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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT
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PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
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 $ .03 PER SHARE (1)
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
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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. x
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Based on the closing sale price of $1.5625 on the NASDAQ National Market System,
as of December 3, 1998 the aggregate market value of the registrant's common
stock held by nonaffiliates was $5,026,458.
As of December 3, 1998 the number of shares outstanding of the registrant's
common stock, $.03 par value was 5,502,736 shares.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held February 24, 1999, (the "1999 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.
(1) On November 17, 1998, the Company's Board of Directors approved a
one-for-three reverse stock split effective December 1, 1998. Par
value has been restated to reflect the split.
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TABLE OF CONTENTS
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Page(s)
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PART I Item 1. Business. . . . . . . . . . . . . . . . . . . . . 3-9
Item 2. Properties. . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 9-10
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . 10
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters. . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 12-17
Item 8. Financial Statements and Supplementary Data . . . 18-34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . 18
PART III Item 10. Directors and Executive Officers. . . . . . . . . 35
Item 11. Executive Compensation. . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . 35
Item 13. Certain Relationships and Related Transactions. . 35
PART IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 35-36
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
</TABLE>
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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 two 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. In
September 1998, Manor Care, Inc. was merged with a wholly owned subsidiary of
Health Care and Retirement Corporation ("HCR"). Concurrently, HCR changed
its name to HCR Manor Care, Inc. The Company expects that the merger
involving HCR will not affect the lines of business in which the Company
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 1998, approximately 43% of the Company's revenue was
derived from paraprofessional services provided by home health aides and
homemaker/companions, 28% was derived from medical/surgical nursing, 13% from
hospice services, 11% was attributable to rehabilitation services, 3% from
infusion pharmacy products, and 2% from medical supplies.
The Company receives payment for its services from various
sources. The following summarizes the Company's revenue by payer source:
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SEPTEMBER 30
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1998 1997 1996
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Medicare, cost reimbursement (1) 55% 56% 70%
Insurance and county governments 17% 19% 14%
Private payers 16% 16% 14%
Medicare hospice benefit, per diem based 12% 9% 2%
---- ---- ----
100% 100% 100%
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(1) Fiscal 1997 revenue was impacted by a $17,101,000 increase
to Medicare reserves. See Note 5 to the financial statements.
As a result of the recently enacted Medicare Interim Payment
System, the Company has increased its focus on higher margin non-Medicare
payer sources in an effort to reduce reliance on Medicare.
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.
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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 train clients to regain independence
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 terminally ill clients and their
families. 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 two 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
ensure all therapies are appropriate and that Company standards are being
followed.
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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. 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
payers 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.
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
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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 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, 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 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.
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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.
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 in the future will 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 Balanced Budget
Act of 1997 (the "Budget Act") contains numerous changes in reimbursement to
health care providers and has significantly impacted the health care
industry. Additionally, the level of net revenues and profitability of the
Company, like those of other health care providers, will be affected by the
continuing efforts of other payers to contain or reduce the costs of health
care by lowering reimbursement rates, increasing case management review of
services, negotiating reduced contract pricing and setting capitation
arrangements.
Prior to October 1, 1997, Medicare reimbursed 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. In August
1997, President Clinton signed into law the Budget Act with plans 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.
In October 1998, President Clinton signed into law the Omnibus Consolidated
and Emergency Supplemental Appropriations Act for Fiscal Year 1999 (the
"Appropriations Act") which includes a number of policy changes affecting
health care providers. Provisions of these Acts which apply to home health
providers are discussed below.
Effective October 1, 1997, the Budget Act requires HCFA to
implement a prospective payment system ("PPS") for home health agencies by
October 1, 1999. Until prospective payment takes effect, the Budget Act sets
up an interim payment system ("IPS") that provides for lowering reimbursement
limits for home health visits. Under the Budget Act, home health agencies
will be reimbursed the lesser of (i) actual, reasonable costs, (ii) per-visit
cost limits based on 105% of median costs of freestanding home health
agencies, or (iii) agency-specific per-beneficiary cost limits, based on 98%
of 1994 costs, adjusted for inflation. In addition, the Budget Act provides
that if the Secretary of the Department of Health and Human Services ("HHS")
fails to implement a PPS by October 1, 1999, the cost limits and
per-beneficiary limits will be reduced an additional 15% on that date. The
IPS program rates were announced April 1, 1998, but given effect
retroactively to October 1, 1997. As a result of the new per-beneficiary
cost limits, together with the per-visit limits, the Company recorded a $4.5
million reduction to the Company's fiscal 1998 revenue. This adjustment
reflects the Company's estimate of the impact of IPS on revenue and is
subject to audit and review by Medicare. (See Note 5 to the financial
statements.)
Effective October 1, 1998, the Appropriations Act includes
revisions to the Medicare IPS for home health agencies. The Appropriations
Act acknowledges HHS's inability to meet the October 1, 1999 PPS deadline by
delaying the statutory implementation date of PPS until October 1, 2000. The
Appropriations Act also delays until October 1, 2000 the provision that
mandated a 15% cut to limits if PPS implementation is delayed. 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. The Appropriations Act also
responds to widespread concerns about inadequate payments to home health
agencies under IPS by modifying per-beneficiary limits. Specifically, for
providers with a 12-month cost reporting period ending in fiscal 1994, each
home health agency below the national median per-beneficiary limit will have
its limit increased by one-third of the difference between its limit and the
national median. Payments to agencies without a 12-month cost reporting
period ending in fiscal 1994, but for which the first cost reporting period
begins before fiscal 1999, will be increased by two percent. In addition,
the Appropriations Act increases the per-visit limit from 105% to 106% of the
national median cost.
INSURANCE
General and professional liability insurance is maintained by
the Company which includes coverage up to $200,000,000 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.
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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 is derived principally from referrals by other
health care providers, it is not materially dependent on any trademarks or
service marks.
EMPLOYEES
On September 30, 1998, the Company employed 655 persons on a
full-time basis and approximately 1,400 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 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 the
Company in fiscal 1999. In fiscal 1999, the Company will disclose
information relating to three segments: Extended Hours Division, Visit
Division, and Hospice Division.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and members of the Board of Directors
of the Company are as follows:
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NAME AGE POSITION(S) HELD
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Wolfgang von Maack (1) (2) 58 Director and Chairman, President and Chief Executive
Officer
C. Michael Ford (3) 60 Director
Robert J. Hoffman, Jr. (4) 43 Corporate Secretary and Acting Chief Financial Officer
James J. Lynn, Ed.D. (1) 56 Director
Judith Lloyd Storfjell, Ph. D. (3) 55 Director
Marvin Wilensky (3) 70 Director
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(1) Member of the Nominating Committee.
(2) Mr. von Maack was elected to the Board of Directors
effective June 6, 1997 and elected Chairman of the Board
effective November 17, 1998.
(3) Messrs. Wilensky and Ford and Dr. Storfjell were appointed
as members of the Board of Directors effective November 17,
1998, filling the vacancies resulting from the resignations
of Messrs. Buckley, Rempe and Tomasso.
(4) Mr. Hoffman was appointed Secretary and Acting Chief
Financial Officer effective June 22, 1998.
Mr. von Maack has served as President and Chief Executive
Officer of the Company since May 1997 and Chairman of the Board since
November 1998. 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. Ford has been the owner and Chairman of the Board of
Montpelier Corporation since October 1997. He had served as Vice President,
Development of Columbia/HCA Healthcare Corporation from September 1994 to
September 1997. He was Vice President of Marketing for Meditrust from October
1993 to September 1994. He was employed by Charter Medical
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Corporation from June 1976 to 1988 in a variety of positions, including
Secretary and Treasurer and Executive Vice President of Finance, Chief
Financial Officer and member of the Board of Directors.
Mr. Hoffman has served as Corporate Secretary and Acting Chief
Financial Officer since June 1998. He has been employed by HCR Manor Care
Inc., from 1982 through 1998 in a variety of positions including Director of
Internal Audit, Controller of Rehab Services Division, Director of Financial
Analysis, and Director of SEC Compliance/Lodging Accounting. He previously
served as Assistant Controller for Makro Self Service Corporation from 1981
to 1982.
Mr. Lynn has been a director of the Company since 1987 and has
served as Director of Management Development of the Company from October 1995 to
October 1998. 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.
Dr. Storfjell has served as President of Storfjell Associates
since 1986 and Assistant Professor, Department of Public Health Nursing,
College of Nursing Graduate Faculty, University of Illinois at Chicago since
1988. She was a Lecturer, School of Nursing at the University of Michigan
from 1987 to 1988. She was President and founder of Health Care at Home
Management Corporation from 1979 to 1986. She previously served as a Public
Health Nursing Supervisor for Berrien County, Benton Harbor, Michigan from
1974 to 1978, as a Teacher for Beirut Overseas School, Beirut, Lebanon, and a
variety of other nursing positions from 1966 to 1970.
Mr. Wilensky has served as Chairman of WILMAC, Inc., since
1991. He had served at Hillhaven Corporation from 1990 to 1997 in a variety
of positions, including President and Chief Operating Officer, Executive Vice
President of Operations, Convalescent Division, Senior Vice President of
Operations, Convalescent Division, Vice President of Operations, Convalescent
Division, and Vice President of Operations, East Coast Operations. He was a
member of the Board of Directors for Vitalink from 1992 to 1997. He served
as Director for First Healthcare Corporation from 1970 to 1977, as Developer
and Owner of Birchwood Terrace Healthcare from 1963 to 1969, as a Consultant
for Porter Hospital from 1968 to 1969, and Consultant, Metropolitan Life
Insurance Company from 1958 to 1963.
ITEM 2. PROPERTIES
The Company's executive offices are located in Minnetonka,
Minnesota, a suburb of Minneapolis, in approximately 20,900 square feet of
leased space.
The Company's 38 office locations each lease approximately
1,000 to 8,000 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 pending cases which challenge the
disallowance of reimbursement by the fiscal intermediaries of the U.S.
Department of Health and Human Services ("HHS") for various categories of
costs incurred by the Company in providing services to Medicare
beneficiaries. These cases are pending before HHS's Provider Reimbursement
Review Board ("PRRB"), an administrative tribunal, before the United States
District Court for the District of Minnesota ("District Court") or before the
United States Court of Appeals for the Eighth Circuit ("Court of Appeals").
