-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IJFzo78BDkQ6EhKtF6XR5qIr1MfZbr9yq8AF2gkZgZlMHIGnvvDcN05tbyPP2suR fjoUzgFViQ9mH5a5YTOXZA== 0000912057-95-011783.txt : 19960102 0000912057-95-011783.hdr.sgml : 19960102 ACCESSION NUMBER: 0000912057-95-011783 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IN HOME HEALTH INC /MN/ CENTRAL INDEX KEY: 0000818645 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 411458213 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17490 FILM NUMBER: 95606248 BUSINESS ADDRESS: STREET 1: 601 LAKESHORE PKWY STE 500 STREET 2: CARLSON CENTER CITY: MINNETONKA STATE: MN ZIP: 55343-3837 BUSINESS PHONE: 6124497500 MAIL ADDRESS: STREET 1: 601 LAKESHORE PKWY STREET 2: STE 500 CITY: MINNETONKA STATE: MN ZIP: 55305 FORMER COMPANY: FORMER CONFORMED NAME: IN HOME HEALTH INC DATE OF NAME CHANGE: 19880803 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 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 LAKESHORE PARKWAY MINNETONKA, MINNESOTA 55305-5214 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 612-449-7500 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $ .01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ---- Based on the closing sale price of $2.50 on the NASDAQ National Market System, as of December 1, 1995 the aggregate market value of the registrant's common stock held by nonaffiliates was $22,861,898. As of December 1, 1995 the number of shares outstanding of the registrant's common stock, $.01 par value was 16,295,037 shares. Documents Incorporated by Reference: The Company's Proxy Statement for its Annual Meeting of Shareholders to be held February 27, 1996, (the "1995 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. TABLE OF CONTENTS
PAGE(S) PART I Item 1. Business...................................................................... 3-8 Item 2. Properties.................................................................... 8 Item 3. Legal Proceedings............................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders........................... 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters........ 9 Item 6. Selected Financial Data....................................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 10-13 Item 8. Financial Statements and Supplementary Data................................... 14-30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................... 14 PART III Item 10. Directors and Executive Officers.............................................. 30 Item 11. Executive Compensation........................................................ 30 Item 12. Security Ownership of Certain Beneficial Owners and Management................ 30 Item 13. Certain Relationships and Related Transactions................................ 30 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 30-31 SIGNATURES ......................................................................................... 32
2 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, rehabilitation, personal care and homemaking. The Company currently provides services from 41 offices and ten 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. The Company began expansion into new markets in 1984 with the opening of an office in St. Louis. All expansion into new geographic markets subsequent to St. Louis have been through acquisitions. On October 24, 1995 the Company consummated transactions with Manor Healthcare Corp., a wholly owned subsidiary of Manor Care, Inc., whereby Manor Healthcare acquired approximately 64% of the voting power of the Company's voting capital stock and the Company received net cash proceeds of approximately $18 million. The agreement with Manor Healthcare contemplates that the Company will continue to operate in the lines of business in which it currently engages. INDUSTRY BACKGROUND The Company believes that the home health care business is a rapidly growing industry still in its formative stages. This rapid growth in the market has several causes. First, substantial cost savings are realized through treatment at home as an alternative to hospitalization. The National Association for Home Care ("NAHC") estimates that home health care costs can be one-half to one-third of the cost of comparable hospital care. Second, Medicare reimburses hospitals a fixed amount based on the patient's diagnosis, regardless of the cost of service or length of stay. This provides hospitals with an incentive for shorter patient stays, frequently leading to the use of home care. Third, advances in medical technology make it possible to provide treatments at home that once required hospitalization. Patients requiring ventilators or intravenous therapies frequently can be cared for safely at home. Fourth, home health care allows the patient to remain in a familiar environment, which is often medically and psychologically preferable. Many health insurance plans now include home care benefits. Evidence of the cost savings from the use of home health services has caused many Health Maintenance Organizations (HMOs), health insurance carriers, employers, third party administrators and utilization review services to negotiate fees and contract with home health providers for their clients. Clients usually do not select their home health provider; the selection is usually made with the assistance of health care professionals such as physicians, hospital discharge planners, nurses and social workers. 