of services between them on terms that are
fair to each party. The Company and Manor Care, Inc. entered into an
agreement whereby Manor Care, Inc. or ManorCare Health Services, Inc. will
provide to the Company certain administrative services, reimbursement
services, legal services and other similar types of services through
September 30, 1998. Under this agreement, administrative fees of $129,000
and $1,006,000 for years ended September 30, 1997 and 1996, respectively,
were accrued. Management believes that the foregoing charges are
reasonable allocations of the costs incurred by ManorCare Health Services,
Inc. on the Company's behalf. Based on this agreement, $59,000 and
$1,006,000 was payable to ManorCare Health Services, Inc. at September 30,
1997 and 1996, respectively.
31
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 31,585 $ 31,375 $ 18,855 $ 28,324
Loss from operations (104) (718) (15,617) (6,028)
Loss applicable to common stock (660) (1,194) (14,443) (6,555)
Loss per common and common
equivalent share (.04) (.07) (.89) (.40)
</TABLE>
During the fourth quarter of fiscal 1997, the Company recorded adjustments
to its Medicare reserve of $2.8 million. (See Note 5 to the financial
statements.) The Company also experienced an increase in its non-Medicare
aged receivables which resulted in a bad debt expense of $2.4 million.
FISCAL 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------ --------
<S> <C> <C> <C> <C>
Revenue $ 32,468 $ 31,792 $ 30,302 $ 30,524
Income (loss) from operations 109 82 179 (2,184)
Loss applicable to common stock (404) (546) (560) (1,991)
Loss per common and common
equivalent share (.02) (.03) (.03) (.12)
</TABLE>
During the fourth quarter of fiscal 1996, the Company recorded one time
charges of $1,600,000 for a settlement with the former President and former
Chief Financial Officer on October 22, 1996 and $700,000 for relocations
and other severance agreements. The Company also repurchased 244,805
shares of common stock at market value as part of the settlement with the
former officers.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 "Earnings Per Share" which is
effective for reporting periods ending after December 15, 1997. Earlier
adoption is not permitted. The Company does not expect the new standard to
have a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Company has not determined the
impact of adoption of the standard.
32
<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, 1997 and 1996 and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended September 30, 1997. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14(a)2.
These consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 17, 1997
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information required under this Item with respect to directors will be
contained in the section entitled "Election of Directors" in the Company's 1998
Proxy Statement, and is incorporated herein by reference.
Information concerning executive officers is set forth in the section
entitled "Executive Officers of the Registrant" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item will be contained in the section
entitled "Executive Compensation and Other Information" in the Company's 1998
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item will be contained in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item will be contained in the section
entitled "Election of Directors - Certain Transactions" in the Company's 1998
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements filed with this Form 10-K are
listed in Item 8 above.
2. FINANCIAL STATEMENT SCHEDULES
The schedules required to be filed as part of this Annual Report on
Form 10-K are listed below with their location in this report.
PAGE
----
In Home Health, Inc.:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . 33
Schedules for the Years Ended September 30, 1997, 1996 and 1995:
II - Valuation and Qualifying Accounts and Reserves. . . . . 38
All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements
or notes thereto.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1997.
34
<PAGE>
(C) EXHIBITS:
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation, as amended. (i)
3.2 Restated Bylaws.
4.1 Form of specimen Common Stock certificate. (iii)
4.2 Form of specimen certificate for Series A Preferred Stock.
(i)
4.3 Certificate of Designation of the Series, Number of Shares
in Series, Dividend Rate, Redemption Price, Liquidation
Price, Conversion Right and Other Rights and Preferences of
the Series A Preferred Stock ($1.00 par value) of In Home
Health, Inc. (i)
10.1 Management Incentive Plan in place for fiscal 1997.
10.2 Lease agreement dated October 24, 1991 with Minnesota CC
Properties, as amended. (i)
10.3 The Company's 1987 Stock Option Plan, as amended. (i)
10.4 The Company's 1995 Stock Option Plan, as amended. (i)
10.5 The Company's 1991 Employee Stock Purchase Plan, as amended.
10.6 Securities Purchase and Sale Agreement dated May 2, 1995, as
amended between the Company and ManorCare Health Services
(iv)
10.7 Letter of Credit Agreement dated September 30, 1997 with
First Bank National Association.
10.8 Letter of Credit Agreement dated December 16, 1996 with
First Bank National Association.
10.9 Employment Agreement between the Company and James J. Lynn
dated October 24, 1995.
10.10 Administrative Services Agreement dated November 15, 1997
between In Home Health, Inc. and Manor Care, Inc.
11 Computation of Per Share Earnings
23 Independent Auditors' Consent
27 Financial Data Schedule
(i) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1995.
(ii) Incorporate herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996.
(iii) Incorporated herein by reference to the Registrant's
Registration Statement (Form S-18) No. 33-17228C.
(iv) Incorporated herein by reference to the Registrant's current
report on Form 8-K dated May 2, 1995.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Minnetonka,
Minnesota.
IN HOME HEALTH, INC.
By: /s/ Wolfgang von Maack
----------------------------------------------
Wolfgang von Maack, Chief Executive Officer
Date: December 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Wolfgang von Maack Chief Executive Officer, December 19, 1997
- ------------------------ President and Director
Wolfgang von Maack (principal executive officer)
/s/ Thomas R. Gross Chief Financial Officer December 19, 1997
- ------------------------ (principal financial officer)
Thomas R. Gross
/s/ James J. Lynn Director December 19, 1997
- ------------------------
James J. Lynn
/s/ Joseph R. Buckley Director December 19, 1997
- ------------------------
Joseph R. Buckley
/s/ Donald C. Tomasso Director December 19, 1997
- ------------------------
Donald C. Tomasso
/s/ James H. Rempe Director December 19, 1997
- ------------------------
James H. Rempe
36
<PAGE>
IN HOME HEALTH, INC.
SCHEDULE AND EXHIBIT INDEX
SCHEDULE PAGE
--------- ----
II Valuation and Qualifying Accounts and Reserves 38
EXHIBIT
3.2 Restated Bylaws. 39
10.1 Management Incentive Plan in place for fiscal 1997 68
10.5 The Company's 1991 Employee Stock Purchase Plan, as amended 72
10.7 Letter of Credit Agreement dated September 30, 1997
with First Bank National Association. 79
10.8 Letter of Credit Agreement dated December 16, 1996 with
First Bank National Association. 80
10.9 Employment Agreement between the Company and James J. Lynn
dated October 24, 1995. 82
10.10 Administrative Services Agreement dated November 15, 1997
between In Home Health, Inc. and Manor Care, Inc. 91
11 Computation of Earnings per Share 98
23 Independent Auditors' Consent 99
27 Financial Data Schedule 100
37
<PAGE>
SCHEDULE II
IN HOME HEALTH, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
---------
(2)
(1) Charged Balance
Balance at Charged to to Other at
Beginning Costs and Accounts- Deductions End of
Classification of Period Expenses Describe -Describe Period
(B) (A)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Allowance for Doubtful Accounts - Current $ 802 $2,727 $ - $1,500 $ 2,029
Medicare Reserve 7,239 - 17,101 7,540 16,800
1996
- ----
Allowance for Doubtful Accounts - Current $ 867 $ 560 $ - $ 625 $ 802
Medicare Reserve 6,396 - 2,067 1,224 7,239
1995
- ----
Allowance for Doubtful Accounts - Current $1,029 $ 856 $ - $1,018 $ 867
Medicare Reserve 4,961 - 1,435 - 6,396
</TABLE>
(A) Write-off of bad debts and Medicare disputes which the Company has decided
not to pursue, net of recoveries.
(B) Adjustment to Medicare reserve.
38
<PAGE>
As amended through June 6, 1997,
effective June 6, 1997
RESTATED
BY-LAWS
OF
IN HOME HEALTH, INC.
AND SUBSIDIARIES
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of
the corporation shall be such as is designated by the Board of Directors from
time to time.
SECTION 2. REGISTERED OFFICE. The location and address of the registered
office of the corporation shall be such as is designated by the Board of
Directors or the President from time to time and certified to the Secretary of
State. The registered office need not be identical with the principal executive
office of the corporation and may be changed from time to time by the Board of
Directors.
SECTION 3. OTHER OFFICES. The corporation may have other offices at such
places within and without the State of Minnesota as the Board of Directors may
from time to time determine.
39
<PAGE>
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the shareholders of this
corporation shall be held at its principal executive office unless some other
place for any such meeting within or without the State of Minnesota be
designated by the Board of Directors in the notice of meeting. Any regular or
special meeting of the shareholders of the corporation called by or held
pursuant to a written demand of shareholders shall be held in the county where
the principal executive office is located.
SECTION 2. REGULAR MEETINGS. (a) Regular meetings of the shareholders of
this corporation may be held at the discretion of the Board of Directors on an
annual or less frequent periodic basis on such date and at such time and place
as may be designated by the Board of Directors in the notice of meeting. At
regular meetings the shareholders shall elect a Board of Directors and transact
such other business as may be appropriate for action by shareholders. If a
regular meeting of shareholders has not been held for a period of fifteen (15)
months, one or more shareholders holding not less than three percent (3%) of the
voting power of all shares of the corporation entitled to vote
40
<PAGE>
may call a regular meeting of shareholders by delivering to the President or
Treasurer a written demand for a regular meeting. Within thirty (30) days after
the receipt of such written demand by the President or Treasurer, the Board of
Directors shall cause a regular meeting of shareholders to be called and held on
notice no later than ninety (90) days after the receipt of written demand, all
at the expense of the corporation.
(b) At a regular meeting, the shareholders shall elect directors of the
corporation and shall transact such other business as may properly come before
them. To be properly brought before the meeting, business must be of a nature
that is appropriate for consideration at a regular meeting and must be (I)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a shareholder. In addition to any other
applicable requirements, for business to be properly brought before a regular
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing to the Secretary of the corporation. To be timely, each such notice
must be given, either by personal delivery or by United States
41
<PAGE>
mail, postage prepaid, to the Secretary of the corporation, and received not
later than the close of business on the 10th day following the day on which such
notice of the date of the regular meeting was mailed or public disclosure of the
meeting was made, whichever first occurs. Each such notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before the
regular meeting (1) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the regular
meeting, (2) the name and address of record of the shareholder proposing such
business, (3) the class or series (if any) and number of shares of the
corporation which are owned by the shareholder, and (4) any material interest of
the shareholder in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be transacted at the regular meeting except in
accordance with the procedures set forth in this Article; PROVIDED, HOWEVER,
that nothing in this Article shall be deemed to preclude discussion by any
shareholder of any business properly brought before the regular meeting in
accordance with these Bylaws.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders, for
any purpose or purposes appropriate for action
42
<PAGE>
by shareholders, may be called by the President, by the Vice President in the
absence of the President, by the Treasurer, or by the Board of Directors or any
two or more members thereof. Such meeting shall be held on such date and at
such time and place as shall be fixed by the person or persons calling the
meeting and designated in the notice of meeting. Special meetings may also be
called by one or more shareholders holding not less than ten percent (10%) of
the voting power of all shares of the corporation entitled to vote by delivering
to the President or Treasurer a written demand for a special meeting, which
demand shall contain the purposes of the meeting; PROVIDED, HOWEVER, that a
special meeting for the purpose of considering any action to directly or
indirectly facilitate a business combination (as defined in the Minnesota
Business Corporation Act), including any action to change or otherwise affect
the composition of the Board of Directors for that purpose, must be called by
twenty-five percent (25%) or more of the voting power of all shares entitled to
vote. Within thirty (30) days after the receipt of a written demand for a
special meeting of shareholders by the President or Treasurer, the Board of
Directors shall cause a special meeting of shareholders to be called and held on
notice no later than ninety (90) days after
43
<PAGE>
the receipt of such written demand, all at the expense of the corporation.