Each case involves specific Company branch offices for specific fiscal years,
but has precedential value for the same type of costs for other branch office
fiscal years. Following a PRRB ruling, either the Company or the fiscal
intermediary may request that HHS review the PRRB decision. If HHS declines
review, the PRRB's decision is viewed as the final agency decision. If HHS
reviews the PRRB decision, the HHS decision based on that review is the final
agency decision. The Company may then seek judicial review in United States
District Court. The pending cases are summarized below:
1. In May 1996, the Company filed a case in the District Court
challenging the application of certain HHS Salary Equivalency Guidelines to its
employee physical therapists. The Company maintains, among other things, that
the Guidelines are only applicable to physical therapists who are independent
contractors. The reimbursement impact (i.e., ignoring other challenged
disallowances, the amount by which the Company's Medicare reimbursement is
reduced) of the disallowances in dispute, representing costs incurred in the
fiscal year ended September 30, 1992, is approximately $207,000. Similar
disallowances have also been made in fiscal years ended September 30, 1991, 1993
and 1994, amounting to $214,000, $280,000 and $276,000, respectively. The final
determination of this case will likely have a precedential impact on other such
disallowances. In February
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1996 the PRRB ruled in favor of the Company, but in April 1996, HHS reversed
that decision. In March 1997 the District Court set HHS's decision aside as
providing an insufficient explanation. In October 1997, HHS issued a new
decision purporting to clarify its previous decision. The Company appealed
this decision to the District Court, where in June 1998, the Court again set
aside HHS's decision. In August 1998, HHS appealed the District Court
decision to the Court of Appeals. The Company expects a decision sometime in
1999.
2. In July 1998, the Company filed a case in the District
Court claiming that the Salary Equivalency Guidelines which HHS applies to
outside contractor physical therapists were unlawfully low. The
reimbursement impact of the disallowances in dispute, representing costs
incurred in the fiscal years ended September 30, 1992 and 1993, is
approximately $118,000. Similar disallowances have also been made in
subsequent fiscal years, in which the reimbursement impact is approximately
$135,000. In May 1998, the PRRB's ruling affirmed the fiscal intermediaries'
adjustments. The Company expects a decision from the District Court sometime
in 1999.
3. In August 1997, the Company filed a case in District Court
challenging disallowances of certain so-called "stock maintenance costs,"
e.g. the costs of annual reports, 10-Ks, 10-Qs, news releases, annual
meetings, mailing of proxies, stock transfer agent fees, accounting and legal
fees for SEC related services. In May 1997 the PRRB ruled in favor of the
Company, but in July 1997 HHS reversed that decision. In June 1998, the
Court affirmed the decision of HHS. This case involved the fiscal years
ended September 30, 1989 through 1997 and amounted to approximately $800,000
in reimbursement. The Company did not appeal the decision of the District
Court.
The Company settled several cases with fiscal intermediaries
during the fiscal year ended September 30, 1998. The cases challenged the
disallowance of reimbursement by the fiscal intermediaries of the U.S.
Department of Health and Human Services for various categories of costs
incurred by the Company in providing services to Medicare beneficiaries.
These settlements are summarized below:
1. In January 1998, the Company reached a Stipulation of
Settlement regarding disallowances of costs related to the Company's Home
Care Coordinator/Community Liaisons ("HCCs") and related supervisory
personnel. The disputes concerned whether the HCCs in certain of the
Company's offices sufficiently documented their activities such that
allegedly non-reimbursable activities could be distinguished from
reimbursable activities. The disputes concerned costs incurred from July 1,
1988 through September 30, 1994 and amount to approximately $10.1 million of
reimbursement.
2. During fiscal 1998, the Company reached agreements with
its fiscal intermediaries regarding disallowances of certain pharmacist
costs. The disputes concerned costs incurred from October 1, 1990 through
September 30, 1997 and amount to approximately $6.8 million of reimbursement.
As a result of the agreements discussed in (1) and (2) above,
the Company reduced its Medicare reserves by approximately $4.6 million.
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 1998.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANTS 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 December 3, 1998, there were
approximately 1,152 record holders of the common stock.
The closing sale prices for the common stock as reported by
NASDAQ for each quarter of the two most recent fiscal years were:
<TABLE>
<CAPTION>
Year Ended September 30 (Restated for reverse stock split)
----------------------------------------------------------
1998 1997
----------------- -----------------
High Low High Low
---- --- ---- ----
<S> <C> <C> <C> <C>
First Quarter $ 5.625 $ 2.532 $ 6.563 $ 5.063
Second Quarter $ 4.500 $ 2.625 $ 6.375 $ 4.875
Third Quarter $ 4.125 $ 2.814 $ 5.250 $ 3.188
Fourth Quarter $ 3.375 $ 1.500 $ 5.813 $ 3.750
</TABLE>
These prices do not include retail markups, markdowns or commissions and may
not represent actual transactions. On November 17, 1998, the Company's Board
of Directors approved a one-for-three reverse stock split effective December
1, 1998. The above numbers have been restated to reflect the split. (See
Note 11 to the financial statements.)
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended September 30
-------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenue $ 97,008 $ 110,139 $125,086 $129,816 $120,485
Income (loss) from operations $ 2,449 $ (22,467) $ (1,814) $ 3,774 $ 1,353
Income (loss) before income taxes $ 3,450 $ (21,937) $ (1,165) $ 3,007 $ 684
Net income (loss) $ 3,450 $ (20,157) $ (982) $ 1,621 $ 247
Net income (loss) available to
common shareholders $ 803 $ (22,852) $ (3,501) $ 1,621 $ 247
Basic and diluted earnings (loss)
per share (1) $ .15 $ (4.19) $ (.64) $ .30 $ .05
</TABLE>
(1) Numbers reflect the one-for-three reverse stock split effective December 1,
1998. (See Note 11 to the financial statements.)
BALANCE SHEET DATA
<TABLE>
<CAPTION>
September 30
-----------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Current assets $37,299 $ 34,004 $ 44,053 $ 21,394 $ 23,926
Current liabilities 23,076 25,008 33,170 21,289 20,707
Total assets 48,360 50,224 82,683 57,559 56,726
Long-term debt 44 278 1,080 2,443 3,304
Redeemable convertible preferred stock 12,584 19,061 18,766 - -
Shareholders' equity 11,129 3,588 26,758 30,509 28,482
</TABLE>
11
<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
- ---------------------------------------------------------------------------------
1997 1996
1998 1997 1996 to 1998 to 1997
---- ---- ---- ------- -------
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100 % 100 % 100 % (12)% (12)%
Direct Costs 56 64 54 (24)% 5 %
--- --- ---
Gross Profit 44 36 46 9 % (32)%
General, Administrative and
Selling Expenses 42 54 47 (31)% 0 %
Restructuring Charge (Credit) (1) 2 - - -
--- --- ---
Income (Loss) From Operations 3 % (20)% (1)% - 1,139 %
--- --- ---
- ---------------------------------------------------------------------------------
</TABLE>
Together, the Balanced Budget Act of 1997 (the "Budget Act") and
the Omnibus Consolidated and Emergency Supplemental Appropriations Act for
Fiscal Year 1999 (the "Appropriations Act") require HCFA to implement a
prospective payment system ("PPS") for home health agencies by October 1, 2000.
Until PPS is implemented, the Budget Act established an Interim Payment System
("IPS"), effective October 1, 1997, that reimburses home health agencies the
lesser of: (1) actual, reasonable costs, (2) per-visit cost limits, or (3) newly
implemented per-beneficiary cost limits. The IPS program rates were announced
April 1, 1998, but given effect retroactively to October 1, 1997. As a result
of the new per-beneficiary cost limits, together with the established per-visit
cost limits, the Company recorded a $4.5 million reduction in revenue in fiscal
1998. In response to the implementation of IPS, the Company initiated a series
of cost reduction programs, care delivery process improvements, and revenue
growth actions. Additionally, the Company successfully resolved several
reimbursement disputes with HCFA, resulting in a $4.6 million increase in
revenue. See "Forward Looking Information" below for a discussion of the
possible impact of these regulatory matters on expected results.
Revenue for fiscal 1998 decreased 12%, principally due to
reductions of Medicare patient visits and corporate costs that were
implemented to minimize the impact of new per beneficiary limits and
tightened per visit limits imposed by the Medicare Interim Payment System.
Revenue for 1997 decreased 12% principally as a result of increases in
Medicare reserves, which are reported as a deduction from revenue. Medicare
reserves of $17,101,000 were recorded in fiscal 1997, principally relating to
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 further discussion of the Medicare cost
reimbursement disputes.
The breakdown by division of the Company's total revenue is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended September 30
1998 1997 1996
---- ---- ----
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Extended Hours Division 27% 27% 21%
Visit Division 57% 59% 72%
Infusion Pharmacy 3% 5% 4%
Hospice Division 13% 9% 3%
- ---------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Extended Hours Division revenue decreased 11% and increased
12% in fiscal 1998 and fiscal 1997, respectively. The decrease in fiscal 1998
revenue resulted principally from a reduction in the volume of new low margin
cases accepted and a lack of staffing for certain service offerings in
several markets. The increase in fiscal 1997 was due to the Company's focus
on increasing non-Medicare business lines. Hospice revenue increased 19% and
235% in fiscal 1998 and fiscal 1997, respectively, as a result of increased
overall patient census. Visit Division revenue declined 14% in fiscal 1998,
primarily due to a 30% decrease in patient visits and corporate cost
reductions implemented in an effort to minimize the impact of IPS. Visit
Division revenue declined 28% in fiscal 1997, principally as a result of the
increase in Medicare reserves of $17,101,000 and a 9% decrease in patient
visits. Infusion Pharmacy revenue decreased 55% in fiscal 1998 primarily due
to a reduction of infusion product offerings in a number of markets and the
closure of eight pharmacies as part of the Company's restructuring plan
during fiscal 1997. In comparison, Infusion Pharmacy revenue increased 4% in
fiscal 1997.
Direct costs, as a percent of revenue, were 56%, 64% and 54%
in fiscal years 1998, 1997 and 1996, respectively. The change in fiscal 1997
resulted principally from increases to Medicare reserves that are recorded as
reductions in revenue. Direct costs, as a percent of revenue before Medicare
reserves, were 58%, 55% and 53% in fiscal years 1998, 1997 and 1996,
respectively.