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 1995, approximately 52% 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% was attributable to rehabilitation services, 3% came from infusion pharmacy products, 2% from critical care nursing, and 2% came from medical supplies. Services offered by the Company are paid for by Medicare, Medicaid, insurance carriers, HMOs, state and county government programs and individuals. Approximately 76% of the Company's revenue in fiscal 1995 came from reimbursement by the Medicare program, which is an increase from 74% in fiscal 1994. Approximately 12% of the Company's revenue in fiscal 1995, a decrease from 14% in fiscal 1994, was attributable to other third party payors, such as HMOs, insurance companies and county governments. The balance of the Company's revenue, 12% in 1995 and 1994, was received directly from individual clients. The Company anticipates that the payor mix will continue to be comparable to fiscal 1995. 3 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. Pharmacists prepare and dispense drug and nutritional therapies by physician order and monitor the client's treatment. Home Health Aides provide personal care such as bathing, assistance with walking, and other procedures that do not require professional nursing expertise. Homemakers/Companions assist with meal preparation and housekeeping, and provide companionship that can help maintain independent living. Physical Therapists assist clients to restore strength and range of joint motion for improved function; and retrain clients in all areas of ambulation and mobility. Occupational Therapists assist clients to become independent in activities of daily living, such as feeding, dressing, hygiene, and social activities. Speech Pathologists retrain clients to deal with speech, swallowing, language or hearing impediments to improve communication abilities. Social Workers assist clients and their families to deal with financial, personal and social concerns resulting from health problems. OPERATING DIVISIONS The Company has 41 office locations consisting of 29 branches and twelve satellites. Each of the Company's branches has two divisions, a Visit Division and an Extended Hours Division. The Company's satellite locations provide Visit Division services only. 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. The Visit Division charges by the visit while the Extended Hours Division charges by the hour. 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. As an expansion of the Visit Division services, the Company began providing pharmaceutical drugs, fluids and supplies through its first Infusion Pharmacy in January 1991. Previously the Company had contracted with other infusion providers for the pharmaceuticals and supplies being utilized. The Company now operates ten Infusion Pharmacies. The Infusion Pharmacies operate with one or more full time pharmacists who collaborate with the client's physician, nurse and other health care providers. The Company's pharmacists prepare and dispense drug and nutritional therapies by physician order and monitor the client's response to treatment. The pharmacist is available to the client's physician and the Company's nurses 24 hours a day, 7 days a week, to answer questions regarding drug actions and interactions, dosage requirements and interpretation of laboratory data. The pharmacist and nurse may jointly visit clients in their home to evaluate their response to treatment. The pharmacist is responsible for complying with State and Federal regulations regarding the operation of an infusion pharmacy. Pharmacy quality assurance procedures are followed to assure all therapies are appropriate and that Company standards are being followed. 4 A Hospice Division has been added in one market during fiscal 1995. Hospice provides palliative care through an interdisciplinary team to the terminally ill client and the client's family. The Hospice Division charges a per diem rate which includes medications, supplies, equipment, and team services. 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 Clients do not usually select their own home health providers; the Company's services are typically utilized as a result of referrals by other health professionals. The Company has identified many potential referral sources for home health services. These referral sources include physicians, hospitals, nursing homes, community resources, home care agencies, HMOs, word of mouth and the other division (Visit or Extended Hours). One of the Company's goals is to broaden the referral base with physicians, hospitals and health insurance payors. The Company believes the growth of its business depends on its ability to maintain and establish strong working relationships with hospitals, clinics, nursing homes, physician