Business transacted at any special meeting of shareholders shall be limited to
the purpose or purposes stated in the notice of meeting. Any business
transacted at any special meeting of shareholders that is not included among the
stated purposes of such meeting shall be voidable by or on behalf of the
corporation unless all of the shareholders have waived notice of the meeting.
SECTION 4. NOTICE OF MEETINGS. Except where a meeting of shareholders is
an adjourned meeting and the date, time, and place of such meeting were
announced at the time of adjournment, notice of all meetings of shareholders
stating the date, time, and place thereof, and any other information required by
law or desired by the Board of Directors or by such other person or persons
calling the meeting, and in the case of special meetings, the purpose thereof,
shall be given to each shareholder of record entitled to vote at such meeting
not less than three (3) nor more than sixty (60) days prior to the date of such
meeting. In the event that a plan of merger or the sale or other disposition of
all or substantially all of the assets of the corporation is to be considered at
a meeting of shareholders, notice of such meeting shall be given to every
shareholder, whether or not
44
<PAGE>
entitled to vote, not less than fourteen (14) days prior to the date of such
meeting.
Notices of meeting shall be given to each shareholder entitled thereto by
oral communication, by mailing a copy thereof to such shareholder at an address
he has designated or to the last known address of such shareholder, by handing a
copy thereof to such shareholder, or by any other delivery that conforms to law.
Notice by mail shall be deemed given when deposited in the United States mail
with sufficient postage affixed. Any shareholder may waive notice of any
meeting of shareholders. Waiver of notice shall be effective whether given
before, at, or after the meeting and whether given orally, in writing, or by
attendance. Attendance by a shareholder at a meeting is a waiver of notice of
that meeting, except where the shareholder objects at the beginning of the
meeting to the transaction of business because the meeting is not lawfully
called or convened and does not participate thereafter in the meeting, or
objects before a vote on an item of business because the item may not lawfully
be considered at that meeting and does not participate in the consideration of
that item at the meeting.
SECTION 5. RECORD DATE. For the purpose of determining shareholders
entitled to notice of and to vote at any meeting of
45
<PAGE>
shareholders or any adjournment thereof, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors of the corporation may, but
need not, fix a date as the record date for any such determination of
shareholders, which record date, however, shall in no event be more than sixty
(60) days prior to any such intended action or meeting.
SECTION 6. QUORUM. The holders of a majority of the voting power of all
shares of the corporation entitled to vote at a meeting shall constitute a
quorum at a meeting of shareholders for the purpose of taking any action other
than adjourning such meeting. If the holders of a majority of the voting power
of all shares are not represented at a meeting, the shareholders present in
person or by proxy shall constitute a quorum for the sole purpose of adjourning
such meeting, and the holders of a majority of the shares so represented may
adjourn the meeting to such date, time, and place as they shall announce at the
time of adjournment. Any business may be transacted at the meeting held
pursuant to such an adjournment and at which a quorum shall be represented,
which might have been transacted at the adjourned meeting. If a quorum is
present when a duly called or held
46
<PAGE>
meeting is convened, the shareholders present may continue to transact business
until adjournment, even though the withdrawal of a number of shareholders
originally represented leaves less than the number otherwise required for a
quorum.
A meeting of the shareholders at which there is a quorum may be adjourned
as to all or part of the matters to be considered at the meeting upon motion by
the person presiding at such meeting and by a majority vote of shares
represented in person or by proxy at such meeting. Such adjournment shall be
until a specific time and place, and the time and place for the reconvened
meeting shall be announced at the meeting and reflected in the minutes thereof.
SECTION 7. VOTING AND PROXIES. At each meeting of the shareholders every
holder of the Common Stock shall be entitled to one vote in person or by proxy
for each share of Common Stock held by such shareholder and each holder of
Preferred Stock having the power to vote with the Common Stock shall be entitled
to such number of votes in person or by proxy as is specified pursuant to the
terms of such Preferred Stock for each share of such Preferred Stock held by
such shareholder, but no appointment of a proxy shall be valid for any purpose
more than eleven (11) months after the date of its execution, unless a longer
period is
47
<PAGE>
expressly provided in the appointment. Every appointment of a proxy shall be in
writing (which shall include telegraphing, cabling, or telephotographic
transmission), and shall be filed with the Secretary of the corporation before
or at the meeting at which the appointment is to be effective. An appointment
of a proxy for shares held jointly by two or more shareholders shall be valid if
signed by any one of them, unless the Secretary of the corporation receives from
any one of such shareholders written notice either denying the authority of that
person to appoint a proxy or appointing a different proxy. All questions
regarding the qualification of voters, the validity of appointments of proxies,
and the acceptance or rejection of votes shall be decided by the presiding
officer of the meeting. The shareholders shall take action by the affirmative
vote of the holders of a majority of the voting power of the shares present, in
person or represented by proxy, and entitled to vote, except where a different
vote is required by law, the Articles of Incorporation, or these By-Laws.
SECTION 8. ACTION WITHOUT MEETING BY SHAREHOLDERS. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting by written action signed by all of the shareholders entitled to vote on
such
48
<PAGE>
action. Such written action shall be effective when signed by all of the
shareholders entitled to vote thereon or at such different effective time as is
provided in the written action.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the corporation
shall be managed by or under the direction of its Board of Directors. The
directors may exercise all such powers and do all such things as may be
exercised or done by the corporation, subject to the provisions of applicable
law, the Articles of Incorporation, and these By-Laws.
SECTION 2. NUMBER, TENURE, AND QUALIFICATION. The number of directors
which shall constitute the whole Board of Directors shall be fixed from time to
time by resolution of the shareholders, subject to increase by resolution of the
Board of Directors. In the event that the shareholders fail to fix the number
of directors, the number of directors shall be the number provided for in the
Articles of Incorporation, subject to increase by resolution of the Board of
Directors. No decrease in the number of directors pursuant to this section
shall effect the removal of any director then in office except upon compliance
with the provisions of Section 7 of this Article. Each director
49
<PAGE>
shall be elected at a regular meeting of shareholders, except as provided in
Sections 6 and 7 of this Article, and shall hold office until the next regular
meeting of shareholders and thereafter until his successor is duly elected and
qualified, unless a prior vacancy shall occur by reason of his death,
resignation, or removal from office. Directors shall be natural persons but
need not be shareholders.
SECTION 3. MEETINGS. Meetings of the Board of Directors may be held at
such times and places as shall from time to time be determined by the Board of
Directors. Meetings of the Board of Directors also may be called by the
President, by the Vice President in the absence of the President, or by any
director, in which case the person or persons calling such meeting may fix the
date, time, and place thereof, either within or without the State of Minnesota,
and shall cause notice of meeting to be given. The Chairman of the Board of
Directors shall preside at all meetings of the Board of Directors when present.
SECTION 4. NOTICE OF MEETINGS. If the date, time, and place of a meeting
of the Board of Directors has been announced at a previous meeting, no notice is
required. In all other cases three (3) days' notice of meetings of the Board of
Directors, stating the date and time thereof and any other information
50
<PAGE>
required by law or desired by the person or persons calling such meeting, shall
be given to each director. If notice of meeting is required, and such notice
does not state the place of the meeting, such meeting shall be held at the
principal executive office of the corporation. Notice of meetings of the Board
of Directors shall be given to directors in the manner provided in these By-Laws
for giving notice to shareholders of meetings of shareholders.
Any director may waive notice of any meeting. A waiver of notice by a
director is effective whether given before, at, or after the meeting, and
whether given orally, in writing, or by attendance. The attendance of a
director at any meeting shall constitute a waiver of notice of such meeting,
unless such director objects at the beginning of the meeting to the transaction
of business on grounds that the meeting is not lawfully called or convened and
does not participate thereafter in the meeting.
SECTION 5. QUORUM AND VOTING. A majority of the directors currently
holding office shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors. In the absence of a quorum, a majority of
the directors present may adjourn the meeting from time to time until a quorum
is
51
<PAGE>
present. If a quorum is present when a duly called or held meeting is convened,
the directors present may continue to transact business until adjournment, even
though the withdrawal of a number of directors originally present leaves less
than the number otherwise required for a quorum.
The Board of Directors shall take action by the affirmative vote of a
majority of the directors present at any duly held meeting, except as to any
question upon which any different vote is required by law, the Articles of
Incorporation, or these By-Laws. A director may give advance written consent or
objection to a proposal to be acted upon at a meeting of the Board of Directors.
If the proposal acted on at the meeting is substantially the same or has
substantially the same effect as the proposal to which the director has
consented or objected, such consent or objection shall be counted as a vote for
or against the proposal and shall be recorded in the minutes of the meeting.
Such consent or objection shall not be considered, in determining the existence
of a quorum.
SECTION 6. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Any vacancy
occurring in the Board of Directors may be filled by the affirmative vote of a
majority of the directors remaining in office, even though said remaining
directors be less than a
52
<PAGE>
quorum. Any newly created directorship resulting from an increase in the
authorized number of directors by action of the Board of Directors may be filled
by a majority vote of the directors serving at the time of such increase. Any
vacancy or newly created directorship may be filled by resolution of the
shareholders. Unless a prior vacancy occurs by reason, of his death,
resignation, or removal from office, any director so elected shall hold office
until the next regular meeting of shareholders and until his successor is duly
elected and qualified.
SECTION 7. REMOVAL OF DIRECTORS. The entire Board of Directors or any
director or directors may be removed from office, with or without cause, at any
special meeting of the shareholders, duly called for that purpose as provided in
these By-Laws, by a vote of the shareholders holding a majority of the shares
entitled to vote at an election of directors. At such meeting, without further
notice, the shareholders may fill any vacancy or vacancies created by such
removal as provided in Section 6 of this Article. Any such vacancy not so
filled may be filled by the directors as provided in Section 6 of this Article.
Any director named by the Board of Directors to fill a vacancy may be removed at
any time, with or without cause, by an
53
<PAGE>
affirmative vote of a majority of the remaining directors, even though said
remaining directors be less than a quorum, if the shareholders have not elected
directors in the interval between the appointment to fill the vacancy and the
time of removal.
SECTION 8. COMMITTEES. The Board of Directors, by a resolution approved by
the affirmative vote of a majority of the directors then holding office, may
establish one or more committees of one or more persons having the authority of
the Board of Directors in the management of the business of the corporation to
the extent provided in such resolution. Such committees, however, shall at all
times be subject to the direction and control of the Board of Directors.
Committee members need not be directors and shall be appointed by the
affirmative vote of a majority of the directors present. A majority of the
members of any committee shall constitute a quorum for the transaction of
business at a meeting of any such committee. In other matters of procedure the
provisions of these By-Laws shall apply to committees and the members thereof to
the same extent they apply to the Board of Directors and directors, including,
without limitation, the provisions with respect to meetings and notice thereof,
absent members, written actions, and valid acts. Each
54
<PAGE>
committee shall keep regular minutes of its proceedings and report the same to
the Board of Directors.