General, administrative and selling expenses as a percent of
revenue decreased to 42% in fiscal 1998 compared to 54% in fiscal 1997 and
47% in fiscal 1996. The increase in general, administrative and selling
expenses as a percent of revenue in fiscal 1997 was principally due to the
reduction in revenues attributable to increases in the Medicare reserves.
General, administrative and selling expenses as a percent of revenue before
Medicare reserves, were 44%, 47% and 47% in fiscal years 1998, 1997 and 1996,
respectively. The decrease in the percent for fiscal 1998 is principally
attributable to cost controls implemented by management in response to IPS.
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. Total
expenditures related to facilities consolidation were $853,000 during fiscal
1998. As of September 30, 1998, $456,000 of costs, comprised of lease costs
and related equipment write-offs associated with vacated sites, remain to be
paid out and are included in current liabilities. The restructuring plan is
expected to be completed by the end of the third quarter of fiscal 1999.
Net interest income for fiscal years 1998, 1997 and 1996 was
$1,001,000, $530,000 and $649,000, respectively. Interest income is
principally derived from earnings on cash and cash equivalents. The
increase in net interest income in fiscal 1998 was due to increases in cash
equivalents generated by operating activities.
Income tax expense of $1,668,000 for fiscal 1998 has been
offset by net operating loss carryforwards generated in fiscal 1997. Income
tax benefit was 8% of the loss before tax in fiscal 1997 and 16% of the loss
before tax in fiscal 1996. The fiscal 1997 tax rate was impacted by a
valuation allowance against the Company's net operating loss carryforward and
certain other deferred tax assets. The tax rate for fiscal 1996 was impacted
by changes in the proportion of non-deductible expenses to pretax income or
loss.
Income (loss) applicable to common shareholders was $803,000,
($22,852,000) and ($3,501,000) for fiscal years 1998, 1997 and 1996,
respectively. The significant loss in fiscal 1997 was principally
attributable to an increase of $17,101,000 in Medicare reserves resulting
from unfavorable decisions received in fiscal 1997 from the Medicare fiscal
intermediary, the Provider Reimbursement Review Board and the U.S. District
Court relating to prior period cost reports. The restructuring charge of
$2,476,000 also contributed to the loss in fiscal 1997.
LIQUIDITY & CAPITAL RESOURCES
During fiscal 1998 the Company's cash and cash equivalents
increased $7,609,000 to $21,462,000 at September 30, 1998. The increase in cash
was principally a result of progress payments received from third parties in
excess of anticipated
13
<PAGE>
reimbursement under the recently implemented IPS. In November 1998, the
Company repaid $6,529,000 to the fiscal intermediary based on the
intermediary's revised computations that accounted for the new
per-beneficiary limits. At September 30, 1998, the amount repaid was
included in accrued liabilities - third party in the Company's consolidated
balance sheets.
Approximately 55%, 56% and 70% of revenue for the fiscal years
ended September 30, 1998, 1997, and 1996, respectively, was derived from
services provided to Medicare beneficiaries for which payment is based on
cost. Payments for these services are made by the Medicare program based on
reimbursable costs incurred in rendering 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 related accounts receivable balances at net realizable value.
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 such costs are not reimbursable and thus not recoverable by the
Company under the Medicare program. When the Company disagrees with findings
of the Medicare fiscal intermediaries, it seeks relief through administrative
and legal channels. Based on a detailed analysis of statutes and
regulations, administrative and judicial decisions, and consultation with
independent industry experts and legal counsel, the Company provides a
reserve (by means of a revenue deduction) for any costs incurred which are
not probable of recovery. At September 30, 1998, total disputed costs were
$4,324,000; the Company believes that recovery of $3,336,000 of such costs
(including extrapolation for all unsettled cost reporting periods) may not be
probable and, accordingly, has established reserves totaling $3,336,000 at
September 30, 1998.
At September 30, 1998, disputed costs totaling $988,000 were
unreserved. Of these costs, $977,000 relate to the compensation of physical
therapists employed by the Company. The Medicare intermediary has taken the
position that contractor physical therapist salary equivalency guidelines
should be applied to the Company's employee physical therapists, and thus
disallowed certain physical therapy costs for the fiscal 1992 cost reporting
period. The Company appealed to the Provider Reimbursement Review Board
("PRRB") and received a favorable ruling in February 1996. In April 1996,
the Health Care Financing Administration ("HCFA") reversed the PRRB ruling
and disallowed all of the disputed costs. The Company appealed to the U.S.
Federal District Court ("District Court") in Minneapolis, which in March 1997
set aside HCFA's decision, finding it arbitrary and capricious because HCFA
provided an insufficient explanation for their decision. In October 1997,
HCFA issued a decision purporting to clarify their previous decision, and
disallowed all disputed costs. The Company appealed to the District Court,
and in June 1998 the District Court again ruled in favor of the Company,
declaring HCFA's decision contrary to law and set it aside. In August 1998,
HCFA appealed the decision to the Eighth Circuit Court of Appeals. The
Company, based on its assessment and the opinion of its legal counsel,
Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota, continues to believe
that it is probable that the Company will ultimately prevail in this case.
At September 30, 1998, total accounts receivable (net of
reserves) due from Medicare were $7,790,000. Based on the progress toward
resolution of the disputed costs, management estimates that net receivables
of $988,000 will not be realized within the next twelve months, and
accordingly, has classified net receivables of $988,000 as a non-current
asset. Accrued liabilities to third-party at September 30, 1998 represent
payments from Medicare in excess of amounts that the Company will be entitled
to upon ultimate settlement of Medicare cost reports.
Operating activities provided $10,785,000 in cash during
fiscal 1998, used $769,000 in cash during fiscal 1997 and provided $2,739,000
in cash during fiscal 1996. Included in the cash provided by operating
activities in fiscal 1998 was $6,529,000 of progress payments received from
third parties in excess of costs incurred. This entire amount was repaid in
November 1998, which will affect fiscal 1999 operating cash flows.
Additionally, fiscal 1998 cash provided by operating activities included
$3,918,000 of income tax refunds in connection with a net operating loss
carryback of the fiscal 1997 net operating loss. Total accounts receivable
(current and long-term) decreased 14% during fiscal 1998, decreased 59%
during fiscal 1997 and increased 31% during fiscal 1996. The decrease in
accounts receivable during fiscal 1998 was due to the decreases in related
revenue. The decrease during fiscal 1997 was due primarily to the additions
to the Medicare reserve of $17,101,000. The increase in fiscal 1996 was
primarily due to the increase in disputed costs.
Investing activities provided $2,000 and $241,000 in fiscal
1998 and 1997, respectively, and used $1,687,000 in fiscal 1996. The
investments in fiscal 1996 consisted primarily of acquired property and
computer systems software. With the exception of $148,000 of capital lease
contracts, all of the Company's investments in property were funded with cash.
14
<PAGE>
During fiscal 1996, the Company issued redeemable convertible
preferred stock, common stock and a warrant to HCR generating $17,719,000 of
cash from financing activities. (See Note 1 to the financial statements).
The Company paid HCR cash dividends of $2,400,000 in fiscal 1998 and 1997,
and $2,253,000 in fiscal 1996. Additionally, during fiscal years 1998, 1997
and 1996, the Company made principal payments on long-term debt of $792,000,
$1,480,000 and $2,097,000, respectively.
The Company has letter of credit facilities for $1,915,000.
The letters of credit are collateralized by secured investments and will
expire in December 1999.
The redeemable convertible preferred stock issued to HCR
includes 130,000 shares that may be redeemed at the option of HCR at
$13,000,000 face value on or after October 24, 2000 and 70,000 shares with a
face value of $7,000,000 that may only be redeemed at the option of the
Company. Management has performed preliminary evaluations on a number of
financing alternatives in the event HCR elects to redeem the $13,000,000 of
preferred stock. Management believes that cash provided from operations
along with existing cash balances will be sufficient to finance the Company's
operations through October 24, 2000, and long-term financing alternatives
will be available to meet the Company's future needs, however there are no
assurances such long-term financing will ultimately be obtained.
YEAR 2000
The Company has assessed and continues to assess the potential
impact of the Year 2000 issue affecting most corporations, primarily
concerning the ability of information systems to properly recognize and
process information relating to the year 2000 and beyond. The Company's goal
is to be Year 2000 compliant by January 31, 1999.
The Company began addressing the Year 2000 issue in fiscal
1997, primarily in the business systems area, such as general ledger,
payroll, and accounts payable, which were modified and are now compliant.
Remaining business systems, such as the internally developed business
operations systems, phone system, and wide area network are targeted for
modification or replacement by January 31, 1999. The estimated cost of
modification/replacement is $275,000 and is not expected to have a material
impact on the Company's financial performance.
Principal risk areas for the Company would be the potential
inability to bill its principal third party payer, Medicare, for services
rendered to patients, or the inability of the third party payer's systems to
recognize the billing data, delaying payment for services rendered. The
Health Care Finance Administration ("HCFA"), which administers Medicare
payments, published a targeted date of December 31, 1998 for Year 2000
compliance and has delayed other projects to accomplish their tasks. The
Company is not aware of any significant exposure due to its own systems or
the systems of third parties, however, there can be no guarantee that the
systems of third parties on which the Company relies will be converted in a
timely manner, or that such failure would not have a material adverse impact
on the Company. The Company will continue to monitor publications of HCFA
and its principal fiscal intermediary, United Government Services, and
develop contingency plans as conditions merit. With a targeted date of
January 31, 1999 for internal systems, the Company believes that adequate
time has been allotted to modify or replace all current systems.
FORWARD LOOKING INFORMATION
Statements included in this Management's Discussion and
Analysis of Financial Condition and Results of Operations in the letter to
Stockholders and, elsewhere in the Annual Report, in the Company's Form 10-K
and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made with
the approval of an authorized executive officer which are not historical or
current facts are "forward-looking statements" made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The factors discussed below, among others, could affect the
Company's actual results and could cause the Company's actual financial
performance to differ materially from that expressed in any forward-looking
statement.
The majority of the Company's revenue is derived from services
provided to Medicare beneficiaries. 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. This does not allow the Company to generate a profit from these
services. In fact, due to certain limitations on the nature and amount of
the costs that are reimbursable, the Company incurs a loss on the Medicare
business.