groups, and other health care providers and to keep them informed on the services the Company provides. In each geographic area in which the Company operates a professional health care liaison team consisting of home care coordinators, which are primarily registered nurses, is responsible for contact with referral sources. The team identifies client needs and emphasizes the benefits of the Company's services. The liaison team members contact physicians, hospitals, nursing homes and other health care providers to explain the services provided by the Company. Other health care professionals within the Company, such as a pharmacist or nurse specialist, may accompany the liaison team member to offer clinical or technical expertise. The General Manager of each branch is responsible for making contractual arrangements with hospitals, HMOs, governments, clients and large physician groups. GEOGRAPHIC EXPANSION There were no acquisitions in fiscal 1995. The Company entered three new geographic markets (Greensboro, NC; Toledo, OH and San Antonio, TX) and opened one office in an existing market in fiscal 1994. Greensboro was an expansion utilizing a Certificate of Need acquired in 1993. The other two markets were added through acquisitions. These acquisitions all met the Company's goals of entering the largest metropolitan markets and brings the number of geographic markets in which the Company operates to 19. COMPETITION The home health care business has become highly competitive. There are four 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 TEMPORARY EMPLOYMENT COMPANIES: These organizations provide home care and supplemental staffing to hospitals and nursing homes. NATIONAL SPECIALIZED HOME CARE PROVIDERS: These companies typically provide specialized care; for example, hospice, AIDS or infusion therapy, in multiple geographic markets. In the area of infusion therapy there are many significant competitors, although one provider is estimated to serve 40% of the home infusion therapy market. 5 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, and others provide a broad range of home care services. The Company believes that the primary competitive factors are availability of personnel, 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, branches are subject to certain federal laws and regulations. The Company's provision of pharmaceuticals and other supplies for home infusion therapy subjects the Company to additional regulation, such as the need for licensing as a pharmacy and the need to comply with various federal and state laws and regulations governing pharmacies and the handling of pharmaceuticals. The Company has all necessary licenses and permits for its current operations. Providers of home health services may be subject to increasing regulation in the future. Compliance with laws and 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. INSURANCE General and professional liability insurance are maintained by the Company which includes coverage up to $11,000,000 per claim and per year. There can be no assurance that the Company will not be subject to claims in excess of its insurance coverage or that such insurance will continue to be available. To date, the Company has had no professional liability losses. SERVICE MARKS AND TRADEMARKS The Company operates in certain markets under the name "In Home Health" and under the name "Home Health Plus" in the remaining markets, which are registered service marks. The Company believes that because its business derives principally from referrals by other health care providers, it is not materially dependent on any trademarks or service marks. EMPLOYEES On September 30, 1995, the Company employed 1,230 persons on a full- time basis and approximately 3,000 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. 6 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and members of the Board of Directors for the Company are as follows:
NAME AGE POSITION(S) HELD ---- ---- ---------------- Mark L. Gildea (1) 43 Chief Executive Officer and Director Judy M. Figge 47 President and Director Kenneth J. Figge (2) 62 Executive Vice President, Chief Financial Officer, Secretary and Director Cathy R. Reeves 47 Vice President and Chief Operating Officer Margaret L. Maxon 44 Vice President - Customer Relations James J. Lynn 53 Director Joseph Buckley (1)(2)(3) 48 Director James H. Rempe (1)(2)(3) 65 Director Donald C. Tomasso (1)(3) 50 Director