SECTION 9. ACTION IN WRITING. Any action required or permitted to be taken
at a meeting of the Board of Directors or of a lawfully constituted committee
thereof may be taken by written action signed by all of the directors then in
office or by all of the members of such committee, as the case may be. If the
action does not require shareholder approval, such action shall be effective if
signed by the number of directors or members of such committee that would be
required to take the same action at a meeting at which all directors or
committee members were present. If any written action is taken by less than all
directors, all directors shall be notified immediately of its text and effective
date. The failure to provide such notice, however, shall not invalidate such
written action.
SECTION 10. MEETING BY MEANS OF ELECTRONIC COMMUNICATION. Members of the
Board of Directors of the corporation, or any committee designated by such
Board, may participate in a meeting of such Board or committee by means of
conference telephone or similar means of communication by which all persons
participating in the meeting can simultaneously hear each other, and
55
<PAGE>
participation in a meeting pursuant to this section shall constitute presence in
person at such meeting.
SECTION 11. NOMINATIONS TO THE BOARD OF DIRECTORS. Subject to the rights,
if any, of holders of any preferred stock, nominations for the election of
directors may be made by the Board of Directors or a committee appointed by the
Board of Directors or by any shareholder entitled to vote generally in the
election of directors. However, any shareholder entitled to vote generally in
the election of directors may nominate one or more persons for election as
directors at a regular or special meeting of shareholders only if written notice
of such shareholder's intent to make such nomination or nominations has been
given, either by personal delivery or by United States mail, postage prepaid, to
the Secretary of the corporation and received not later than the close of
business on the 10th day following the day on which notice of the date of the
meeting was mailed or public disclosure of the date of the meeting was made,
whichever first occurs. Each such notice to the Secretary shall set forth: (i)
the name and address of record of the shareholder who intends to make the
nomination; (ii) a representation that the shareholder is a holder of record of
shares of the corporation entitled to vote at such meeting and intends to appear
in person
56
<PAGE>
or by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) the name, age, business and residence addresses, and principal
occupation or employment of each nominee; (iv) a description of all arrangements
or understandings between the shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (v) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (vi) the consent of each nominee to
serve as a director of the corporation if so elected. The corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the corporation to determine the eligibility of such proposed
nominee to serve as a director of the corporation. The presiding officers of
the meeting may, if the facts warrant, determine that a nomination was not made
in accordance with the foregoing procedure, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
57
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. NUMBER AND QUALIFICATION. The officers of the corporation shall
be elected by the Board of Directors and shall include a Chief Executive
Officer, a President, a Chief Financial Officer, a Secretary, and a Treasurer.
The Board of Directors may also appoint one or more Vice Presidents or such
other officers and assistant officers as it may deem necessary. Except as
provided in these By-Laws, the Board of Directors shall fix the powers, duties,
and compensation of all officers. Officers may, but need not, be directors of
the corporation. Any number of offices may be held by the same person.
SECTION 2. TERM OF OFFICE. An officer shall hold office until his
successor shall have been duly elected, unless prior thereto he shall have
resigned or been removed from office as hereinafter provided.
SECTION 3. REMOVAL AND VACANCIES. Any officer or agent elected or
appointed by the Board of Directors shall hold office at the pleasure of the
Board of Directors and may be removed, with or without cause, at any time by the
vote of a majority of the Board of Directors. Any vacancy in an office of the
corporation shall be filled by the Board of Directors.
58
<PAGE>
SECTION 4. PRESIDENT. The President shall have such powers and perform
such duties as the Board of Directors may from time to time prescribe. The
President shall report to the Chief Executive Officer of the corporation.
SECTION 5. VICE PRESIDENTS. The Vice President, if any, or vice Presidents
in case there be more than one, shall have such powers and perform such duties
as the Board of Directors may from time to time prescribe. In the absence of
the President or in the event of his death, inability, or refusal to act, the
Vice President, or in the event there be more than one Vice President, the Vice
Presidents in the order designated by the Board of Directors, or, in the
absence of any designation, in the order of their election, shall perform the
duties of the President, and, when so acting, shall have all the powers of and
be subject to all of the restrictions upon the President.
SECTION 6. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and of the shareholders and shall maintain records of, and whenever
necessary, certify all proceedings of the Board of Directors and of the
shareholders. He shall keep the stock books of the corporation, and, when so
directed by the Board of Directors or other person or persons authorized to call
such meetings, shall give or cause to be given
59
<PAGE>
notice of meetings of the shareholders and of meetings of the Board of
Directors. He shall also perform such other duties and have such other powers
as the Board of Directors may from time to time prescribe.
SECTION 7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have
the care and custody of the corporate funds and securities of the corporation
and shall disburse the funds of the corporation as may be ordered from time to
time by the Board of Directors. The Chief Financial Officer shall keep full and
accurate financial records for the corporation and shall have such other powers
and perform such other duties as the Board of Directors may from time to time
prescribe.
SECTION 8. OTHER OFFICERS. The Assistant Secretaries and Assistant
Treasurers in the order of their seniority, unless otherwise determined by the
Board of Directors, shall, in the absence or disability of the Secretary or
Treasurer, perform the duties and exercise the powers of the Secretary and
Treasurer respectively. Such Assistant Secretaries and Assistant Treasurers
shall have such other powers and perform such other duties as the Board of
Directors may from time to time prescribe. Any other officers appointed by the
Board of Directors shall hold
60
<PAGE>
office at the pleasure of the Board of Directors and shall have such powers,
perform such duties, and be responsible to such other officers as the Board of
Directors may from time to time prescribe.
SECTION 9. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
preside at all meetings of the shareholders and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The Chief
Executive Officer shall have such powers and perform such duties as the Board of
Directors may from time to time prescribe.
SECTION 10. TREASURER. The Treasurer shall have such powers and perform
such duties as the Board of Directors may from time to time prescribe.
ARTICLE V
CERTIFICATES AND OWNERSHIP OF SHARES
SECTION 1. CERTIFICATES. All shares of the corporation shall be
represented by certificates. Each certificate shall contain on its face (a) the
name of the corporation, (b) a statement that the corporation is incorporated
under the laws of the State of Minnesota, (c) the name of the person to whom it
is issued, and (d) the number and class of shares, and the designa-
61
<PAGE>
tion of the series, if any, that the certificate represents. Certificates shall
also contain any other information required by law or desired by the Board of
Directors, and shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by either the President, a Vice
President, the Secretary, or an Assistant Secretary. If a certificate is signed
(1) by a transfer agent or an assistant transfer agent or (2) by a transfer
clerk acting on behalf of the corporation and a registrar, the signature of any
such President, Vice President, Secretary, or Assistant Secretary may be a
facsimile. If a person signs or has a facsimile signature placed upon a
certificate while an officer, transfer agent, or registrar of a corporation, the
certificate may be issued by the corporation, even if the person has ceased to
have that capacity before the certificate is issued, with the same effect as if
the person had that capacity at the date of its issue. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the person to whom the shares represented thereby are issued with the
number of shares and date of issue shall be entered on the stock transfer books
of the corporation. All certificates surrendered to the corporation or the
transfer agent for transfer shall be canceled and no new
62
<PAGE>
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and canceled, except that in case of a lost,
destroyed, or mutilated certificate, a new one may be issued therefor upon such
terms and indemnity to the corporation as the Board of Directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by his legal representative who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the corporation, and on
surrender of such shares to the corporation or the transfer agent of the
corporation.
SECTION 3. OWNERSHIP. Except as otherwise provided in this Section, the
person in whose name shares stand on the books of the corporation shall be
deemed by the corporation to be the owner thereof for all purposes. The Board
of Directors, however, by a resolution approved by the affirmative vote of a
majority of directors then in office, may establish a procedure whereby a
shareholder may certify in writing to the corporation that all or a portion of
the shares registered in the name of the shareholder
63
<PAGE>
are held for the account of one or more beneficial owners. Upon receipt by the
corporation of the writing, the persons specified as beneficial owners, rather
than the actual shareholder, shall be deemed the shareholders for such purposes
as are permitted by the resolution of the Board of Directors and are specified
in the writing.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 1. CONTRACTS. The Board of Directors may authorize such officers
or agents as they shall designate to enter into contracts or execute and deliver
instruments in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances.
SECTION 2. LOANS. The corporation shall not lend money to, guarantee the
obligation of, become a surety for, or otherwise financially assist any person
unless the transaction, or class of transactions to which the transaction
belongs, has been approved by the affirmative vote of a majority of directors
present, and (a) is in the usual and regular course of business of the
corporation, (b) is with, or for the benefit of, a related corporation, an
organization in which the corporation has a financial interest, an organization
with which the corporation
64
<PAGE>
has a business relationship, or an organization to which the corporation has
the power to make donations, (c) is with, or for the benefit of, an officer
or other employee of the corporation or a subsidiary, including an officer or
employee who is a director of the corporation or a subsidiary, and may
reasonably be expected, in the judgment of the Board of Directors, to benefit
the corporation, or (d) has been approved by the affirmative vote of the
holders of two-thirds of the outstanding shares, including both voting and
nonvoting shares.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes, or other evidences of indebtedness issued in the name
of the corporation shall be signed by such officers or agents of the corporation
as shall be designated and in such manner as shall be determined from time to
time by resolution of the Board of Directors.
SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks or other financial institutions as the Board of Directors may select.
65
<PAGE>
ARTICLE VII
MISCELLANEOUS
SECTION 1. DIVIDENDS. The Board of Directors may from time to time
declare, and the corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law.
SECTION 2. RESERVES. There may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors from time
to time, in their absolute discretion, deem proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the corporation, or for the purchase of additional property, or
for such other purpose as the directors shall deem to be consistent with the
interests of the corporation, and the directors may modify or abolish any such
reserve.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be such
twelve-month period as may be set by a resolution of the Board of Directors,
provided, however, that the first fiscal year of the corporation may be a
shorter period if permitted by law and set by a resolution of the Board of
Directors.
66
<PAGE>
SECTION 4. AMENDMENTS. Except as limited by the Articles of Incorporation,
these By-Laws may be altered or amended by the Board of Directors at any meeting
of directors to the full extent permitted by law, subject, however, to the power
of the shareholders of this corporation to alter or repeal such By-Laws.
* * * * *
The undersigned, Secretary of In Home Health, Inc., a Minnesota corporation
does hereby certify that the foregoing are the Restated By-Laws of the
corporation incorporating all amendments to date.
Dated: June 16, 1997 /s/ Kari K. Schell,
---------------------------------------
Kari K. Schell,
Secretary
67
<PAGE>
IN HOME HEALTH, INC.
MANAGEMENT INCENTIVE PLAN
FISCAL YEAR 1997
In Home Health has annual incentive plans for key positions. The purpose of
these plans is:
* To ensure a competitive total compensation package for key
management and support positions.
* To attract, retain and motivate qualified employees in key
management and support positions.
* To stimulate higher performance levels by clarifying and
strengthening the links between an individual's contributions
and their compensation.
* To assure that corporate goals and objectives are an integral
part of every employee's performance.