15
<PAGE>
Together, the Balanced Budget Act of 1997 (the "Budget Act")
and the Omnibus Consolidated and Emergency Supplemental Appropriations Act
for Fiscal Year 1999 (the "Appropriations Act") require HCFA to implement a
prospective payment system ("PPS") for home health agencies by October 1,
2000, with up to a four-year phase-in period. The Budget Act and
Appropriations Act provide that if HHS fails to implement a PPS by October 1,
2000, the per-visit and per-beneficiary cost limits will be reduced an
additional 15% on that date. 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. Additionally, there was a requirement that the Company
have surety bonds of at least $50,000 for each Medicare-certified nursing
agency. The Company met this requirement which was later rescinded.
Until prospective payment takes effect on October 1, 2000, the
Budget Act sets up an interim payment system ("IPS") that provides for
lowering of reimbursement limits for home health visits. For fiscal 1998,
home health agencies' cost limits will be determined as the lesser of (i)
actual, reasonable costs, (ii) per-visit cost limits based on 105% of median
costs of freestanding home health agencies or (iii) agency-specific
per-beneficiary cost limits, based on 98% of 1994 costs, adjusted for
inflation. The new cost limits were announced April 1, 1998, effective
retroactively to October 1, 1997. The new limits, together with the
per-visit limits, caused a $4.5 million reduction to the Company's 1998
revenue. The Company initiated a series of cost reduction programs, care
delivery process improvements, and revenue growth actions and anticipates
future effects will be significantly less. In response to industry and
patient protest as to the severity of cuts in payments resulting from the
1998 interim payments, Congress enacted change in the 1999 payments.
Effective October 1, 1998, the Appropriations Act includes
revisions to the Medicare IPS for home health agencies. The Appropriations
Act responds to widespread concerns about inadequate payments to home health
agencies under IPS by modifying per-beneficiary limits. Specifically, for
providers with a 12-month cost reporting period ending in fiscal 1994, each
home health agency below the national median per-beneficiary limit will have
its limit increased by one-third of the difference between its limit and the
national median. Payments to agencies without a 12-month cost reporting
period ending in fiscal 1994, but for which the first cost reporting period
begins in fiscal 1999, will be increased by two percent. In addition, the
Appropriations Act increases the per-visit limit from 105% to 106% of the
national median cost. While the Company expects to be able to operate under
the new limits, based on the recent changes, there can be no assurances these
are the final rates.
During 1997, several cost reimbursement issues that were in
dispute for several years were resolved through decisions by the PRRB and the
U.S. District Court. As a result of these decisions and other communications
from HCFA, it became clear that some costs incurred by the Company would not
be reimbursed by Medicare. Although the Company has restructured its
operations and eliminated a portion of these nonreimbursable costs, the
Company will continue to incur some costs that are not reimbursed by
Medicare, as it believes they constitute a necessary function to the conduct
of its business.
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.
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
16
<PAGE>
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.
The Company is also affected 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 payers, hospitals, physicians and other
health care professionals.
As a result of these developments, the Company is not able to
conclude that it is more likely than not that it will be able to generate
future earnings which will allow it to utilize its NOLs and, accordingly, has
established a valuation allowance against the NOLs.
At September 30, 1998, the Company had federal operating loss
carryforwards of $9,100,000 which will expire in 2012. Management believes
it is more likely than not that certain of these net operating loss
carryforwards may expire unused and, accordingly, has established a valuation
allowance against them.
17
<PAGE>
<TABLE>
<S> <C> <C>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
Consolidated Balance Sheets...................... 19-20
Consolidated Statements of Operations............ 21
Consolidated Statements of Shareholders' Equity.. 22
Consolidated Statements of Cash Flows............ 23
Notes to Consolidated Financial Statements....... 24-33
Independent Auditors' Report..................... 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
</TABLE>
18
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,462 $ 13,853
Accounts receivable, net of allowances
of $1,175 and $2,029 in 1998 and 1997,
respectively 13,598 14,125
Prepaid income tax - 3,907
Deferred income tax 1,269 1,540
Prepaid expenses and other current assets 970 579
--------- ---------
Total current assets 37,299 34,004
--------- ---------
Property:
Furniture and equipment 8,123 9,621
Computer equipment and software 6,771 7,506
Leasehold improvements 529 727
--------- ---------
Total 15,423 17,854
Accumulated depreciation (10,954) (10,501)
--------- ---------
Property - net 4,469 7,353
--------- ---------
Other Assets:
Accounts receivable, long-term 988 2,891
Goodwill, net 5,274 5,432
Other assets 330 544
--------- ---------
Total other assets 6,592 8,867
--------- ---------
Total Assets $ 48,360 $ 50,224
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
IN HOME HEATH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 219 $ 777
Accounts payable 2,612 4,255
Accounts payable - related party 111 59
Accrued liabilities:
Third party 12,669 6,789
Compensation 3,225 4,034
Insurance 3,246 6,704
Restructuring 456 1,807
Other 538 583
--------- ---------
Total current liabilities 23,076 25,008
--------- ---------
Long-Term Debt 44 278
Deferred Revenue 41 398
Deferred Rent Payable 198 248
Deferred Income Tax 1,288 1,643
Commitments and Contingencies - -
Redeemable Convertible Preferred Stock - $1.00 par value,
$20,000 redemption value, authorized 200 shares; issued
and outstanding 1997 - 200 shares - 19,061
$1.00 par value, $13,000 redemption value, authorized
130 shares; issued and outstanding 1998 - 130 shares 12,584 -
Shareholders' Equity:
Redeemable Convertible Preferred Stock - $1.00 par value,
$7,000 redemption value, authorized 70 shares; issued
and outstanding 1998 - 70 shares 7,000 -
Preferred stock - authorized 800 shares - -
Common stock - $.03 par value, authorized 13,334 shares;
issued and outstanding - 1998 - 5,479 shares,
1997 - 5,466 shares 164 164
Additional paid-in capital 23,675 23,661
Retained deficit (19,710) (20,237)
--------- ---------
Total shareholders' equity 11,129 3,588
--------- ---------
Total Liabilities and Shareholders' Equity $ 48,360 $ 50,224
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue (net of Medicare reserves of
($3,662), $17,101 and $2,067 in 1998,
1997 and 1996, respectively) $ 97,008 $ 110,139 $ 125,086
-------- --------- ---------
Operating Expenses:
Direct costs of revenue (primarily payroll related costs) 53,885 70,570 67,108
General, administrative and selling expenses 41,173 59,560 59,792
Restructuring charge (credit) (499) 2,476 -
-------- --------- ---------
Total operating expenses 94,559 132,606 126,900
-------- --------- ---------
Income (loss) from operations 2,449 (22,467) (1,814)
-------- --------- ---------
Interest:
Interest expense (65) (265) (450)
Interest income 1,066 795 1,099
-------- --------- ---------
Net interest income 1,001 530 649
-------- --------- ---------
Income (loss) before income taxes 3,450 (21,937) (1,165)
Income tax benefit - (1,780) (183)
-------- --------- ---------
Net income (loss) $ 3,450 $ (20,157) $ (982)
-------- --------- ---------
-------- --------- ---------
Net income (loss) available to common shareholders $ 803 $ (22,852) $ (3,501)
-------- --------- ---------
-------- --------- ---------
Basic and diluted earnings (loss) per share $ .15 $ (4.19) $ (.64)
-------- --------- ---------
-------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Redeemable
Convertible
Common Stock Preferred Stock Additional Retained
------------ --------------- paid-in earnings
Shares Amount Shares Amount capital (deficit)
------ ------ ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1995 5,426 $ 163 - $ - $24,230 $ 6,116
Common stock issued for:
Employee stock plans 90 2 - - 541 -
Exchange for options (2) - - - (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 5,514 165 - - 23,978 2,615
Common stock issued for
employee stock plans 34 1 - - 185 -
Repurchase from former officers (82) (2) - - (502) -
Net loss - - - - - (20,157)
Preferred dividends - - - - - (2,400)
Preferred stock accretion - - - - - (295)
----- --- --- ----- ------ ----------
Balance - September 30, 1997 5,466 164 - - 23,661 (20,237)
Common stock issued for
employee stock plans 36 1 - - 52 -
Repurchase (23) (1) - - (38) -
Net income - - - - - 3,450
Preferred dividends - - - - - (2,400)
Preferred stock accretion - - - - - (247)
Preferred stock conversion - - 70 7,000 - (276)
----- --- --- ----- ------ ----------
Balance - September 30, 1998 5,479 $ 164 70 $ 7,000 $23,675 $ (19,710)
----- --- --- ----- ------ ----------
----- --- --- ----- ------ ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
IN HOME HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 3,450 $ (20,157) $ (982)
Adjustments:
Depreciation and amortization 2,400 3,012 3,034
Loss on disposal of fixed assets 862 344 185
Accounts receivable 2,430 24,420 (9,714)
Prepaid expenses and other assets 3,508 (2,133) (582)
Accounts payable (1,643) 593 (806)
Accounts payable - related party 52 (947) 1,006
Accrued liabilities 217 (7,130) 12,267
Deferred revenue (357) (422) (422)
Deferred rent payable (50) (19) (84)
Deferred income tax (84) 1,670 (1,163)
------ ------ ------
Net cash provided (used) by operating activities 10,785 (769) 2,739
------ ------ ------
Cash Flows From Investing Activities:
Acquisition of property (6) (109) (1,486)
Repayments (advances) to officers and employees 8 350 (201)
------ ------ ------
Net cash provided (used) by investing activities 2 241 (1,687)
------ ------ ------
Cash Flows From Financing Activities:
Payment of long-term debt (792) (1,480) (2,097)
Issuance of preferred stock and warrants - - 17,719
Preferred dividends paid (2,400) (2,400) (2,253)
Issuance (repurchase) of common stock 14 (356) 531
------ ------ ------
Net cash provided (used) by financing activities (3,178) (4,236) 13,900
------ ------ ------
Cash and Cash Equivalents:
Net increase (decrease) 7,609 (4,764) 14,952
Beginning of year 13,853 18,617 3,665
------ ------ ------
End of year $ 21,462 $ 13,853 $ 18,617
------ ------ ------
------ ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
IN HOME HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
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 high-tech nursing,
hospice, rehabilitation, infusion therapy 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. The book value of investments approximates market due to the
variable interest rates of the underlying securities.
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.
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 year ended
September 30, 1996 was $148,000. No property was acquired under
capitalized leases for the years ended September 30, 1998 or 1997.