(1) Messrs. Gildea, Buckley, Rempe and Tomasso were elected as members of the Board of Directors effective October 24, 1995, which was also the effective date of resignations from the Board of Directors by S. Marcus Finkle and Sheldon Lieberbaum. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. Mr. Gildea has served as Chief Executive Officer of the Company since October 24, 1995 and as President, Alternate Site Services Division of Manor Healthcare since December 1994. Previously he served as Vice President of Managed Care of Manor Healthcare from December 1993 to December 1994. Prior to joining Manor Healthcare, he was employed as Executive Vice President of Option Care, Inc. from October, 1992 to December, 1993. He was previously employed by CareMark, Inc. for over 10 years, including as Area Vice President. Ms. Figge has been the President and a director of the Company since its founding in 1983. She served as the Company's Chief Executive Officer from 1988 to October 1995 and became the Chairman of the Board of Directors of the Company in October 1995. From 1981 until 1983, Ms. Figge was the President of a predecessor to the business of the Company. Ms. Figge is a registered nurse. She is the wife of Mr. Figge, identified below. Mr. Figge has been Secretary and a director of the Company since it was founded in April, 1983, became Treasurer of the Company in March 1984, and became Executive Vice President and Chief Financial Officer of the Company in 1987. From 1981 until 1983 Mr. Figge was a director of a predecessor to the business of the Company. Mr. Figge has worked for the Company on a part-time basis since March 1984 and on a full-time basis since January 1986. Prior to January 1982, Mr. Figge was employed by Honeywell, Inc. for 21 years in various positions in its Aerospace and Defense Group and International Division, including Vice President-Commercial Aviation Operations. He is the husband of Ms. Figge, identified above. Ms. Reeves became Vice President and Chief Operating Officer in July, 1992. Ms. Reeves joined the Company in September 1987 as General Manager for Home Health Plus in St. Louis, Missouri. She was first promoted to Midwest Regional Manager then Regional Vice President before her present capacity as Vice President and Chief Operating Officer. 7 Ms. Maxon became Vice President - Customer Relations in October, 1994. Ms. Maxon joined the Company in October 1990 as General Manager in the Chicago office of Home Health Plus. She was promoted to Area Manager and then Business Development Regional Manager prior to her current position. Ms. Maxon was employed by North Dallas Diagnostic Center as a sales representative in 1989 and 1990. Mr. Lynn has been a director of the Company since 1987 and has served as Training and Development Director of the Company since October 1995. He had served as Vice President - Marketing and Human Resources of the Company on a nominal basis from 1986 to 1990. Since 1981 Mr. Lynn has been a principal of Lynn & Associates, a management consulting company of which Mr. Lynn is the founder and President. Mr. Buckley has served as President, Assisted Living Division of Manor Healthcare since January 1995 and was Senior Vice President - Information Resources and Development of Manor Care, Inc. from June 1990 to January 1995. He previously served as Vice President - Information Resources of Manor Care, Inc. from July 1989 to June 1990 and as Vice President - Real Estate of Manor Care, Inc. from September 1983 to July 1989. Mr. Rempe has served as Senior Vice President, General Counsel and Secretary of Manor Care, Inc. since August 1981. He has served in the same capacity with Choice Hotels International, Inc. since February 1981 and with Manor Healthcare since December 1980. He is a Director of Vitalink Pharmacy Services, Inc., has served as its Secretary since January 1983 and was its Senior Vice President from January 1983 to September 1991. Mr. Tomasso has served as President, Long Term Care Division, of Manor Healthcare since January 1995, as President and Chief Operating Officer of Manor Healthcare from May 1991 to January 1995 and as a Director of Manor Healthcare since June 1991. He has been Chairman and Chief Executive Officer of Vitalink Pharmacy Services, Inc. since January 1995 and was its Vice Chairman from September 1991 to January 1995. From September 1990 to March 1991 he was President of AMF Bowling Centers, Inc. Mr. Tomasso was previously employed by Marriott Corporation for more than five years, including as Executive Vice President/General Manager of the Roy Rogers Division. ITEM 2. PROPERTIES The Company's executive offices are located in Minnetonka, Minnesota, a suburb of Minneapolis, in approximately 27,900 square feet of leased space. The Company's 41 office locations each lease approximately 2,000 to 7,000 square feet of office space in their respective locations. The Company's leased properties are suitable and adequate for its current needs and additional space is expected to be available as needed at competitive rates. ITEM 3. LEGAL PROCEEDINGS On October 28 and November 14, 1994 the Company filed two suits in Federal District Court against the U.S. Department of Health and Human Services (HHS) and several regional members of the Blue Cross Association which HHS uses to administer the Medicare program. The two suits allege that the defendants have unjustly withheld approximately $8,800,000 in payments that are owed to the Company for services it provided to Medicare beneficiaries from 1988 through fiscal 1994. The court has not ruled on the two suits pending the outcome of administrative rulings by the HHS Provider Reimbursement Review Board concerning these disputes. Medicare payments to home health care providers are based on reimbursement of allowable costs incurred by the provider in serving Medicare beneficiaries. The Company alleges that the defendants have arbitrarily and capriciously disallowed reimbursement of a portion of In Home Health's personnel costs, primarily for home care coordinators and physical therapists, and have failed to provide the Company with a timely administrative hearing. The Company is also continuing to pursue administrative remedies on these and other disputed Medicare payment issues. See Note 5 of the financial statements for discussion on the Medicare cost reimbursement disputes. The Company is also 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. 