ELIGIBILITY
The plans are intended to include those management and support personnel who
have measurable effects on financial results. Positions will be identified by
the Executive Management Team and the Compensation Committee of the Board of
Directors.
TOTAL COMPENSATION OPPORTUNITY
The total compensation package, composed of base salary and benefits, plus the
management incentive plan, is designed to provide participants with an
opportunity to earn above average compensation for meeting and exceeding the
plan objectives.
ANNUAL INCENTIVE MOTIVATION
An incentive will be motivational if:
1. the opportunity is large enough to be of significance to the individual,
and
2. the individual perceives that he/she can reasonably impact and/or control
the expected results which are set forth in the compensation plan.
68
<PAGE>
INCENTIVE ELEMENTS
For fiscal year 1997, the emphasis will be placed on achieving revenue and
operating profit goals.
No bonus will be paid to any manager where a loss occurs in their area of
responsibility, even if the loss was planned or if the Company incurs a loss for
the year.
GENERATION OF INCENTIVE POOL
Each year, incentive dollars will be integrated into the operating budget based
on performance projections for individuals and the corporation.
INCENTIVE PAYMENTS
Incentive payments will be paid annually. Payments will be made when the
audited results of the preceding fiscal year are available and the individual
incentive amount has been approved by the appropriate department head and at
least one executive officer. The incentive amount is a percentage of base
salary in effect on the last day of the fiscal year.
NEW HIRES
Participants hired during the year must be employed for at least 6 of the 12
months of the fiscal year in order to be eligible for the incentive. A prorated
payment may be made based on the number of full months (6 to 11 months) worked
during the fiscal year. Exceptions to this policy must receive the prior
written approval of the Chief Executive Officer.
TRANSFERS, PROMOTIONS AND LEAVES
If an employee is transferred or promoted into an incentive eligible position
during the fiscal year, he/she will be eligible for incentive when they complete
at least six (6) months of employment in the position. A prorated payment may
be made based on the number of full months (six to eleven) worked in the
eligible position.
If the employee is promoted from one eligible position to another eligible
position and is in the higher position at least six months, the amount paid may
be prorated according to the number of months worked in each position. If the
employee is in the new position for less than six months, the incentive will not
be prorated but will be based on the lower position's incentive rate.
An employee transferring into a lower incentive from a higher incentive position
will receive the lower incentive rate for the entire year. An employee who
transfers out of an eligible incentive position any time during the year is
ineligible for any incentive relating to that year.
69
<PAGE>
An employee on an unpaid leave of absence will not be paid incentive for the
months or portions of months absent. The amount will be prorated for the full
months worked in an eligible position.
TERMINATION
In the event a participant is terminated for cause, no incentive will be paid.
When a participant voluntarily terminates their position before the incentive
award is due to be paid, payment of the incentive will not be made. Exceptions
to this policy may be made at the discretion of the Chief Executive Officer and
must be in writing. Payments to former employee will be made on the normal
schedule.
REGIONAL OR AREA POSITIONS
All Corporate, area or regional positions will participate in the Company's
Annual Incentive Plan utilizing the Company's consolidated results to determine
their Management Incentive compensation for the year. Branch and Pharmacy
General Managers will participate in the General Managers Incentive Plan.
Details of the pertinent plan will be distributed to the participants.
DURATION OF PLAN
The company may change, modify, or amend this plan at any time. This plan is for
fiscal year 1997 only and no plan for fiscal year 1998 or any other fiscal year
is implied.
These plans are set at the level of operating performance at Corporate, Regional
or Branch as follows:
CORPORATE
ANNUAL REVENUE PLAN ACHIEVEMENT
- -------------------------------------------------------------------------------
Annual Profit
Plan Achievement 95% 100% 105% 110% 115% 120% 125% 130%
in Dollars (000)*
- -------------------------------------------------------------------------------
2,430 0% 60% 60% 60% 60% 60% 60% 75%
2,565 60% 80% 80% 80% 80% 80% 80% 100%
2,700 80% 100% 100% 100% 100% 100% 100% 100%
2,846 100% 105% 110% 110% 110% 110% 110% 130%
2,999 105% 110% 115% 130% 130% 130% 130% 150%
3,161 110% 130% 130% 150% 150% 150% 150% 175%
3,331 130% 130% 150% 150% 150% 175% 175% 200%
3,511 150% 150% 150% 175% 175% 185% 200% 200%
3,700 150% 150% 175% 185% 185% 200% 200% 200%
*Net Income Before the Dividend.
70
<PAGE>
REGION 1
ANNUAL REVENUE PLAN ACHIEVEMENT
- -------------------------------------------------------------------------------
Annual Operating
Profit Achievement 95% 100% 105% 110% 115% 120% 125% 130%
in Dollars (000)*
- -------------------------------------------------------------------------------
2,627 0% 48% 48% 48% 48% 48% 60% 15%
2,773 48% 64% 64% 64% 64% 64% 64% 80%
2,919 64% 80% 80% 80% 80% 80% 80% 80%
3,076 80% 84% 88% 88% 88% 88% 88% 104%
3,242 84% 88% 92% 104% 104% 104% 104% 120%
3,417 88% 104% 104% 120% 120% 120% 120% 140%
3,601 104% 104% 120% 120% 120% 140% 140% 160%
3,795 120% 120% 120% 140% 140% 148% 160% 160%
4,000 120% 120% 140% 148% 148% 160% 160% 160%
* Operating Profit
REGION 2
ANNUAL REVENUE PLAN ACHIEVEMENT
- -------------------------------------------------------------------------------
Annual Operating
Profit Achievement 95% 100% 105% 110% 115% 120% 125% 130%
in Dollars (000)*
- -------------------------------------------------------------------------------
3,007 0% 48% 48% 48% 48% 48% 60% 15%
3,174 48% 64% 64% 64% 64% 64% 64% 80%
3,341 64% 80% 80% 80% 80% 80% 80% 80%
3,521 80% 84% 88% 88% 88% 88% 88% 104%
3,711 84% 88% 92% 104% 104% 104% 104% 120%
3,911 88% 104% 104% 120% 120% 120% 120% 140%
4,122 104% 104% 120% 120% 120% 140% 140% 160%
4,344 120% 120% 120% 140% 140% 148% 160% 160%
4,578 120% 120% 140% 148% 148% 160% 160% 160%
* Operating Profit
BRANCH
ANNUAL REVENUE PLAN ACHIEVEMENT
- -------------------------------------------------------------------------------
Annual Profit
Plan Achievement 95% 100% 105% 110% 115% 120% 125% 130%
- -------------------------------------------------------------------------------
90% 0% 60% 60% 60% 60% 60% 60% 75%
95% 60% 80% 80% 80% 80% 80% 80% 100%
100% 80% 100% 100% 100% 100% 100% 100% 100%
105% 100% 105% 110% 110% 110% 110% 110% 130%
110% 105% 110% 115% 130% 130% 130% 130% 150%
115% 110% 130% 130% 150% 150% 150% 150% 175%
120% 130% 130% 150% 150% 150% 175% 175% 200%
125% 150% 150% 150% 175% 175% 185% 200% 200%
130% 150% 150% 175% 185% 185% 200% 200% 200%
* Operating Profit
71
<PAGE>
As Amended
IN HOME HEALTH, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT OF PLAN. In Home Health, Inc. (hereinafter referred to
as the "Company") proposes to grant to certain employees of the Company the
opportunity to purchase common stock of the Company. Such common stock shall be
purchased pursuant to the plan herein set forth which shall be known as the "IN
HOME HEALTH, INC. EMPLOYEE STOCK PURCHASE PLAN" (hereinafter referred to as the
"Plan"). The Company intends that the Plan shall qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended, and shall be construed in a manner consistent with the requirements of
said Section 423 and the regulations thereunder.
2. PURPOSE. The Plan is intended to encourage stock ownership by
employees of the Company, and as an incentive to them to remain in employment,
improve operations, increase profits, and contribute more significantly to the
Company's success.
3. ADMINISTRATION. The Plan shall be administered by a stock purchase
committee (hereinafter referred to as the "Committee") consisting of not less
than three directors or employees of the Company, as designated by the Board of
Directors of the Company (hereinafter referred to as the "Board of Directors").
The Board of Directors shall fill all vacancies in the Committee and may remove
any member of the Committee at any time, with or without cause. The Committee
shall select its own chairman and hold its meetings at such times and places as
it may determine. All determinations of the Committee shall be made by a
majority of its members. Any decision which is made in writing and signed by a
majority of the members of the Committee shall be effective as fully as though
made by a majority vote at a meeting duly called and held. The determinations
of the Committee shall be made in accordance with its judgment as to the best
interests of the Company, its employees and its shareholders and in accordance
with the purposes of the Plan; provided, however, that the provisions of the
Plan shall be construed in a manner consistent with the requirements of Section
423 of the Internal Revenue Code, as amended. Such determinations shall be
binding upon the Company and the participants in the Plan unless otherwise
determined by the Board of Directors. The Company shall pay all expenses of
administering the Plan. No member of the Board of Directors or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted under it.
4. DURATION AND PHASES OF THE PLAN. (a) The Plan will commence on
November 1, 1991 and will terminate September 30, 1999, except that any phase
commenced prior to such termination shall, if necessary, be allowed to continue
beyond such termination until completion. Notwithstanding the foregoing, this
Plan shall be considered of no force or effect and any options granted shall be
considered null and void unless the holders of a majority of all of the issued
and outstanding shares of the common stock of the Company approve the Plan
within twelve (12) months after the date of its adoption by the Board of
Directors.
(b) The Plan shall be carried out in one or more phases, each phase being
for a period of one year, except that the first phase shall consist of the
eleven (11) month period ending September 30, 1992. Each phase shall commence
immediately after the termination of the preceding phase. The existence and
date of commencement of a phase (the "Commencement Date") shall be determined by
the Committee, provided
72
<PAGE>
that the commencement of the first phase shall be within twelve (12) months
before or after the date of approval of the Plan by the shareholders of the
Company. In the event all of the stock reserved for grant of options hereunder
is issued pursuant to the terms hereof prior to the commencement of one or more
phases scheduled by the Committee or the number of shares remaining is so small,
in the opinion of the Committee, as to render administration of any succeeding
phase impracticable, such phase or phases shall be cancelled. Phases shall be
numbered successively as Phase 1, Phase 2 and Phase 3.
(c) The Board of Directors may elect to accelerate the termination date of
any phase effective on the date specified by the Board of Directors in the event
of (i) any consolidation or merger of the Company in which the Company is not
the continuing or surviving corporation or pursuant to which shares would be
converted into cash, securities or other property, other than a merger of the
Company in which shareholders immediately prior to the merger have the same
proportionate ownership of stock in the surviving corporation immediately after
the merger; (ii) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all of the assets
of the Company; or (iii) any plan or liquidation or dissolution of the Company.
5. ELIGIBILITY. All Employees, as defined in Paragraph 19 hereof, who are
employed by the Company at least one day prior to the Commencement Date of a
phase shall be eligible to participate in such phase.
6. PARTICIPATION. Participation in the Plan is voluntary. An eligible
Employee may elect to participate in any phase of the Plan, and thereby become a
"Participant" in the Plan, by completing the Plan payroll deduction form
provided by the Company and delivering it to the Company or its designated
representative prior to the Commencement Date of that phase. Payroll deductions
for a Participant shall commence on the first payday after the Commencement Date
of the phase and shall terminate on the last payday immediately prior to or
coinciding with the termination date of that phase unless sooner terminated by
the Participant as provided in Paragraph 9 hereof.