GOODWILL - Costs in excess of net assets of acquired businesses have been
capitalized and are being amortized over 40 years. Accumulated
amortization was $1,053,000 and $895,000 at September 30, 1998 and 1997,
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 $56,000 and $573,000 as of September 30,
1998 and 1997, 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 Statement of Financial Accounting Standards
("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.
24
<PAGE>
REVENUE RECOGNITION - Revenue is 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 by
Medicare regulations) 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.
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 2,250,000 shares of its common stock (41% of outstanding) at
$10.20 per share and ManorCare Health Services, Inc. purchased 2,250,000
shares from the Company at $10.20 per share. In addition, ManorCare Health
Services, Inc. invested $20 million to purchase redeemable convertible
preferred shares and a warrant to purchase 2,000,000 shares of common stock
at an exercise price of $11.25 per share. (See Notes 6, 8 and 11.)
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 deemed 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.
would 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
$340,000, $129,000 and $1,006,000 for the years ended September 30, 1998,
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, $111,000 and $59,000 was payable to ManorCare Health Services,
Inc. at September 30, 1998 and 1997, respectively.
On September 24, 1998, Health Care and Retirement Corporation and Manor
Care, Inc. announced that at separate special meetings of their
stockholders, an Agreement and Plan of Merger was approved. As a result of
the merger, Manor Care, Inc. became a wholly owned subsidiary of Health
Care and Retirement Corporation, and Health Care and Retirement Corporation
was renamed HCR Manor Care, Inc. ("HCR") with shares traded under the
symbol HCR on the New York Stock Exchange. The Company expects that the
merger involving HCR will not affect the lines of business in which the
Company currently engages.
RECLASSIFICATION - Certain reclassifications have been made to the fiscal
1997 and 1996 financial statements to conform to the presentations adopted
in fiscal 1998. These reclassifications had no effect on net income (loss)
or earnings (loss) per share as previously reported.
2. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Effective October 1, 1997 the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128").
Earnings per share amounts presented for fiscal 1997 and 1996 have been
restated for the adoption of SFAS No. 128. Earnings per share amounts
presented for fiscal 1998, 1997 and 1996 have been restated for the
one-for-three reverse stock split effective December 1, 1998. (See
Note 11.) The following table reflects the calculation of basic and
diluted earnings per share for the years ended September 30, 1998,
1997 and 1996.
25
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EARNINGS PER SHARE:
Net income (loss) $ 3,450 $(20,157) $ (982)
Dividends on preferred stock (2,400) (2,400) (2,253)
Preferred stock accretion (247) (295) (266)
----- ------- ------
Net income (loss) available to
common shareholders $ 803 $(22,852) $(3,501)
----- ------- ------
----- ------- ------
Weighted average shares outstanding 5,467 5,450 5,488
----- ------- ------
----- ------- ------
Basic and diluted earnings (loss) per share $ .15 $ (4.19) $ (.64)
----- ------- ------
----- ------- ------
</TABLE>
Options to purchase 319,996 shares of common stock were outstanding at
September 30, 1998. These options were not included in the computation of
diluted earnings per share because the options' exercise price was greater
than the average market price of the common shares. Options to purchase
360,778 and 688,433 shares of common stock were outstanding at September
30, 1997 and 1996, respectively and were not included in the computation of
diluted earnings per share due to the losses in the periods.
Redeemable convertible preferred stock was issued to HCR in October 1995.
As of September 30, 1998, 130,000 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, while 70,000 shares can be redeemed only at
the option of the Company on and after the fifth anniversary. The
redeemable preferred shares have voting rights on an as-if converted basis,
and are initially convertible into 3.3 million common shares at an initial
conversion price of $6.00 per share. A private warrant issued in October
1995 to HCR to purchase 2 million shares of common stock at $11.25 per
share expired in October 1998. The impact of the redeemable convertible
preferred stock and the warrant on diluted earnings per share would be
anti-dilutive and, therefore, have been excluded.
3. RESTRUCTURING CHARGE
During fiscal 1997, the Company 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, and the relocation of
eight other sites to more economical locations and $361,000 of severance
costs related to administrative staff reductions.
Total expenditures related to facilities consolidation were $853,000 and
$668,000 in fiscal 1998 and 1997, respectively. As of September 30, 1998,
$456,000 of costs, comprised of lease costs and related equipment
write-offs associated with vacated sites, remain to be paid out and are
included in other current liabilities. In fiscal 1998, the Company
reduced the restructuring liability by $499,000. The restructuring plan
is expected to be completed by the end of the third quarter of fiscal
year 1999.
4. LONG-TERM DEBT
Long-term debt consists of obligations under capitalized leases with
interest rates up to 11.3%, due through July 2000.
26
<PAGE>
Future minimum payments as of September 30, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
------------------------
<S> <C>
1999 $ 247
2000 65
---
Total minimum payments 312
Less amounts representing interest 49
---
Present value of future minimum payments 263
Less current maturities 219
---
Long-term debt $ 44
---
---
</TABLE>
Assets recorded under capital leases are included in property at cost of
$1,047,828 and $4,631,000, and accumulated depreciation of $368,198 and
$1,918,000 at September 30, 1998 and 1997, respectively. Interest paid for
the years ended September 30, 1998, 1997 and 1996 was $65,000, $265,000 and
$450,000, respectively.
5. MEDICARE COST REIMBURSEMENT
Approximately 55%, 56% and 70% of revenue for the fiscal years ended
September 30, 1998, 1997, and 1996, respectively, was derived from services
provided to Medicare beneficiaries for which payment is based on cost.
Payments for these services are made by the Medicare program based on
reimbursable costs incurred in rendering 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 related accounts receivable balances at net realizable value.
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 such costs are not reimbursable and thus not recoverable by the
Company under the Medicare program. When the Company disagrees with
findings of the Medicare fiscal intermediaries, it seeks relief through
administrative and legal channels. Based on a detailed analysis of
statutes and regulations, administrative and judicial decisions, and
consultation with independent industry experts and legal counsel, the
Company provides a reserve (by means of a revenue deduction) for any costs
incurred which are not probable of recovery. At September 30, 1998, total
disputed costs were $4,324,000; the Company believes that recovery of
$3,336,000 of such costs (including extrapolation for all unsettled cost
reporting periods) may not be probable and, accordingly, has established
reserves totaling $3,336,000 at September 30, 1998.
At September 30, 1998, disputed costs totaling $988,000 were unreserved.
Of these costs, $977,000 relates to the compensation of physical therapists
employed by the Company. The Medicare intermediary has taken the position
that contractor physical therapist salary equivalency guidelines should be
applied to the Company's employee physical therapists, and thus disallowed
certain physical therapy costs for the fiscal 1992 cost reporting period.
The Company appealed to the Provider Reimbursement Review Board ("PRRB")
and received a favorable ruling in February 1996. In April 1996, the Health
Care Financing Administration ("HCFA") reversed the PRRB ruling and
disallowed all of the disputed costs. The Company appealed to the U.S.
Federal District Court ("District Court") in Minneapolis, which in March
1997 set aside HCFA's decision, finding it arbitrary and capricious because
HCFA provided an insufficient explanation for their decision. In October
1997, HCFA issued a decision purporting to clarify their previous decision,
and disallowed all disputed costs. The Company appealed to the District
Court, and in June 1998 the District Court again ruled in favor of the
Company, declaring HCFA's decision contrary to law and set it aside. In
August 1998, HCFA appealed the decision to the Eighth Circuit Court of
Appeals. The Company, based on its assessment and the opinion of its legal
counsel, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota, continues
to believe that it is probable that the Company will ultimately prevail in
this case.
At September 30, 1998, total accounts receivable (net of reserves) due from
Medicare were $7,790,000. Based on the progress toward resolution of the
disputed costs, management estimates that net receivables of $988,000 will
not be realized within the next twelve months, and accordingly, has
classified net receivables of $988,000 as a non-current
27
<PAGE>
asset. Accrued liabilities to third-party at September 30, 1998 represent
payments from Medicare in excess of amounts that the Company will be
entitled to upon ultimate settlement of Medicare cost reports.
During fiscal 1997, the Company adjusted its Medicare reserves by a charge
to revenues of $17,101,000, principally as a result of PRRB and Court
decisions which clarified the definition of allowable activities and
documentation requirements related to the Company's community liaison
costs.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock was issued to HCR on October 24,
1995. The preferred shares were originally redeemable 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 3.3 million
common shares at an initial conversion price of $6.00 per share. (See Note
11.) 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.
On April 13, 1998, the Company entered into an agreement with HCR whereby
HCR waived its right to give notice on or after October 24, 2000 requiring
the Company to redeem 70,000 of the 200,000 shares. The effect of the
agreement allowed the Company to present the 70,000 modified shares in the
Shareholders' Equity section of its balance sheet, while the remainder of
the Preferred Shares continues to be presented outside the Shareholders'
Equity section of the balance sheet. The reason for the waiver was to
allow the Company to meet the requirements for continued listing of its
common stock on the NASDAQ National Market ("NASDAQ") by retaining a
minimum net tangible asset balance, as defined by NASDAQ, of at least
$5,000,000. With respect to the remaining 130,000 shares, the Company also
entered into a resolution whereby it will not redeem any shares of its
capital stock from HCR if such redemption would cause the Company's net
tangible assets, as defined by NASDAQ to be less than $5,000,000. HCR
consented to the adoption of the resolution.
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 $4,401,000, $4,852,000 and $4,237,000, for the years ended September
30, 1998, 1997 and 1996, respectively.
Future minimum rental payments as of September 30, 1998 for operating
leases with noncancelable terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
------------------------
<S> <C>
1999 $ 3,074
2000 2,220
2001 1,940
2002 1,083
2003 158
------
Total minimum payments $ 8,475
------
------
</TABLE>
The Company has letter of credit facilities totaling $1,915,000. The
letters of credit are collateralized by secured investments and will expire
in December 1999.
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.
28
<PAGE>
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 1,267,000 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>
-------------------------------------------------------------------------------------------------------------
1998 1997 1996
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 361 $7.17 689 $8.55 495 $8.43
beginning of year
Granted 130 5.25 251 5.46 377 8.28
Exercised - - (3) 1.59 (39) 3.75
Canceled (171) 6.74 (576) 8.10 (144) 8.73
---- ---- ----
Outstanding at end
of year 320 6.62 361 7.17 689 8.55
---- ---- ----
---- ---- ----
Options exercisable
at year-end 157 7.67 159 8.64 249 9.72
-------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, there are 283,000 shares available for grant.