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 1995. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's Common Stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and is traded on the NASDAQ National Market System under the symbol "IHHI". As of December 1, 1995 there were approximately 1,420 record holders of the common stock. The closing sale price for the common stock as reported by NASDAQ for each quarter of the two most recent fiscal years were: YEAR ENDED SEPTEMBER 30 ----------------------- 1995 1994 ---- ---- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter 2 5/8 1 13/16 4 1/16 2 1/2 Second Quarter 2 9/16 1 3/4 3 5/8 2 9/16 Third Quarter 2 15/16 2 3/16 2 13/16 1 15/16 Fourth Quarter 3 3/32 2 9/16 2 13/16 1 7/8 These prices do not include retail markups, markdowns or commissions and may not represent actual transactions. The Company is limited by its line of credit agreement in the amount of cash dividends it can pay and it presently intends to reinvest all earnings for continued expansion. ITEM 6. SELECTED FINANCIAL DATA (Dollars and Shares in Thousands, except per share amounts) STATEMENT OF INCOME DATA
YEAR ENDED SEPTEMBER 30 ----------------------------------------------------- 1995 1994 1993 1992 1991 Service revenue $ 129,816 $ 120,485 $ 103,761 $ 75,072 $ 36,929 Income from operations 3,774 1,353 2,432 3,840 1,850 Income before income taxes 3,007 684 1,952 3,716 1,755 Net income 1,621 247 1,015 2,303 1,037 Net income per share - primary .10 .02 .06 .15 .10 Weighted average common and common equivalent shares outstanding - primary 16,304 16,013 16,056 15,780 11,680
BALANCE SHEET DATA
SEPTEMBER 30 ----------------------------------------------------- 1995 1994 1993 1992 1991 Current assets $ 21,394 $ 23,926 $ 28,975 $ 25,955 $ 14,128 Current liabilities 21,289 20,707 19,457 9,072 4,724 Total assets 57,559 56,726 54,379 38,761 20,088 Long-term debt 2,443 3,304 4,740 3,552 1,275 Shareholders' equity 30,509 28,482 27,459 24,976 13,872
9 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 income and the percentage changes from year to year.
Percent Percent of Revenues Change ------------------------------------------------------------- 1994 1993 1995 1994 1993 to 1994 to 1995 - ------------------------------------------------------------------------------------------------------------ Revenue 100% 100% 100% 8% 16% Direct Costs of Revenue 57 58 55 7% 22% --- --- --- Gross Profit 43 42 45 9% 9% General, Administrative and Selling Expenses 40 41 43 5% 12% --- --- --- Income From Operations 3% 1% 2% 179% (44%) - -----------------------------------------------------------------------------------------------------------
Revenue for 1995 increased 8% over 1994. Revenue increased 11% as a result of increased services provided in geographic markets in which the Company operated at the beginning of the prior year ("existing markets"), 2% as a result of acquisitions made in 1994, and 2% as a result of a decrease in additions to the Medicare reserve. This is offset by a 7% decrease in revenue as a result of pricing and mix changes. Revenue for 1994 increased 16% over 1993. Revenue increased 17% as a result of increased services provided in geographic markets in which the Company operated at the beginning of the prior year ("existing markets"), and 5% as a result of acquisitions. This is offset by a 6% decrease in revenue as a result of the Medicare reserve (4%) and pricing and mix changes (2%). Medicare reserves of $1,435,000, $3,861,000 and $1,100,000 were recorded as adjustments to revenue in 1995, 1994 and 1993, respectively. The Company's growth within existing markets is the result of industry growth, the Company's marketing efforts and improved name recognition. In 1994 the Company entered the Toledo and San Antonio markets through acquisitions and expanded into the Greensboro market utilizing a Certificate of Need acquired in 1993. In 1993 the Company entered the Raleigh-Durham, Dallas and Norfolk geographic markets, all of which were through acquisitions. There were no acquisitions in 1995. The breakdown by division of the Company's total revenue is as follows:
Year Ended September 30 - ---------------------------------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------- Extended Hours Division 19% 18% 20% -- -- -- -- -- -- Visit Division - Service 78% 78% 77% Infusion Product 3% 4% 3% -- -- -- 81% 82% 80% -- -- -- -- -- --