7. PAYROLL DEDUCTIONS. (a) Upon enrollment, a Participant shall elect to
make contributions to the Plan by payroll deductions (in full dollar amounts and
in amounts calculated to be as uniform as practicable throughout the period of
the phase), in the aggregate amount not in excess of 10% of such Participant's
Base Pay for the term of the phase, as determined according to Paragraph 19
hereof.
The minimum authorized payroll deduction must aggregate to not less than
$10 per pay period.
(b) In the event that the Participant's compensation for any pay period is
terminated or reduced from the compensation rate for such a period as of the
Commencement Date of the phase for any reason so that the amount actually
withheld on behalf of the Participant as of the termination date of the phase is
less than the amount anticipated to be withheld over the phase year as
determined on the Commencement Date of the phase, then the extent to which the
Participant may exercise his option shall be based on the amount actually
withheld on his behalf. In the event of a change in the pay period of any
Participant, such as from bi-weekly to monthly, an appropriate adjustment shall
be made to the deduction in each new pay period so as to ensure the deduction of
the proper amount authorized by the Participant.
(c) All payroll deductions made for Participants shall be credited to
their accounts under the Plan. A Participant may not make any separate cash
payments into such account.
73
<PAGE>
(d) Except for his right to discontinue participation in the Plan as
provided in Paragraph 9, no Participant shall be entitled to increase or
decrease the amount to be deducted in a given phase after the Commencement Date.
8. OPTIONS.
(a) GRANT OF OPTION.
(i) A Participant who is employed by the Company as of the
Commencement Date of a phase shall be granted an option as
of such date to purchase a number of full shares of Company
common stock to be determined by dividing the total amount
to be credited to that Participant's account under Paragraph
7 hereof by the option price set forth in Paragraph
8(a)(ii)(A) hereof, subject to the limitations of Paragraph
10 hereof.
(ii) The option price for such shares of common stock shall be
the lower of:
A. Eighty-five percent (85%) of the fair market value of
such shares of common stock on the Commencement Date of
the phase; or
B. Eighty-five percent (85%) of the fair market value of
such shares of common stock on the termination date of
the phase.
(iii) The fair market value of shares of common stock of the
Company shall be determined by the Committee for each
valuation date in a manner acceptable under Section 423 of
the Internal Revenue Code of 1986.
(iv) Anything herein to the contrary notwithstanding, no Employee
shall be granted an option hereunder:
A. Which permits his rights to purchase stock under all
employee stock purchase plans of the Company, its
subsidiaries or its parent, if any, to accrue at a rate
which exceeds Twenty-Five Thousand Dollars ($25,000) of
the fair market value of such stock (determined at the
time such option is granted) for each calendar year in
which such option is outstanding at any time;
B. If immediately after the grant such Employee would own
and/or hold outstanding options to purchase stock
possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock
of the Company, its parent, if any, or of any
subsidiary of the Company. For purposes of determining
stock ownership under this Paragraph, the rules of
Section 424(d) of the Internal Revenue Code, as
amended, shall apply; or
C. Which can be exercised after the expiration of 27
months from the date the option is granted.
(b) EXERCISE OF OPTION.
74
<PAGE>
(i) Unless a Participant gives written notice to the Company
pursuant to Paragraph 8(b)(ii) or Paragraph 9 prior to the
termination date of a phase, his option for the purchase of
shares will be exercised automatically for him as of such
termination date for the purchase of the number of full
shares of Company common stock which the accumulated payroll
deductions in his account at that time will purchase at the
applicable option price, subject to the limitations set
forth in Paragraph 10 hereof.
(ii) A Participant may, by written notice to the Company at any
time during the thirty (30) day period immediately preceding
the termination date of a phase, elect, effective as of the
termination date of that phase, to exercise his option for a
specified number of full shares less than the maximum number
which may be purchased under his option.
(iii) As promptly as practicable after the termination date of any
phase, the Company will deliver to each Participant herein
the common stock purchased upon the exercise of his option,
together with a cash payment equal to the balance, if any,
of his account which was not used for the purchase of common
stock with interest accrued thereon.
9. WITHDRAWAL OR TERMINATION OF PARTICIPATION. (a) A Participant may, at
any time prior to the termination date of a phase, withdraw all payroll
deductions then credited to his account by giving written notice to the Company.
Promptly upon receipt of such notice of withdrawal, all payroll deductions
credited to the Participant's account will be paid to him with interest accrued
thereon and no further payroll deductions will be made during the phase. In
such event, the option granted the Participant under that phase of the Plan
shall lapse immediately. Partial withdrawals of payroll deductions hereunder
may not be made.
(b) In the event of the death of a Participant, the person or persons
specified in Paragraph 14 may give notice to the Company within sixty (60) days
of the death of the Participant electing to purchase the number of full shares
which the accumulated payroll deductions in the account of such deceased
Participant will purchase at the option price specified in Paragraph 8(a)(ii)
and have the balance in the account distributed in cash with interest accrued
thereon. If no such notice is received by the Company within said sixty (60)
days, the accumulated payroll deductions will be distributed in full in cash
with interest accrued thereon.
(c) Upon termination of Participant's employment for any reason other than
death of the Participant, the payroll deductions credited to his account, plus
interest, shall be returned to him.
10. STOCK RESERVED FOR OPTIONS. (a) One Million Five Hundred Thousand
(1,500,000) shares of the Company's common stock are reserved for issuance upon
the exercise of options to be granted under the Plan. Shares subject to the
unexercised portion of any lapsed or expired option may again be subject to
option under the Plan.
(b) If the total number of shares of the Company common stock for which
options are to be granted for a given phase as specified in Paragraph 8 exceeds
the number of shares then remaining available under the Plan (after deduction of
all shares for which options have been exercised or are then outstanding) and if
the Committee does not elect to cancel such phase pursuant to Paragraph 4, the
Committee shall make a pro rata allocation of the shares remaining available in
as uniform and equitable
75
<PAGE>
a manner as it shall consider practicable. In such event, the options to be
granted and the payroll deductions to be made pursuant to the Plan which would
otherwise be effected may, in the discretion of the Committee, be reduced
accordingly. The Committee shall give written notice of such reduction to each
Participant affected.
(c) The Participant (or a joint tenant named pursuant to Paragraph 10(d)
hereof) shall have no rights as a shareholder with respect to any shares subject
to the Participant's option until the date of the issuance of a stock
certificate evidencing such shares. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior to the date
such stock certificate is actually issued, except as otherwise provided in
Paragraph 12 hereof.
(d) The shares of the Company common stock to be delivered to a
Participant pursuant to the exercise of an option under the Plan will be
registered in the name of the Participant or, if the Participant so directs by
written notice to the Committee prior to the termination date of that phase of
the Plan, in the names of the Participant and one other person the Participant
may designate as his joint tenant with rights of survivorship, to the extent
permitted by law.
11. ACCOUNTING AND USE OF FUNDS. Payroll deductions for each Participant
shall be credited to an account established for him under the Plan. A
Participant may not make any separate case payments into such account. Such
account shall be solely for bookkeeping purposes and no separate fund or trust
shall be established hereunder and the Company shall not be obligated to
segregate such funds. All funds from payroll deductions received or held by the
Company under the Plan may be used, without limitation, for any corporate
purpose by the Company.
12. ADJUSTMENT PROVISION. (a) Subject to any required action by the
shareholders of the Company, the number of shares covered by each outstanding
option, and the price per share thereof in each such option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of the Company common stock resulting from a subdivision or consolidation
of shares or the payment of a share dividend (but only on the shares) or any
other increase or decrease in the number of such shares effected without receipt
of consideration by the Company.
(b) In the event of a change in the shares of the Company as presently
constituted, which is limited to a change of all its authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be the
shares within the meaning of this Plan.
13. NON-TRANSFERABILITY OF OPTIONS. (a) Options granted under any phase
of the Plan shall not be transferable except under the laws of descent and
distribution and shall be exercisable only by the Participant during his
lifetime and after his death only by his beneficiary of the representative of
his estate as provided in Paragraph 9(b) hereof.
(b) Neither payroll deductions credited to a Participant's account, nor
any rights with regard to the exercise of an option or to receive common stock
under any phase of the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way by the Participant. Any such attempted assignment,
transfer, pledge or other disposition shall be null and void and without effect,
except that the
76
<PAGE>
Company may, at its option, treat such act as an election to withdraw funds in
accordance with Paragraph 9.
14. DESIGNATION OF BENEFICIARY. A Participant may file a written
designation of a beneficiary who is to receive any cash to the Participant's
credit plus interest thereon under any phase of the Plan in the event of such
Participant's death prior to exercise of his option pursuant to Paragraph 9(b)
hereof, or to exercise his option and become entitled to any stock and/or cash
upon such exercise in the event of the Participant's death prior to exercise of
the option pursuant to Paragraph 9(b) hereof. The beneficiary designation may
be changed by the Participant at any time by written notice to the Company.
Upon the death of a Participant and upon receipt by the Company of proof
deemed adequate by it of the identity and existence at the Participant's death
of a beneficiary validly designated under the Plan, the Company shall in the
event of the Participant's death under the circumstances described in Paragraph
9(b) hereof, allow such beneficiary to exercise the Participant's option
pursuant to Paragraph 9(b) if such beneficiary is living on the termination date
of the phase and deliver to such beneficiary the appropriate stock and/or cash
after exercise of the option. In the event there is not validly designated
beneficiary under the Plan who is living at the time of the Participant's death
under the circumstances described in Paragraph 9(b) or in the event the option
lapses, the Company shall deliver the cash credited to the account of the
Participant with interest to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed to the
knowledge of the Company, it may, in its discretion, deliver such cash to the
spouse or to any one or more dependents or relatives of the Participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate. The Company will not be responsible for or
be required to give effect to the disposition of any cash or stock or the
exercise of any option in accordance with any will or other testamentary
disposition made by such Participant or in accordance with the provision of any
law concerning intestacy, or otherwise. No designated beneficiary shall, prior
to the death of a Participant by whom he has been designated, acquire any
interest in any stock or in any option or in the cash credited to the
Participant under any phase of the Plan.
15. AMENDMENT AND TERMINATION. The Plan may be terminated at any time by
the Board of Directors provided that, except as permitted in Paragraph 4(c) with
respect to an acceleration of the termination date of any phase, no such
termination will take effect with respect to any options then outstanding.
Also, the Board may, from time to time, amend the Plan as it may deem proper and
in the best interests of the Company or as may be necessary to comply with
Section 423 of the Internal Revenue Code of 1986, as amended, or other
applicable laws or regulations; provided, however, that no such amendment shall,
without prior approval of the shareholders of the Company (1) increase the total
number of shares for which options may be granted under the Plan (except as
provided in Paragraph 12 herein), (2) permit aggregate payroll deductions in
excess of ten percent (10%) of a Participant's compensation as of the
Commencement Date of a phase, or (3) impair any outstanding option.
16. INTEREST. In any situation where the Plan provides for the payment of
interest on a Participant's payroll deductions, such interest shall be
determined by averaging the month-end balances in the Participant's account for
the period of his participation and computing interest thereon at the rate of
five percent (5%) per annum.