(See Note 11.)
STOCK REPURCHASE
In fiscal 1998, the Company repurchased 23,000 shares of common stock at
fair market value.
In fiscal 1997, the Company repurchased 82,000 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.
WARRANT
A private warrant issued in October 1995 to purchase 2,000,000 shares of
common stock expired in October 1998.
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 500,000 shares reserved for
this plan of which 36,000 shares were issued on September 30, 1998 at $1.50
per share, 31,000 shares were issued on September 30, 1997 at $4.62 per
share and 51,000 shares were issued on September 30, 1996 at $5.58 per
share. At September 30, 1998 there were 227,000 shares available for
future offerings.
SFAS 123
The following table summarizes information concerning currently outstanding
and exercisable options:
29
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------
Outstanding Weighted-Average Weighted-Average Exercisable
Range of as of Remaining Exercise Price as of Average Weighted-Average
Exercise Prices 9/30/98 Contractual Life 9/30/98 Exercise Price
in Years
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 - $3.99 10,669 2.0 $ 3.09 10,669 $ 3.09
$4.00 - $5.99 195,174 8.2 $ 5.34 49,951 $ 5.43
$6.00 - $7.99 49,297 6.8 $ 7.04 41,531 $ 7.08
$8.00 - $9.99 29,673 5.6 $ 9.08 19,672 $ 8.98
$10.00 - $11.99 11,836 4.9 $10.30 11,836 $10.30
$12.00 - $13.99 19,179 3.8 $12.79 19,179 $12.79
$14.00 - $15.99 4,168 4.3 $14.71 4,168 $14.71
------- -------
319,996 7.1 $ 6.62 157,006 $ 7.67
-----------------------------------------------------------------------------------------------------------
</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 123 for purposes of determining compensation expense
related to stock options granted during the years ended September 30, 1998,
1997 and 1996, net income (loss) available to common shareholders and basic
and diluted earnings (loss) per share would have been changed to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) available to common shareholders
As reported $803,000 $(22,852,000) $(3,501,000)
Pro forma $261,000 $(23,380,000) $(4,029,000)
Basic and diluted earnings (loss) per share
As reported $ .15 $ (4.19) $ (.64)
Pro forma $ .05 $ (4.29) $ (.73)
</TABLE>
The fair value of each option granted during 1998, 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 4.23%, 6.46% and 6.07% during fiscal 1998, 1997 and 1996,
respectively; expected volatility of the market price of the Company's
common stock of 105%, 68% and 155% during fiscal 1998, 1997 and 1996,
respectively; turnover of 2%, 37% and 26% during fiscal years 1998, 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 1998, 1997 and 1996 was
$4.11, $3.39 and $6.96, respectively.
The fair value of the employees' stock purchase plan was estimated using
the Black-Scholes model with the following assumptions for fiscal 1998,
1997 and 1996: no dividend yield; a risk free interest rate of 4.23%,
6.46% and 6.07% during fiscal 1998, 1997 and 1996, respectively; expected
volatility of the market price of the Company's common stock of 105%, 68%
and 155% during fiscal years 1998, 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 fiscal 1998,
1997 and 1996 was $3.06, $3.24 and $5.79, respectively.
30
<PAGE>
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 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, 1998, 1997 and
1996 consisted of (in thousands):
<TABLE>
Caption>
1998 FEDERAL STATE TOTAL
------- ----- -----
<S> <C>
Current $ 108 $ (24) $ 84
Deferred (69) (15) (84)
------ ----- ------
$ 39 $ (39) $ -
------ ----- ------
------ ----- ------
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)
------ ----- ------
------ ----- ------
</TABLE>
The income tax expense differs from the amount computed by applying the
Federal statutory rate to income before income taxes for each of the years
ended September 30, 1998, 1997 and 1996 as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Tax (benefit) at Federal statutory rate $ 1,173 $(7,459) $ (396)
State income taxes, net of Federal benefit 169 (995) 21
Officers life insurance - 2 35
Goodwill amortization 41 38 41
Meals and entertainment 30 62 106
Other 255 (218) 10
Valuation allowance (1,668) 6,790 -
------- ------ -----
Income tax benefit $ - $(1,780) $ (183)
------- ------ -----
------- ------ -----
</TABLE>
The tax benefit related to the exercise of employee stock options is
recorded as additional paid-in-capital.
During the year ended September 30, 1998, income tax refunds of $3,918,000
were received from carryback of the 1997 net operating loss. Income taxes
paid during the years ended September 30, 1997 and 1996 were $24,000 and
$2,257,000, respectively.
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities at September 30, 1998 and 1997 are as
follows:
31
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
ASSET LIABILITY ASSET LIABILITY
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Bad debt allowance $ 454 $ - $ 757 $ -
Depreciation and amortization - 950 - 1,215
Insurance accruals 1,522 - 2,817 -
Capitalized items expensed for taxes - 434 - 651
Deferred revenue 16 - - (149)
Vacation 286 - 300 -
Restructuring reserve 176 - 674 -
Benefit of NOL carryforward 3,898 - 3,734 -
Other 39 (96) 48 (74)
------ --------- ------ ---------
6,391 1,288 8,330 1,643
Less valuation allowance (5,122) - (6,790) -
------ --------- ------ ---------
$ 1,269 $ 1,288 $ 1,540 $ 1,643
------ --------- ------ ---------
------ --------- ------ ---------
</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, 1998, the Company had federal operating loss
carryforwards of $9,100,000 which will expire in 2012.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
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 the Company in
fiscal 1999. In fiscal 1999, the Company will disclose information
relating to three segments: Extended Hours Division, Visit Division, and
Hospice Division.
11. REVERSE STOCK SPLIT
On November 17, 1998, the Company declared a one-for-three reverse stock
split effective the close of business December 1, 1998. The Board of
Directors declared the reverse split to reduce the number of outstanding
shares of common stock and thereby encourage an increase in the price per
share of the common stock on the public market in an effort to maintain
eligibility for the continued trading on the NASDAQ National Market. While
the Company believes the reverse split should allow the common stock to
continue to trade on the NASDAQ National Market, this depends on the
Company meeting eligibility requirements in the future, and the Company
can provide no assurance that such requirements will be met.
The par value of the common stock has been increased from $.01 to $.03 and
the outstanding shares have decreased from 16,437,000 to 5,479,000 at
September 30, 1998. All references in the accompanying financial
statements to the number of common shares and the per share amounts have
been restated to reflect the reverse stock split.
32
<PAGE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $27,858 $26,439 $22,904 $19,807
Income from operations 674 528 635 612
Net income available to common shareholders 186 120 287 210
Basic and diluted earnings per share .04 .02 .05 .04
</TABLE>
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)
Net loss applicable to common shareholders (660) (1,194) (14,443) (6,555)
Basic and diluted loss per share (.12) (.21) (2.66) (1.20)
</TABLE>
During the fourth quarter of fiscal 1997, the Company recorded adjustments
to its Medicare reserve of $2.8 million. The Company also experienced an
increase in its non-Medicare aged receivables which resulted in a bad debt
expense of $2.4 million.
33
<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, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 1998. Our audits also included
the consolidated financial statement schedule listed in the Index at Item
14(a)2. These consolidated financial statements 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998
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, 1998
34
<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 1999
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 1999
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 1999 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 1999
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.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report..................................... 34
Schedule for the Years Ended September 30, 1998, 1997 and 1996:
II - Valuation and Qualifying Accounts and Reserves.......... 39
</TABLE>
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 1998.
35
<PAGE>
(c) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Amendment of Articles of Incorporation.
3.2 Restated Bylaws. (iv)
4.1 Form of specimen Common Stock certificate.
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)
4.4 Preferred Stock Modification Agreement. (v)
10.1 Executive Incentive Plan in place for fiscal 1998.
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 Letter of Credit Agreement dated September 29, 1998 with
U.S. Bank National Association, as amended.
10.7 Letter of Credit Agreement dated December 16, 1996 with U.S.
Bank National Association. (iv)
10.8 Non-employee Director Stock Compensation Plan.
10.9 Employment Agreement between the Company and James J.
Lynn dated October 24, 1995. (iv)
10.10 Administrative Services Agreement dated November 15,
1997 between In Home Health, Inc. and Manor Care, Inc. (iv)
23 Independent Auditors' Consent
27 Financial Data Schedule
(i) Incorporated herein by reference to the Registrants'
Annual Report on Form 10-K for the year ended September
30, 1995.
(ii) Incorporated herein by reference to the Registrants'
Registration Statement (Form S-18) No. 33-17228C.
(iii) Incorporated herein by reference to the
Registrants' current report on Form 8-K dated May 2,
1995.
(iv) Incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30,
1997.
(v) Incorporated herein by reference to the Registrants'
current Report on Form 8-K dated April 14, 1998.
</TABLE>
36
<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
and President
Date: December 18, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Wolfgang von Maack Chief Executive Officer, December 18, 1998
- -------------------------- President and Director
Wolfgang von Maack (principal executive officer)
/s/ Robert J. Hoffman, Jr. Chief Financial Officer December 18, 1998
- --------------------------- (principal financial officer)
Robert J. Hoffman, Jr.
/s/ James J. Lynn, Ed.D. Director December 18, 1998
- -------------------
James J. Lynn, Ed.D.
/s/ C. Michael Ford Director December 18, 1998
- ----------------------
C. Michael Ford
/s/ Judith Lloyd Storfjell, Ph.D. Director December 18, 1998
- ----------------------------------
Judith Lloyd Storfjell, Ph.D.
/s/ Marvin Wilensky Director December 18, 1998
- ---------------------
Marvin Wilensky
</TABLE>
37
<PAGE>
IN HOME HEALTH, INC.
SCHEDULE AND EXHIBIT INDEX
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
II Valuation and Qualifying Accounts and Reserves 39
EXHIBIT
-------
3.1 Articles of Amendment of Articles of Incorporation. 40
4.1 Form of specimen Common Stock certificate. 41
10.1 Executive Incentive Plan in place for fiscal 1998. 43
10.5 The Company's 1991 Employee Stock Purchase Plan, as
amended 46
10.6 Letter of Credit Agreement dated September 29, 1998
with U.S. Bank National Association, as amended. 54
10.8 Non-employee Director Stock Compensation Plan. 55
23 Independent Auditors' Consent. 61
27 Financial Data Schedule. 62
</TABLE>
38
<PAGE>
SCHEDULE II
IN HOME HEALTH, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------
(1) (2)
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses -Describe -Describe Period
(B) (A)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
- ----
Allowance for Doubtful Accounts - Current $2,029 $ (2) $ - $ 852 $ 1,175
Medicare Reserve 16,800 - (3,662) 9,802 3,336
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
</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.