Extended Hours Division revenue increased 11% and 7% in 1995 and 1994, respectively, and Visit Division revenue increased 7% and 18% in the comparable periods. Within the Visit Division, infusion product revenue decreased 12% in 1995 after an increase of 32% in 1994. The reduction in the rate of the Company's overall growth is due primarily to cash constraints resulting from disputes with Medicare fiscal intermediaries which are discussed under "Liquidity and Capital Resources" and Note 5 of the financial statements. Direct costs of revenue, as a percentage of sales, were 57%, 58% and 55% in 1995, 1994 and 1993, respectively. The change in 1995 was principally a result of the decrease in additions to the Medicare reserve as a percent of revenue. The change 10 in 1994, resulting from an increase of direct costs of 22% over 1993, whereas revenues increased only 16%, was due to volume increase, the recording of the revenue reserve which reduced revenues, fewer and smaller acquisitions and reductions in operational support staff resulting in a smaller relative increase in general, administrative and selling expense. Direct costs, as a percentage of revenue before Medicare reserves, were 56%, 56% and 54% in 1995, 1994 and 1993, respectively. Total operating expenses increased 6% in 1995 and 18% in 1994, which compares to the increase in revenues of 8% in 1995 and 16% in 1994. The smaller percentage increase in operating expenses as compared to revenue in 1995 was principally due to the reduction in additions to the Medicare reserve as a percent of revenue. The greater percentage increases in total operating costs in 1994, as compared to the revenue increases, are due to the growth in the less profitable Visit Division services and the increases in reserves for disputed costs (which reduce the magnitude of the increase in revenues). The gross profit percentage is 43% for 1995 and 42% for 1994. The increase in gross profit percent is principally a result of the reduction in addition to the Medicare reserve as a percent of revenue. Gross profit decreased in 1994 to 42% as compared to 45% in 1993. With the growth in the Company's operations, revenues and direct costs of revenues in 1994 have grown at a greater pace than general, administrative and selling expenses (see table above). The disproportionate increases in these elements, combined with the greater increase in direct costs of revenue (22%) in relation to the increase in revenue (16%), results in the decrease in gross profit. Gross profit, as a percentage of revenue before Medicare reserves, was 44%, 44% and 46% in 1995, 1994 and 1993, respectively. General, administrative and selling expenses as a percent of revenue decreased to 40% of revenue in 1995 compared to 41% and 43% in 1994 and 1993, respectively. The decrease in 1995 is principally a result of the reduction in additions to the Medicare reserve as a percent of revenue. The decrease in 1994 was due to revenue growth at locations acquired in prior years without related growth in expenses, as well as a conscious effort to control expense. Net interest expense increased $98,000 in 1995 over 1994 and $189,000 in 1994 over 1993. The increase was the result of Medicare repayment plans, long-term equipment leases and reduced short-term investments. Income taxes were 46%, 64% and 44% of pretax income in 1995, 1994 and 1993, respectively. The increase in 1994 in the effective tax rate is due to non-deductible expenses being a higher proportion of pretax earnings. Net income was $1,621,000, $247,000, and $1,015,000 for the years 1995, 1994 and 1993, respectively. The primary reason for the changes in profitability was the addition of reserves related to the Medicare payment dispute which is discussed below and in Note 5. Additions to the Medicare reserves totaled $1,435,000 in 1995, $3,861,000 in 1994 and $1,100,000 in 1993. LIQUIDITY & CAPITAL RESOURCES During fiscal 1995 the Company's cash and cash equivalents increased $2,754,000 to $3,665,000 at September 30, 1995. Total accounts receivable net of third party liabilities increased $760,000 in 1995. Improved collection efforts were offset by continued disputes concerning payment for services to Medicare beneficiaries. Approximately 76%, 74% and 73% of revenue for the years ended September 30, 1995, 1994 and 1993, respectively, was derived from services provided to Medicare beneficiaries. Payment for these services is made by the Medicare program based on reimbursable costs incurred in rendering the services. Payments are made via an interim payment rate as services are rendered. Cost reports are filed with Medicare on an annual basis, which are subject to audit and retroactive adjustment by Medicare. The Company reports revenue only for those costs that it believes are probable (as defined in Statement of Financial Accounting Standards No. 5) of recovery under the applicable Medicare statutes and regulations and reports its accounts receivable balances at net realizable value. The Company utilizes an extensive system of internal controls to ensure such proper reporting of revenues. The Company employs personnel with significant Medicare reimbursement experience to prepare its cost reports and to monitor its operations on an ongoing