17. NOTICES. All notices or other communications in connection with the
Plan or any phase thereof shall be in the form specified by the Committee and
shall be deemed to have been duly given when
77
<PAGE>
received by the Participant or his designated personal representative or
beneficiary or by the Company or its designated representative, as the case may
be.
18. PARTICIPATION OF SUBSIDIARIES. The Employees of any Subsidiary of the
Company shall be entitled to participate in the Plan on the same basis as
Employees of the Company, unless the Board of Directors determines otherwise.
Effective as of the date of coverage of any Subsidiary, any references herein to
the "Company" shall be interpreted as referring to such Subsidiary as well as to
In Home Health, Inc.
In the event that any Subsidiary which is covered under the Plan ceases to
be a Subsidiary of In Home Health, Inc., the employees of such Subsidiary shall
be considered to have terminated their employment for purposes of Paragraph 9
hereof as of the date such Subsidiary ceases to be such a Subsidiary.
19. DEFINITIONS. (a) "Subsidiary" shall include any corporation defined
as a subsidiary of the Company in Section 424(f) of the Internal Revenue Code of
1986, as amended.
(b) "Employee" shall mean any employee, including an officer, of the
Company who as of the day immediately preceding the Commencement Date of a phase
is customarily employed by the Company for more than twenty (20) hours per week
and more than five (5) months in a calendar year.
(c) "Base Pay" is the regular pay for employment for each employee as
annualized for a twelve (12) month period, exclusive of overtime, commissions,
bonuses, disability payments, shift differentials, incentives and other similar
payments, determined as of the Commencement Date of each phase.
As Amended, Adopted by Board of Directors: August 13, 1996
As Amended, Approved by Stockholders: March 6, 1997
78
<PAGE>
[LOGO]
FIRST BANK NATIONAL ASSOCIATION International Banking Division, MPFP1007
Minneapolis Office Cable: FIRSTBANK, MPS
601 Second Avenue South TELEX: 192179 FBNA INTL MPS
Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44
612 973-0736/0710 Fax: 612 973-0838
SEPTEMBER 30, 1997
AMENDMENT TO STANDBY LETTER OF CREDIT
AMENDMENT NUMBER 2 LETTER OF CREDIT NUMBER 76471
--- -----
BENEFICIARY: THE TRAVELERS INDEMNITY COMPANY (BENEFICIARY)
NATIONAL ACCOUNTS COLLATERAL UNIT
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
APPLICANT: IN HOME HEALTH, INC.
601 CARLSON PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55305-5214
THE ABOVE MENTIONED CREDIT IS AMENDED AS FOLLOWS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRESENT AVAILABLE BALANCE DECREASED BY $221,155.00 TO A NEW TOTAL OF
$2,211,845.00.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOR INFORMATIONAL PURPOSES ONLY: EXPIRATION DATE HAS BEEN EXTENDED TO
DECEMBER 15, 1998, IN ACCORDANCE WITH THE TERMS OF THE LETTER OF CREDIT.
THE AMENDMENT ABOVE IS SUBJECT TO BENEFICIARY APPROVAL/DISAPPROVAL AND MUST
BE ACCEPTED OR REFUSED BY MAKING SUCH NOTATION BY YOUR SIGNATURE ON THE
ATTACHED COPY OF THIS AMENDMENT ON THE LINES PROVIDED AND RETURNING SAME TO
OURSELVES. IMMEDIATE REPLY REQUESTED.
I, APPROVE/ACCEPT SUBJECT AMENDMENT
-------------------
(AUTHORIZED SIGNER) DATED
--------------------
OR
I, DISAPPROVE/REFUSE SUBJECT AMENDMENT
-------------------
(AUTHORIZED SIGNER) DATED
--------------------
THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDITS PUBLISHED BY THE INTERNATIONAL CHAMBER OF COMMERCE, OR ANY SUBSEQUENT
REVISION THERETO.
THIS AMENDMENT IS TO BE CONSIDERED AS PART OF THE ABOVE CREDIT AND MUST BE
ATTACHED THERETO.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
FIRST BANK NATIONAL ASSOCIATION, MINNEAPOLIS 0FFICE
/s/ Julie A. Adams /s/ Dawn Johnston
- -------------------- --------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
79
<PAGE>
[LOGO]
FIRST BANK NATIONAL ASSOCIATION International Banking Division
Minneapolis Office Cable: FIRSTBANK, MPS
601 Second Avenue South TELEX: 192179 FBNA INTL MPS
Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44
612 973-0736/0710 Fax: 612 973-0838
-----------------------------------------------
FOR INTERNAL IDENTIFICATION PURPOSES ONLY:
APPLICANT:
IN HOME HEALTH, INC.
601 CARLSON PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55305-5214
-----------------------------------------------
LETTER OF CREDIT
DECEMBER 16,1996
IRREVOCABLE LETTER OF CREDIT NO. 76470
ROYAL INDEMNITY COMPANY (BENEFICIARY), ON BEHALF OF ITSELF AND ITS AFFILIATED
COMPANIES
9300 ARROWPOINT BOULEVARD
CHARLOTTE, NORTH CAROLINA 28273-8135
WE HEREBY ESTABLISH THIS IRREVOCABLE LETTER OF CREDIT IN FAVOR OF THE AFORESAID
ADDRESSEE ("BENEFICIARY") FOR DRAWINGS UP TO UNITED STATES DOLLARS NINE HUNDRED
FIFTEEN THOUSAND ($915,000.00) EFFECTIVE IMMEDIATELY. THIS LETTER OF CREDIT IS
ISSUED, PRESENTABLE AND PAYABLE AT OUR OFFICE AT 601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302 AND EXPIRES WITH OUR CLOSE OF BUSINESS ON
DECEMBER 15, 1997.
THE TERM "BENEFICIARY" INCLUDES ANY SUCCESSOR BY OPERATION OF LAW OF THE NAMED
BENEFICIARY INCLUDING, WITHOUT LIMITATION, ANY LIQUIDATOR, REHABILITATOR.
RECEIVER OR CONSERVATOR.
WE HEREBY UNDERTAKE TO PROMPTLY HONOR YOUR SIGHT DRAFT(S) DRAWN ON US,
INDICATING OUR CREDIT NO. 76470, FOR ALL OR ANY PART OF THIS CREDIT IF PRESENTED
ACCOMPANIED BY THE ORIGINAL OF THIS LETTER OF CREDIT, AT OUR OFFICE SPECIFIED IN
PARAGRAPH 1 ON OR BEFORE THE EXPIRY DATE OR ANY AUTOMATICALLY EXTENDED EXPIRY
DATE.
EXCEPT AS EXPRESSLY STATED HEREIN, THIS UNDERTAKING IS NOT SUBJECT TO ANY
CONDITION OR QUALIFICATION. THIS OBLIGATION OF THIS BANK UNDER THIS LETTER OF
CREDIT IS THE INDIVIDUAL OBLIGATION OF THIS BANK, AND IS NO WAY CONTINGENT UPON
REIMBURSEMENT WITH RESPECT THERETO.
IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT IS DEEMED TO BE AUTOMATICALLY
EXTENDED WITHOUT AMENDMENT FOR ONE YEAR FROM THE EXPIRY DATE HEREOF, OR ANY
FUTURE EXPIRATION DATE. UNLESS AT LEAST THIRTY (30) DAYS PRIOR TO ANY EXPIRATION
CONTINUED ON PAGE TWO
80
<PAGE>
[LOGO]
FIRST BANK NATIONAL ASSOCIATION International Banking Division
Minneapolis Office Cable: FIRSTBANK, MPS
601 Second Avenue South TELEX: 192179 FBNA INTL MPS
Minneapolis, Minnesota 55402-4302 S.W.I.F.T.: FNBMUS44
612 973-0736/0710 Fax: 612 973-0838
ROYAL INDEMNITY COMPANY (BENEFICIARY), ON BEHALF OF ITSELF AND ITS AFFILIATED
COMPANIES
9300 ARROWPOINT BOULEVARD
CHARLOTTE, NORTH CAROLINA 28273-8135
IRREVOCABLE LETTER OF CREDIT NO. 76470
DECEMBER 16,1996
PAGE TWO
DATE WE NOTIFY YOU BY REGISTERED MAIL OR COURIER SERVICE THAT WE ELECT NOT TO
CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD.
THIS LETTER OF CREDIT IS SUBJECT TO AND GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK AND 1993 REVISION OF THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDITS OF THE INTERNATIONAL CHAMBER OF COMMERCE (PUBLICATION NO. 500) AND, IN
THE EVENT OF ANY CONFLICT, THE LAWS OF THE STATE OF NEW YORK WILL CONTROL. IF
THIS CREDIT EXPIRES DURING AN INTERRUPTION OF BUSINESS AS DESCRIBED IN ARTICLE
17 OF SAID PUBLICATION 500, THIS BANK HEREBY SPECIFICALLY AGREES TO EFFECT
PAYMENT IF THIS CREDIT IS DRAWN AGAINST WITHIN 30 DAYS AFTER THE RESUMPTION OF
BUSINESS.
FIRST BANK NATIONAL ASSOCIATION, MINNEAPOLIS OFFICE
/s/ Patricia J.D. Turner /s/ Dawn Johnston
- ----------------------------------- ------------------------------
PATRICIA J.D. TURNER DAWN JOHNSTON
INTERNATIONAL BANK OFFICER INTERNATIONAL BANK OFFICER
81
<PAGE>
[LETTERHEAD]
July 11, 1997
Mr. James J. Lynn
5435 Wedgewood Drive
Shorewood, MN 55331
Dear Jim:
The Board of Directors and Management of In Home Health, Inc. appreciate
your valuable contributions to the company over the last year.
The Employment Agreement dated October 24, 1995 between you and In Home
Health, Inc. is hereby extended for a term of one year and shall continue until
October 24, 1998, unless earlier terminated as provided therein.
If the foregoing reflects our mutual understanding, please sign the
enclosed copy of this letter in the space provided.
Please contact me if you have any questions.
Sincerely,
IN HOME HEALTH, INC.
/s/ Joseph R. Buckley
Joseph R. Buckley
Director
Agreed and Accepted
/s/ James J. Lynn
- -------------------------
James J. Lynn
cc: Wolfgang von Maack
82
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of October 24, 1995, by and between IN HOME
HEALTH, INC., a Minnesota corporation (the "Company"), and JAMES J. LYNN (the
"Employee").
R E C I T A L S
A. The Employee has been employed and has made a unique contribution to
the business of the Company.
B. The Board of Directors of the Company believes that the continued
services of Employee would be of great value to the Company and is desirous of
retaining his services as contemplated hereby.
C. The Employee desires to accept employment by the Company and to render
services to the Company, on the terms and subject to the conditions provided in
this Agreement.
A G R E E M E N T:
1. EMPLOYMENT. The Company hereby agrees to employ and retain the
Employee, and the Employee agrees to be employed and retained by the Company, to
render services to the Company for the period, at the rate of compensation and
upon the other terms and conditions set forth herein. The Employee shall devote
his best efforts to his employment by the Company.