39
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
IN HOME HEALTH, INC.
Pursuant to Minnesota Statutes Section 302A.402, Subd. 3, In Home
Health, Inc., a Minnesota corporation (the "Corporation") adopts the following
Articles of Amendment to its Articles of Incorporation:
1. Article III of the Corporation's Articles of Incorporation is amended
to read as follows:
"The authorized capital stock of this corporation shall consist of
Thirteen Million, Three Hundred Thirty-Three Thousand, Three Hundred
Three (13,333,333) shares of Common Stock, par value $.03 per share,
and One Million (1,000,000) shares of Preferred Stock. The Preferred
Stock may be issued from time to time as shares of one or more series.
Subject to the provisions hereof and the limitations prescribed by
law, the Board of Directors is authorized, by adopting resolutions
providing for the issuance of Preferred Stock of any particular
series, to establish the number of shares of Preferred Stock to be
included in each such series, and to fix the par value, designation,
relative powers, preferences, rights, qualifications, limitations and
restrictions thereof, including without limitation the right to create
voting, dividend and liquidation preferences greater than those of
Common Stock In addition, as to any series of Preferred Stock which
may have voting rights fixed by resolution of the board of directors,
the Board of Directors is authorized to provide in the resolution
fixing the voting rights of any series of Preferred Stock that each
share of such Preferred Stock has voting rights equal to the number of
shares of Common Stock into which each such share of Preferred Stock
may be convertible at any time."
2. The foregoing amendment was approved by the Corporation's Board of
Directors on November 17, 1998, and pursuant to Minn. Stat. 302A.402, subd. 3 no
approval by the shareholders of the Corporation is required.
3. The foregoing amendment will not adversely affect the rights or
preferences of the holders of outstanding shares of any class or series and will
not result in the percentage of authorized shares of any class or series that
remains unissued after the combination exceeding the percentage of authorized
shares of that class or series that were unissued before the combination.
Dated this 25th day of November, 1998.
IN HOME HEALTH, INC.
By
--------------------------------------
Robert J. Hoffman, Jr.
Chief Financial Officer
<PAGE>
[LOGO]
Number Shares
IN HOME HEALTH, INC.
------------------------
CUSIP 453222 40 8
------------------------
Incorporated under the
laws of the State of
Minnesota
THIS CERTIFIES THAT IS THE OWNER AND
REGISTERED HOLDER OF
SHARES OF COMMON STOCK $.03 PAR VALUE OF
IN HOME HEALTH, INC.
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN
PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO
BE SIGNED BY THE FACSIMILE SIGNATURE OF ITS DULY AUTHORIZED OFFICERS.
DATED:
/s/ Robert J. Hoffman, Jr. /s/ Wolfgang von Maack
[SEAL]
SECRETARY PRESIDENT
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. BOX 1596
DENVER, COLORADO 80201
BY
-----------------------------------------------
TRANSFER AGENT & REGISTRAR AUTHORIZED SIGNATURE
<PAGE>
IN HOME HEALTH, INC.
TRANSFER FEE: $20.00 PER NEW CERTIFICATE ISSUED
THE COMPANY IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS OR SERIES. THE
BOARD OF DIRECTORS OF THE COMPANY HAS THE AUTHORITY TO DETERMINE THE RELATIVE
RIGHTS AND PREFERENCES OF EACH SUCH CLASS OR SERIES. THE COMPANY WILL FURNISH
TO EACH SHAREHOLDER, UPON REQUEST MADE OF THE TRANSFER AGENT AND WITHOUT CHARGE,
A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE
RIGHTS OF THE SHARES OF ANY SUCH CLASS OR SERIES SO FAR AS THEY HAVE BEEN
DETERMINED BY THE BOARD OF DIRECTORS.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT-..............Custodian..............
(Cust) (Minor)
under Uniform Gifts to Minors
Act ......................................
(State)
Additional abbreviations may also be used though not in the above list.
- ------------------------------------------------------------------------------
For Value Received, ______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------
- --------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________ attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated ________________________________
____________________________________________
____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
_____________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
<PAGE>
IN HOME HEALTH, INC.
EXECUTIVE INCENTIVE PLAN
FISCAL YEAR 1998
In Home Health has annual incentive plans for executives. Executive is defined
as Corporate Vice Presidents, Directors of Operations and key corporate
employees. The purpose of these plans is:
* To ensure a competitive total compensation package for
executive positions.
* To attract, retain and motivate qualified employees in
executive 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 executive performance.
* Increase shareholder value - stock price growth.
* Profit growth.
ELIGIBILITY
The plans are intended to include those executive 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
executive 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.
<PAGE>
INCENTIVE ELEMENTS
For fiscal year 1998, the emphasis will be placed on achieving budgeted profit
before tax.
No bonus will be paid to any executive where a loss occurs in his/her area of
responsibility. The bonus plus the salary cannot exceed the operating profit of
the branch.
GENERATION OF INCENTIVE POOL
Each year, incentive dollars will be integrated into the operating budget based
on performance projections for executives 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 executive
incentive amount has been approved. 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 new position. A prorated payment
may be made based on the number of full months (six to eleven) worked in the
eligible position.
If the executive 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 executive transferring into a lower incentive from a higher incentive
position will receive the lower incentive rate for the entire year. An
executive who transfers out of an eligible incentive position any time during
the year is ineligible for any incentive relating to that year.
<PAGE>
An executive 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, 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.
DURATION OF PLAN
The company may change, modify, or amend this plan at any time. This plan is for
fiscal year 1998 only and no plan for fiscal year 1999 or any other fiscal year
is implied.
FY 1998 INCENTIVE PLAN PAYMENTS
A. Corporate
Plan pays 25% of base salary to certain corporate executives if annual budget is
achieved. Budget is defined as profit before taxes and payment of preferred
dividends. Budget for FY 1998 is $3,150,000.
B. Branches
Plan pays 25% of base salary to Directors of Operations whose branches have
achieved an operating profit of 3% or more.
<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, 2002, 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.
<PAGE>
(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 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.
2
<PAGE>
(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.
(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:
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<PAGE>
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.
(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
4
<PAGE>
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 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
5
<PAGE>
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 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
6
<PAGE>
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 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.
7
<PAGE>
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
As Amended, Adopted by the Board of Directors: November 17, 1998
<PAGE>
U.S. BANK NATIONAL ASSOCIATION SWIFT: USBKUS44
STANDBY LETTERS OF CREDIT TELEX: 192179 USB INTL MPS
601 SECOND AVENUE SOUTH MPFP1409 PHONE: 612-973-0736
MINNEAPOLIS, MINNESOTA 55402-4302 612-973-0710
FAX: 612-973-0838
SEPTEMBER 29, 1998
- --------------------------------------------------------------------------------
LETTER OF CREDIT NUMBER: SLC76471MMSP
AMENDMENT NUMBER: 4
APPLICANT: IN HOME HEALTH, INC.
601 CARLSON PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55305-5214
BENEFICIARY: THE TRAVELERS INDEMNITY COMPANY (BENEFICIARY)
NATIONAL ACCOUNTS COLLATERAL UNIT
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
- --------------------------------------------------------------------------------
THE ABOVE MENTIONED CREDIT IS AMENDED AS FOLLOWS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRESENT AVAILABLE BALANCE DECREASED BY $668,390.00 TO A NEW TOTAL OF
$1,000,000.00.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE 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 ___________________________
FOR INFORMATIONAL PURPOSES ONLY: EXPIRATION DATE HAS BEEN EXTENDED TO DECEMBER
15, 1999 IN ACCORDANCE WITH THE TERMS OF THE LETTER OF CREDIT.
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.
U.S. BANK NATIONAL ASSOCIATION
___________________________________
AUTHORIZED SIGNATURE
<PAGE>
IN HOME HEALTH, INC.
NON-EMPLOYEE DIRECTOR
STOCK COMPENSATION PLAN
In Home Health, Inc. has adopted and established a stock compensation plan
for Non-Employee Directors in accordance with the following terms and
conditions.
SECTION ONE
DESIGNATION AND PURPOSE OF THE PLAN
A. DESIGNATION. This Plan is designated the "In Home Health, Inc.
Non-Employee Director Stock Compensation Plan."
B. PURPOSE. The purpose of this Plan is to increase the stock-based
component of Non-Employee Director compensation so as to encourage stock
ownership by Non-Employee Directors and to further align the interest of
Non-Employee Directors and stockholders.
SECTION TWO
DEFINITIONS
As used in the Plan, the following terms mean:
A. "Award" means a grant of restricted stock hereunder.
B. "Board" means the Board of Directors of the Company.
C. "Company" means In Home Health, Inc.
D. "Custodial Account" means the account described in Section 7A. herein.
E. "Non-Employee Director" means a member of the Board of the Company who
is not an employee of the Company or any of its subsidiaries.
F. "Participant" means any Non-Employee Director who is granted an Award
as provided in this Plan.
G. "Plan" means this Non-Employee Director Stock Compensation Plan.
H. "Stock" means the common stock of In Home Health, Inc.
I. "Disability" means a permanent and total disability within the meaning
of Section 22 (e)(3) of the Internal Revenue Code of 1986 as amended.
J. "Retirement" means termination of service as a Director for either of
the following reasons; (i.) after attaining 65 years of age or
(ii) failure to be re-elected as a Director by the shareholders of
the Company at the Annual Meeting of Stockholders.
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<PAGE>
SECTION THREE
EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL
A. EFFECTIVE DATE AND STOCKHOLDER APPROVAL. The Plan is subject to
the approval of the Plan by a majority of the shares of Stock voted on the
proposal at the 1999 Annual Meeting of Stockholders. The Plan shall be
effective as of the initial approval date.
B. PERIOD FOR GRANT OF AWARDS. Awards may be made as provided herein
for a period of ten (10) years subsequent to approval by the Company's
shareholders.