2. TERM. The term of the Employee's employment under this Agreement (the
"Employment Term") shall commence on the date hereof (the "Commencement Date"),
which is the date of consummation of the purchase by Manor Healthcare Corp., a
Delaware corporation (the "Purchaser"), of securities of the Company pursuant to
the terms and conditions of the Securities Purchase and Sale Agreement dated as
of May 2, 1995 by and between the Company and the Purchaser (the "Securities
Purchase and Sale Agreement") and shall continue until the second anniversary of
the date hereof (such date being referred to herein as the "Expiration Date"),
unless earlier terminated as provided herein.
83
<PAGE>
-2-
3. DUTIES.
The Employee shall serve the Company by providing certain human
resource/training services and by performing such other duties consistent
therewith. Employee shall provide sixty (60) to eighty (80) hours of such
services each month. Upon termination of the Employee's employment under this
Agreement or the expiration of this Agreement, the Employee shall immediately
submit his resignation from the Board of Directors (if he is then serving
thereon).
4. COMPENSATION AND REIMBURSEMENT OF EXPENSES.
(a) SALARY. For services rendered by the Employee under this
Agreement, the Company shall pay to the Employee as compensation during the
Employment Term a salary (the "Salary") at the rate of ninety thousand dollars
($90,000) per annum. The Salary shall be payable in regular monthly
installments, with the first of such payments made on the Commencement Date. The
Employee will also be eligible to receive annual bonuses based on the Company
revenues up to a maximum amount equal to fifty (50) percent of the Employee's
salary.
(b) Intentionally deleted.
(c) STOCK OPTION. Upon the execution of this Agreement, the Employee
shall be granted options (the "OPTIONS") to purchase 50,000 shares of Common
Stock under an amendment to the Company's 1995 Stock Option Plan approved by the
Company's stockholders (as so amended, the "1995 PLAN") which options (i) will
have an exercise price equal to the fair market value of the Common Stock on the
date of grant, (ii) will be immediately vested upon the grant thereof, (iii)
will be exercisable immediately and (iv) will have a term of ten years from the
date of grant and will expire on the tenth anniversary of the date of grant;
PROVIDED, HOWEVER, that anything herein to the contrary notwithstanding, the
Options shall expire within three months after the termination of the Employee's
employment on the terms and as provided in the 1995 Plan.
(d) REIMBURSEMENT OF EXPENSES. Consistent with established policies
of the Company as in effect from time to time, the Company shall pay or
reimburse the Employee for all reasonable travel, hotel, entertainment and other
business expenses incurred by the Employee in performing his obligations under
this Agreement.
84
<PAGE>
-3-
5. BENEFITS.
(a) BENEFITS PLANS. The Employee shall also be entitled to
participate, on a basis comparable to other key exempt employees of the Company,
in any benefit plan or program of the Company for which exempt employees are or
shall become eligible, including, without limitation, pension, 401(k), life and
disability insurance and stock benefits and/or plans, subject, in the case of
tax-qualified benefit plans and programs, to restrictions under applicable law.
The Employee shall be entitled, at his own expense, to continue his
participation in any group insurance plans after the termination of his
employment with the Company, to the extent required or permitted under
applicable law.
(b) Intentionally deleted.
(c) NO REDUCTION. There shall be no material reduction or diminution
of the benefits provided in this Section 5 (i) unless the Employee shall have
given his prior written consent to such reduction or diminution and an equitable
arrangement (embodied in an ongoing substitute or alternative benefit or plan)
has been made with respect to such benefit or plan or (ii) except, in the case
of Section 5(a), for across-the-board benefit reductions similarly affecting all
key exempt employees of the Company.
6. BENEFITS PAYABLE UPON DISABILITY.
(a) DISABILITY BENEFITS. Subject to Section 7(b) hereof, during any
period of Disability (as hereinafter defined) occurring during the Employment
Term, the Company shall continue to pay to the Employee the compensation
provided in Section 4 hereof and extend to him the benefits provided in Sections
4 and 5 hereof; it being understood that if disability benefits are provided
under any disability policy maintained by the Company, payments under such
policy shall be credited against such obligations of the Company. As used in
this Agreement, the term "Disability" shall mean the material inability of the
Employee to render his agreed-upon services to the Company due to physical
and/or mental infirmity.
(b) SERVICES DURING DISABILITY. During the Employment Term,
notwithstanding any Disability, the Employee shall, to the extent that he is
physically and mentally able to do so, furnish information and assistance to the
Company, and, upon the reasonable request in writing on behalf of the Board,
85
<PAGE>
-4-
from time to time, he shall make himself available to the Company to undertake
reasonable assignments consistent with his current position with the Company and
his physical and mental health.
7. EARLY TERMINATION. This Agreement is subject to termination prior to
the termination prior to the Expiration Date, as follows:
(a) DEATH OF THE EMPLOYEE. If the Employee dies, this Agreement shall
terminate effective as of the date of the Employee's death, and thereupon the
Employee's estate shall be entitled solely to the payments and benefits set
forth in Section 8(b) hereof.
(b) DISABILITY. If the Employee has been unable to perform his
obligations hereunder for four consecutive months, or for at least 120 days
during any calendar year, due to Disability, the Company shall thereafter have
the right to terminate the Employee's employment hereunder upon at least 30
days' prior written notice to the Employee of the effective date of such
termination, and thereupon the Employee shall be entitled solely to the payments
and benefits set forth in Section 8(b) hereof.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The company shall have the
right to terminate the Employee's employment hereunder for Cause (as hereinafter
defined), and thereupon the Employee shall be entitled solely to the payments
and benefits set forth in Section 8(a) hereof. For purposes of this Agreement,
the term "Cause" shall mean any of the following: (i) the Employee's material
breach of this Agreement, which breach shall have continued for 30 days after
written notice by the Company to the Employee detailing the nature of such
breach, (ii) the Employee's conviction for any felony or misdemeanor related to
his acts or omissions as an employee of the Company, or (iii) the Employee's
commission of any material act of dishonesty, fraud or deceit or any violation
of obligations under Section 12 or 13 below. Written notice of the Employee's
termination for Cause shall have been delivered to the Employee with a copy of a
resolution duly adopted by the affirmative vote of a majority of the members of
the Board finding that, in the good faith opinion of the Board, the Employee
conducted himself in a manner as set forth above in this Section 7(c) and
specifying the particulars thereof.
86
<PAGE>
-5-
(d) RESIGNATION OR RETIREMENT. If the Employee resigns or retires
voluntarily ("Voluntary Resignation/Retirement"), this Agreement shall
terminate as of the date of the Employee's resignation or retirement, and
thereupon the Employee shall be entitled solely to the payments and benefits set
forth in Section 8(a). Notwithstanding the foregoing, if such resignation or
retirement is due to the material diminution of Employee's duties as set forth
in this Agreement ("Involuntary Resignation/Retirement"), Employee shall then be
entitled to the payments and benefits set forth in Section 8(b).
(e) TERMINATION FOR OTHER THAN CAUSE. The Company may terminate
Employee for any reasons, at any time, upon written notice of such intention to
terminate, but if not for Cause as stated in (c) above, Employee will be
entitled to the payments and benefits set forth in Section 8(b).
8. EFFECT OF EARLY TERMINATION.
(a) CAUSE OR VOLUNTARY RESIGNATION/RETIREMENT. Upon the early
termination of this Agreement by the Company for Cause or upon the Voluntary
Resignation/Retirement, the Company shall pay to the Employee (i) his Salary
accrued through the effective date of termination, payable at the time such
payment is otherwise due and payable hereunder, and (ii) all other vested
amounts and benefits to which the Employee is entitled, including, without
imitation, vacation pay and expense reimbursement amounts accrued to the
effective date of termination and amounts and benefits owing under the terms of
any benefit plan of the Company in which the Employee participates, and the
Company and the Employee shall have no further obligation to each other under
this Agreement except as otherwise provided herein.
(b) OTHER TERMINATION. Upon the early termination of this Agreement
pursuant to Section 7(a), 7(b), 7(e), or the Involuntary Resignation/Retirement
of Employee, Employee will be entitled to the payments and benefits due for the
remaining term of this Agreement as set forth in Sections 4 and 5, above.
9. ASSISTANCE IN LITIGATION. During the Employment Term, the Employee
shall, upon reasonable notice, furnish such information and proper assistance to
the Company as may reasonably be required by the Company in connection with any
litigation in which it is, or may become, a party.
87
<PAGE>
-6-
10. FEDERAL INCOME TAX WITHHOLDING. The Company shall withhold from any
benefits payable pursuant to this Agreement such Federal, State, City or other
taxes as may be required to be withheld pursuant to any law or governmental
regulations or ruling.
11. EFFECT OF PRIOR AGREEMENTS. This Agreement contains the entire
understanding between the parties hereto respecting the Employee's employment by
the Company and supersedes any prior employment agreement or arrangement between
the Company and the Employee.
12. NON-SOLICITATION AGREEMENT. The Employee covenants and agrees that
while employed by the Company and for a period of one year immediately following
the effective date of any employment termination, the Employee will not in any
way, directly or indirectly, on the Employee's own behalf or on behalf of or in
conjunction with any other person, partnership, firm or corporation, solicit,
divert, take away, or attempt to take away any person, partnership, firm or
corporation (or the business or patronage) that has been a customer of the
Company or any of its affiliated entities. The Employee further agrees that, for
such period, the Employee will not in any way, directly or indirectly, on the
Employee's own behalf or on behalf of or in conjunction with any person,
partnership, firm or corporation, solicit, entice, hire, employ or endeavor to
employ any employee of the Company or any of its affiliated entities.
13. CONFIDENTIAL INFORMATION. The Employee shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company, which shall have been obtained by the
Employee during or by reason of his employment by the Company and which shall
not be public knowledge. During and after the end of the Employment Term, the
Employee shall not, without the prior written consent of the Company,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it, except that, while employed by the
Company in the business of and for the benefit of the Company, the Employee may
provide confidential information as appropriate to attorneys, accountants,
banks, or other persons or entities engaged in business with the Company from
time to time.
88
<PAGE>
-7-
14. GENERAL PROVISIONS.
(a) NONASSIGNABILITY. Neither this Agreement nor any right or
interest hereunder shall be assignable by the Employee, his beneficiaries, or
legal representatives without the Company's prior written consent.
(b) BINDING AGREEMENT. This Agreement shall be binding upon, and
inure to the benefit of, the Employee and the Company and their respective
heirs, executor, administrators, successors and permitted assigns.
(c) AMENDMENT OF AGREEMENT. This Agreement may not be modified or
amended except by an instrument in writing signed by the parties hereto.
(d) WAIVER. No term or condition of this Agreement shall be deemed to
have been waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by writing instrument of the party charged
with such waiver or estoppel.
(e) SEVERABILITY. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not effect any other provision of this
Agreement not held so invalid, and each such other provision shall to the full
extent consistent with law continue in full force and effect.
(f) NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, addressed to James J. Lynn, 5435 Wedgewood Drive,
Shorewood, MN 55331; if to the Company, addressed to In Home Health, Inc.,
Carlson Center, Suite 550, 601 Lakeshore Parkway, Minnetonka, Minnesota
55305-5214 and directed to the attention of the Board with a copy to the
Secretary of the Company; or to such other address as either party any have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
(g) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
89
<PAGE>
-8-
(h) INDULGENCES, ETC. Neither the failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(i) HEADINGS. The headings of paragraphs herein are included solely
for convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
(j) GOVERNING LAW. This Agreement is governed by the laws of the
State of Minnesota, and its validity, interpretation, performance, and
enforcement shall be governed by the laws of the said State.
15. USE OF MATERIALS. Employee for himself and Lynn & Associates hereby
agrees that the Company shall have the perpetual and unrestricted right to use,
modify and copy any and all materials, including copyrighted materials,
heretofore or hereafter prepared by Employee or Lynn & Associates for use by the
Company. The Company shall not be obligated to pay any royalty or other
compensation to exercise the rights referred to in this Section. The Company's
rights under this Section shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Employee has signed this
Agreement, all as of the day and year first above written.
EMPLOYEE IN HOME HEALTH, INC.
/s/ James J. Lynn By: /s/ Kenneth J. Figge
- ------------------------- --------------------------
James J. Lynn
Its: EVP/CFO
--------------------------
90
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT entered into as of this 15th day of November, 1997 by and
between Manor Care, Inc., a Delaware corporation (together with its
subsidiaries and affiliates, other than In Home Health, Inc., hereinafter
referred to as "Manor Care") and In Home Health, Inc., a Minnesota
corporation (together with its subsidiaries, hereinafter referred to as "In
Home").
WHEREAS, Manor Care and In Home desire to formalize the provision
of services by Manor Care to In Home;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and sufficient consideration, the receipt of which is
acknowledged the parties agree as follows:
1. SCOPE OF AGREEMENT. Manor Care will, consistent with the
terms of this Agreement, provide, or cause to be provided to In Home, those
certain corporate, administrative and management services listed on Exhibit A
(each service individually referred to as a "Service" and all services
collectively referred to as the "Services") attached hereto and made part of
this Agreement, and In Home, in consideration thereof, shall pay Manor Care
in accordance with Section 3 below.
2. TERM. This Agreement shall have a retroactive commencement
date of June 1, 1997 and shall terminate as September 30, 1998. Thereafter,
Manor Care agrees to renegotiate the expenses associated with providing
future service.
3. FEES AND PAYMENT.
A. In Home will pay Manor Care a "Management Fee" equal to
Twenty-four Thousand Five Hundred Eighty-three Dollars ($24,583.00) per month
for certain corporate, administrative and management services listed in
Exhibit A, attached hereto. The estimate includes $21,667 per month to pay
for 75% of our President and CEO and his staff. The $21,667 monthly
91
<PAGE>
charge to pay for CEO and staff will be adjusted when a CEO is found and is
paid for by In Home Health.
B. In addition to a management Fee of $7,000 per month for
the period June 1, 1996 through May 31, 1997, In Home has also paid Manor
Care an additional Sixty-five Thousand Four Hundred Fifteen Dollars
($65,415.00) for outside legal services provided through Manor Care for In
Home from June 1, 1996 through May 31, 1997. Manor Care acknowledges such
payment.
C. The total payment due from In Home to Manor Care for the
months for June, July, August and September of 1997 is One Hundred
Sixty-three Thousand Seven Hundred Forty-seven Dollars ($163,747.00)
consisting of four (4) months of Point A and all of Point B.
D. The total FY 1998 Management Fee is Two Hundred
Ninety-five Thousand Dollars ($295,000.00).
E. In Home will receive a cost allocation from Manor Care's
home office cost report (relating to provisions addressed in Subsections A-C
of this Section 3) to include within In Home's cost report for allowable
reimbursement from Medicare. Any changes in this allocation process requires
the approval of the Audit Committee of In Home.
F. The Audit Committees of Manor Care and the special
committee of the In Home Board of Directors will retrospectively review and
agree to each company's fiscal year charges for the administrative service
fees described herein, and prospectively review and agree to the succeeding
year's budgeted administrative service fees. This will be done in both FY
1998 and all subsequent years during which this Agreement is in effect.
G. Manor Care shall bill In Home on the 15th of January,
April, July and October for the Management Fee for the prior three months and
shall bill In Home monthly for any additional
92
<PAGE>
charges incurred by In Home during the prior month. Such additional charges
include outside legal fees, airplane use fees, and other items properly
charged to In Home. Payments shall be due 15 days after receipt of any
invoice.
4. PERFORMANCE OF SERVICES. Manor Care shall perform the
Services with the same degree of care, skill and prudence customarily
exercised for its own operations.
5. LIMITATION ON LIABILITY; INDEMNIFICATION. Except as provided
in the following sentence, neither party shall have any liability under this
Agreement to the other party for damage or loss of any type suffered by the
other party or any third party as a result of the performance or
non-performance of the Services provided hereunder and neither party will be
responsible for general, special, indirect, incidental or consequential
damages, whether known or unknown, that the other party or any third party
may incur or experience on account of entering into or relying on this
Agreement. Each party shall indemnify, defend and hold the other party, its
directors, officers and employees harmless from and against all damages,
losses and out-of-pocket expenses (including attorney fees) caused by or
arising out of any willful failure to perform any obligation or agreement
herein.
6. ASSIGNMENT. In Home shall not assign or transfer any of its
rights under this Agreement without the prior written consent of Manor Care.
In Home acknowledges and consents to Manor Care's transfer and
assignment of its rights and obligations under this Agreement to New
ManorCare Health Services, Inc. (to be renamed ManorCare Health Services,
Inc.) with principal offices at 11555 Darnestown Road, Gaithersburg, Maryland
20878.
7. NOTICES. All notices, requests, demands and other
communications provided for by
93
<PAGE>
this Agreement shall be in writing and shall be deemed to have been given the
earlier of when actually received or three (3) business days after such
writing is deposited in the United States mail, registered or certified mail,
return receipt requested, or sent by Federal Express or other similar
overnight courier services, addressed to the parties as stated below or to
such other address as a party may designate by notice:
If to Manor Care:
ATTN: General Counsel
Manor Care, Inc.
11555 Darnestown Road, 5th Floor
Gaithersburg, MD 20878-3200
If to In Home:
ATTN: Chief Financial Officer
In Home Health, Inc.
Carlson Center, Suite 500
601 Carlson Parkway
Minnetonka, MN 55305-5215
8. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Minnesota.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties and supersedes all proposals, commitments,
writings, negotiations and understandings, oral and written, and all other
communications between the parties relating to the subject matter of this
Agreement. This Agreement may not be amended or otherwise modified except in
writing duly executed by all of the parties. A waiver by any party of any
breach or violation of this Agreement shall not be deemed or construed as a
waiver of any subsequent breach or violation thereof.
10. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of
94
<PAGE>
which shall be deemed an original, but all of which together shall constitute
one and the same document.
11. SEVERABILITY. Should any part, term or condition hereof be
declared illegal or unenforceable or in conflict with any other law, the
validity of the remaining portions or provisions of this Agreement shall not
be affected thereby, and the illegal or unenforceable portions of the
Agreement shall be and hereby are redrafted to conform with applicable law,
while leaving the remaining portions of this Agreement intact.
12. FORCE MAJEURE. No party shall be deemed to have breached this
Agreement or be held liable for any failure or delay in the performance of
all or any portion of its obligations under this Agreement if prevented from
doing so by a cause or causes beyond its control. Without limiting the
generality of the foregoing, such causes include acts of God or the public
enemy, fires, floods, storms, earthquakes, riots, strikes, lock-outs, wars
and war-operations, restraints of government power, communication line or
other utility failure or other circumstances beyond such party's control, or
by reason of the judgment, ruling or order of any court or agency of
competent jurisdiction or change of law or regulation subsequent to the
execution of this Agreement.
13. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section
6, this Agreement is solely for the benefit of the parties and their
respective successors and assign. There are no third party beneficiaries of
or to this Agreement.
14. HEADINGS. Section headings are for convenience only and do
not control or affect the meaning or interpretation of any terms or
provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
95
<PAGE>
MANOR CARE, INC.
By: /s/ James H. Rempe
-------------------------------
Its Sr. Vice President, Gen'l
Counsel and Secretary
-------------------------------
IN HOME HEALTH, INC.
By: /s/ Thomas R. Gross
-------------------------------
Its CFO
-------------------------------
96
<PAGE>
EXHIBIT A
SERVICE TO BE PROVIDED
1. LEGAL SERVICES. Manor Care will provide ongoing legal
services necessary to support the day-to-day business activities of In Home.
Such services include, but are not limited to, legal support for development
and implementation of a corporate compliance plan, acquisitions, preparation
and filing of necessary reporting disclosures with the SEC and provision of
public reports to investors upon request, labor and contracting matters.
This Agreement constitutes prior written approval of In Home for Manor Care
to engage outside legal services on behalf of In Home when necessary and to
supervise such outside counsel. In Home will be billed directly for the cost
of outside counsel.
2. INSURANCE SERVICES. Manor Care will assist in providing to In
Home general and professional liability, workers' compensation, comprehensive
automobile liability and property insurance.
3. OTHER SERVICES. As may be requested by In Home, Manor Care
will, from time to time, provide services not described above, including, but
not limited to, Government Relations, Purchasing and Reimbursement (the
"Other Services").
97
<PAGE>
EXHIBIT 11
IN HOME HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
--------- -------- --------
PRIMARY:
Income (loss) applicable to common stock $ (22,852) $ (3,501) $ 1,621
--------- -------- --------
--------- -------- --------
Shares:
Weighted average number of shares
outstanding during the period 16,325 16,340 16,062
Shares issuable in connection with
stock options and warrants less
shares purchasable from proceeds 23 125 242
--------- -------- --------
Total shares 16,348 16,465 16,304
--------- -------- --------
--------- -------- --------
Income (loss) per common and
common equivalent share $ (1.40) $ (.21) $ .10
--------- -------- --------
--------- -------- --------
ASSUMING FULL DILUTION:
Income (loss) applicable to common stock $ (22,852) $ (3,501) $ 1,621
--------- -------- --------
--------- -------- --------
Shares:
Weighted average number of shares
outstanding during the period 16,325 16,340 16,062
Shares issuable in connection with
stock options and warrants less
shares purchasable from proceeds 23 125 352
--------- -------- --------
Total shares 16,348 16,465 16,414
--------- -------- --------
--------- -------- --------
Income (loss) per common and
common equivalent share $ (1.40) $ (.21) $ .10
--------- -------- --------
--------- -------- --------
98
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
In Home Health, Inc.
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 33-07511, 33-38504, 33-75876 and 333-35963) of our reports dated
November 17, 1997, appearing in this Annual Report on Form 10-K of In Home
Health, Inc. for the year ended September 30, 1997.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 19, 1997
99
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000818645
<NAME> IN HOME HEALTH, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,853
<SECURITIES> 0
<RECEIVABLES> 19,045
<ALLOWANCES> 2,029
<INVENTORY> 0
<CURRENT-ASSETS> 34,004
<PP&E> 17,854
<DEPRECIATION> (10,501)
<TOTAL-ASSETS> 50,224
<CURRENT-LIABILITIES> 25,008
<BONDS> 0
0
19,061
<COMMON> 164
<OTHER-SE> 3,424
<TOTAL-LIABILITY-AND-EQUITY> 50,224
<SALES> 0
<TOTAL-REVENUES> 110,139
<CGS> 0
<TOTAL-COSTS> 70,570
<OTHER-EXPENSES> 62,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (530)
<INCOME-PRETAX> (21,937)
<INCOME-TAX> (1,780)
<INCOME-CONTINUING> (20,157)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,157)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> 0
</TABLE>