SECTION FOUR
ADMINISTRATION OF THIS PLAN
This Plan shall be administered by the Board. The Board shall have all
the powers vested in it by the terms of this Plan, such powers to include
authority (within the limitation described herein) to prescribe the form of
the agreement embodying Awards made under this Plan. Subject to the
provisions of this Plan, the Board shall have the power to construe this
Plan, to determine all questions arising thereunder, and to adopt and amend
such rules and regulations for the administration of this Plan as it may deem
desirable. Any decision of the Board in the administration of this Plan, as
described herein, shall be final and conclusive. The Board may act only by a
majority of its members in office, except that the members thereof may
authorize any one or more of their members or the Secretary or any other
officer of the Company to execute and deliver documents on behalf of the
Board.
SECTION FIVE
GRANT OF AWARDS AND LIMITATION OF
NUMBER OF SHARES SUBJECT TO AWARD
A. COMPENSATION IN COMMON STOCK. Subject to stockholder approval,
beginning with Fiscal Year 1999 (commencing October 1, 1998), and each year
thereafter, each Non-Employee Director shall be granted 5,000 shares upon
such director's initial election and 2,000 shares annually with each
reelection. In addition, each Non-Employee may elect to receive Board
retainer and Board attendance fees in the form of common stock in lieu of
cash. The number of shares issued as consideration for retainer and
attendance fees shall be calculated by dividing the value of fees payable by
the average of the beginning and ending market price of the stock for the
quarterly period such fees were earned. Consideration for Board retainer and
Board attendance fees shall be set from time to time upon majority approval
by the Board. Initially, the Board has approved annual retainer fees of
$10,000 annually, payable quarterly in arrears, plus attendance fees of
$1,000 for each board meeting attended and for each board committee meeting
held if such meeting is held on a day other than on a board meeting day.
B. TOTAL NUMBER OF SHARES. Subject to any adjustment pursuant to
Section 8, the total number of shares of Stock which may be awarded under
this Plan is 200,000 shares. The maximum number of shares authorized may be
increased from time to time by approval of the Board and, if required
pursuant to Rule 16-3 of the Securities and Exchange Commission or its
successors or the applicable rules of any stock exchange, the stockholders of
the Company.
To the extent that an Award lapses or the rights of the Participant to
whom it was granted terminate, expire or are cancelled for any other reason,
in whole or in part, shares of Stock (or remaining shares) subject to such
Award shall again be available for the grant of an Award under the Plan.
Shares delivered by the Company under the plan may be authorized and unissued
Stock, Stock held in the treasury of the Company or Stock purchased on the
open market in accordance with applicable securities laws.
2
<PAGE>
C. INSUFFICIENT NUMBER OF SHARES. In the event that the number of
shares of Stock available for future Awards under this Plan is insufficient
to make all Awards required to be made on any date, then all Participants
entitled to an Award on such date shall share ratably in the number of shares
of Stock which may be included in Awards granted to Participants under this
Plan.
SECTION SIX
ELIGIBILITY
Each Non-Employee Director shall be eligible to receive an Award in
accordance with Section Five. Each Award granted under this Plan shall be
evidenced by an agreement in such form as the Board shall prescribe from time
to time in accordance with this Plan and shall comply with the terms and
conditions set forth herein. Such an agreement shall incorporate the
provisions of this Plan by reference.
SECTION SEVEN
RESTRICTIONS ON SHARES
A. CUSTODIAL ACCOUNT. The shares shall be held by the Company in a
Custodial Account in the name of the Participant until such time as the
shares have vested pursuant to the terms of paragraph 7(B) of this Plan.
B. VESTING. The shares held by the Company shall remain in the
Custodial Account until vesting which shall occur (a) to the extent of
one-fifth of the total number of shares subject to an Award following the
expiration of one year from the date of the Award (b) to the extent of an
additional two-fifths following the expiration of two years from the date of
the Award and (c) to the extent of an additional two-fifths following the
expiration of three years from the date of this Plan, and in each event of
vesting, the deposit by the Participant with the Company of any and all
withholding taxes, federal or state, required to be collected by the Company.
Shares issued in lieu of cash Board retainer and Board attendance fees shall
vest immediately and shall not be subject to the foregoing vesting schedule
or held in the custodial account..
Upon vesting and upon receipt of the required tax deposit, the shares
shall be distributed to the Participant within a reasonable period of time
not to exceed ninety (90) days from the date of vesting and the Custodial
Account shall be terminated with respect to such shares..
C. FORFEITURE. Subject to Section Seven (E) below, if the Participant
ceases to be a Non-Employee Director for any reason prior to vesting, the
Participant shall forfeit the shares, and the Custodial Account shall be
terminated. Ownership of the forfeited shares shall revert back to the
Company.
D. NO ASSIGNMENT. The shares granted under the Plan, while held by
the Company pursuant to the Custodial Account, shall not be transferred,
assigned, pledged, or hypothecated in any way (whether by operation of law or
otherwise), and shall not be subject to execution, attachment, or similar
process. Upon any attempt so to transfer, assign, pledge, hypothecate, or
otherwise dispose of the shares, or of any right or privilege conferred
thereby, contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon such rights and privileges, the
Participant shall forfeit the shares and ownership of the forfeited shares
shall revert back to the Company.
E. DEATH, DISABILITY AND BOARD RETIREMENT. A Participant who ceases
to serve on the Board by reason of (i) death, (ii) Disability, or (iii)
Retirement, shall be vested in his or her entire Award notwithstanding the
limitation of Section 7(B) above.
3
<PAGE>
SECTION EIGHT
CHANGES IN CAPITAL STRUCTURE
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, or extraordinary dividend or
divestiture (including a spin-off), or any other change in the capital
structure or shares of the Company, the Board shall make adjustments,
determined by the Board in its discretion to be appropriate, as to the number
and kind of securities subject to this Plan and specified in Section Five of
this Plan and as to the number and kind of securities covered by each
outstanding Award.
SECTION NINE
RIGHTS AS A STOCKHOLDER
The Participant shall be entitled to vote the shares held by the Company
in the Custodial Account. Any cash or non-cash dividend payable with respect
to shares held in the Custodial Account will remain in the Custodial Account
subject to risk of forfeiture until such time as the shares with respect to
which such cash or non-cash dividend, as the case may be, was declared is
either distributed to the Participant or forfeited by the Participant.
Notwithstanding anything to the contrary contained herein, no Stock
shall be transferred by the Company to a Custodial Account prior to the date
of stockholder approval of the Plan, and no Non-Employee Director shall be
entitled to any rights as a stockholder with respect to any Stock granted
hereunder, including, without limitation voting rights and the right to
receive Dividend Equivalents, until such Stock has been transferred.
SECTION TEN
TITLE
The shares held by the Company shall be held in the name of the
Participant. Such shares shall at all times remain in the Company Custodial
Account until they have been (i) forfeited by the Participant, or (ii)
distributed to the Participant.
SECTION ELEVEN
RISK OF LOSS
The Participant agrees to assume all risks in connection with any
decrease in the value of the shares granted to the Participant.
SECTION TWELVE
NOTICE TO COMPANY
The Participant shall notify the Company immediately if she elects to
make an election under Section 83(b) of the Internal Revenue Code or upon the
occurrence of any other event resulting in the value of the shares being
included in the Participant's gross income prior to vesting.
SECTION THIRTEEN
GENDER
4
<PAGE>
Where applicable, words in the feminine shall include the masculine,
words in the neuter shall include the masculine and feminine, and words in
the singular shall include the plural, and vice versa.
SECTION FOURTEEN
SUCCESSORS
This Agreement shall be binding upon and inure to the benefit of the
Company and its subsidiaries, its successors and assigns and the Participant
and his or her heirs, executors, administrators and legal representatives.
SECTION FIFTEEN
NO RIGHT TO CONTINUE AS A DIRECTOR
Neither the Plan, nor the granting of an Award, nor any other action
taken pursuant to Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that the Company will retain a
Non-Employee Director for any period of time, or at any particular rate of
compensation. Nothing in this Plan shall in any way limit or affect the right
of the Board or the stockholders of the Company to remove any Non-Employee
Director or otherwise terminate his or her service as a director of the
Company.
SECTION SIXTEEN
MISCELLANEOUS PROVISIONS
A. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to
make payment of Awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
government agencies as may be required. The Company shall be under no
obligation to register under the Securities Act of 1933, as amended ("Act"),
any of the shares of Stock issued, delivered or paid in settlement under the
Plan. If Stock awarded under the Plan may in certain circumstances be exempt
from registration under the Act, the Company may restrict its transfer in
such manner as it deems advisable to ensure such exempt status.
B. GOVERNING LAW. All matters relating to the Plan or to Awards
granted hereunder shall be governed by the laws of the State of Minnesota,
without regard to its principles of conflict of laws.
C. TITLES AND HEADINGS. The titles and headings of the sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles and headings, shall
control.
SECTION SEVENTEEN
CHANGE OF CONTROL
In the event of a change of control of the Company, the Company shall
immediately transfer to the Participant all Stock held in the Custodial
Account in the name of the Participant. A "change of control" shall mean (i)
a merger or consolidation in which the Company is not the surviving
corporation or (ii) the acquisition of twenty-five percent or more of the
voting securities of the Company by a person, group, or entity or (iii) the
sale of all or substantially all of the assets of the Company or (iv)
individuals who were members of the Board immediately prior to a meeting of
the stockholders of the Company involving a contest for the election of
Directors do not constitute a majority of the Board immediately following
such election, unless that election of such new Directors was recommended to
the stockholders by management of the Company.
5
<PAGE>
SECTION EIGHTEEN
AMENDMENT AND TERMINATION
DISCRETION OF THE BOARD. This Plan may be terminated or amended at any
time and from time to time by the Board as the Board shall deem advisable
provided, however, that (a) no such amendment shall be effective without
approval of the stockholders of the Company, if stockholder approval of the
amendment is then required pursuant to Rule 16b-3 under the Securities Exchange
Act of 1934 or its successors, or the applicable rules of any securities
exchange, and (b) to the extent prohibited by such Rule 16b-3 or its successors,
the Plan may not be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code of 1986, as amended, or the
regulations thereunder, or the Employee Retirement Income Security Act of 1974,
as amended, or the regulations thereunder. No modification or amendment of this
Plan shall, without the written consent of the Participant, materially and
adversely affect his or her rights under this Plan.
6
<PAGE>
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, 1998, appearing in this Annual Report on Form 10-K of In
Home Health, Inc. for the year ended September 30, 1998.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 18, 1998
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