basis to identify and seek to minimize those costs which are not reimbursed. As a part of its system of internal controls, the Company uses a detailed analysis process in calculating its Medicare revenue at the time services are rendered. This process considers the nature and amounts of the disputed costs (as described in more detail below) along with several authoritative, legal and historical sources of information including: - - Applicable statutes and regulations, such as those contained in the Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care", Health Care Financing Administration 11 (HCFA) Publication 11 "Home Health Agency Manual", applicable sections of HCFA Publication 15-1 "Provider Reimbursement Manual" and intermediary letters and program memoranda issued by HCFA. - - Administrative decisions and rulings on related issues by the Provider Reimbursement Review Board and Administrative Law Judges. - - Judicial decisions from Federal District Courts on relevant cases. - - Consultation with independent industry experts such as Medicare Cost Reimbursement Consultants. - - Opinions of outside legal counsel who specialize in dealing with Medicare reimbursement issues. - - Historical knowledge gained internally from past Medicare audits. - - Meetings and other communication with Medicare Intermediaries, Blue Cross Association and HCFA. This detailed analysis process is updated on a quarterly basis, taking into account any new information (such as decisions relating to the Company's disputed costs, and administrative and judicial decisions relating to similar issues) that may affect the determination of the net realizable value of accounts receivable or of liabilities to repay amounts received for disputed costs. Results of this detailed analysis process are extrapolated to other unaudited cost reporting years for all of the Company's operations, including operations that have not yet been audited by Medicare, to estimate the gross amount of reimbursement that would be affected. The Company, through this ongoing control and monitoring process, provides a reserve (by means of a revenue reduction) for any costs incurred which the Company believes are not probable of recovery. This reserve is reported as a reduction of accounts receivable for disputed costs for which the Company may not ultimately receive payment. The Company has also reported as a liability disputed costs for which it has received payment, which may have to be returned to Medicare. Accordingly, the Company believes that its accounts receivable are stated at net realizable value, and that it has recorded all probable liabilities for repayment of disputed costs. Over the years, Medicare auditors employed by the Medicare fiscal intermediaries have, in connection with their retrospective audit process, taken certain positions with respect to certain types of costs, claiming that they are not reimbursable and thus not recoverable by the Company from the Medicare program. These positions are based on interpretations promulgated after the period covered by the cost reports and applied retroactively, interpretations of cost reimbursement principles that are contrary to the Company's interpretations, or on what the Company believes to be misapplications of specific reimbursement principles, that could not have been foreseen at the time services were rendered and revenue recorded. These positions taken by Medicare auditors are usually determined from Medicare's Notice of Program Reimbursement ("NPR") which typically are not received until two to three years after the services are rendered. In those situations where the Company decides to not challenge an NPR finding, any revenue relating to these costs, as well as the extrapolated impact, if any, on other open costs reporting years, if not written off or provided for earlier, is written off as a revenue reduction at that time. The results of all NPRs are included in the analysis process in calculating net Medicare revenue as described above. The Company has received NPRs challenging $12.1 million of costs as of September 30, 1995. There was an additional $15.1 million of costs at September 30, 1995 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($27.2 million at September 30, 1995) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately half of total disputed costs, is the treatment of certain personnel costs relating to the Company's community liaison positions, which Medicare auditors allege are unreimbursable sales costs; other costs in dispute relate to the cost of physical therapists employed by the Company, the method of allocation of administrative and general costs to branch operations, certain corporate expenses, and cost transfers within branch operations. These disputed costs (including the extrapolated impact) of $27.2 million at September 30, 1995 arose in the fiscal years ended September 30, 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4 million), and 1991 ($2.1 million). The amount of disputed costs has increased over the last several years as the Company's operations have grown, Medicare auditors have taken positions to disallow certain costs in certain cost reports as non-reimbursable, and the Company has extrapolated that amount of costs that may be challenged to other unaudited cost reporting years. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and the Health Care Financing Administration, and is vigorously pursuing these matters through administrative and legal channels. The disputed cost analysis process related to the community liaison and physical therapist positions (which comprise 60% of disputed costs) encompassed all of the authoritative, legal and historical sources discussed above. Based on this review the Company believes that the majority of the community liaison costs are probable of recovery, and that a relatively small portion of these costs are not probable of recovery. The Company has established, and is continuing to add to, a reserve for the portion of these costs not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether the level is appropriate. Nothing has occurred in the legal or administrative process which the Company is pursuing concerning the disputes which has caused the Company to conclude that the reserve should be changed. Therefore, no change has been made in the rate of reserve used to record additional reserves on community liaison related costs incurred on an ongoing basis. On the physical therapist issue, the Company believes Medicare has no 12 basis in the regulations for its disallowance of certain costs related to physical therapists employed by the Company, and therefore the Company has not established a reserve for these disputed costs. The Company has filed two suits against the U.S. Department of Health and Human Services ("HHS") and several members of the Blue Cross Association which act as fiscal intermediaries to administer the Medicare program. The two suits relate to the community liaison and physical therapist issues discussed above allege that the defendants have unjustly withheld payments that are owed to the Company for services it provided to Medicare beneficiaries from fiscal 1989 through fiscal 1994. Legal opinions have been received on both the community liaison and physical therapist issues from an attorney specializing in Medicare reimbursement issues indicating that it is probable that the Company will prevail in both issues. The Company, based on its analysis process, believes that recovery of $6,396,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of September 30, 1995. The net amount of disputed costs which the Company believes is probable of recovery has been included in revenues in the respective years in which services were rendered and, to the extent not paid to the Company, is included in accounts receivable. Total accounts receivable (net of reserves) due from Medicare at September 30, 1995 were $26,034,000, including the receivables (net of reserves) for disputed costs of $20,771,000. As of September 30, 1995 the Company had received $4,480,000 in payments from Medicare for disputed costs. Medicare may seek repayment for such amounts and accordingly, the potential liability for repayments is recorded as Accrued Liabilities - Third Party. The Company believes it is probable that it has not incurred any other liability to repay disputed costs. In view of the expectation that resolution of the disputed costs will not likely be accomplished within the next twelve months, related net receivables of $17,592,000 as of September 30, 1995 have been classified as a non-current asset. Operating activities provided $5,135,000, $982,000 and $951,000 in cash during 1995, 1994 and 1993, respectively. Total accounts receivable (current and long-term) decreased 7% during 1995 and increased 18% and 67% during 1994 and 1993, respectively. The decrease during 1995 was due to improved collection efforts and timing of payments from Medicare. The increase in 1994 was due to the Medicare disputes noted above. The increase in 1993 was due to increased revenue. The average age of total receivables is 87 and 102 days as of September 30, 1995 and 1994, respectively. Investing activities used $772,000, $1,519,000 and $3,152,000 in cash during 1995, 1994 and 1993, respectively. The Company acquired two companies during 1994 and three companies during 1993. The 1994 acquisitions were made with $341,000 in cash, issuance of 10,000 shares of common stock and the assumption of $264,000 in notes payable. In connection with expansion of the Company's operations, the Company acquired property and developed software, which was funded by $785,000 in cash and $1,256,000 of capitalized leases in 1995, $995,000 in cash and $753,000 of capitalized leases in 1994 and $2,466,000 in cash and $3,713,000 of capitalized leases in 1993. Financing activities used $1,609,000, $1,633,000 and $2,218,000 in cash during 1995, 1994 and 1993, respectively, principally for repayment of long-term debt. The Company has a line of credit with a commercial bank that expires in December 1995. Under the credit line, the Company may borrow or obtain letters of credit, all of which in the aggregate may not exceed the lesser of $7.5 million or a borrowing base (which was $5,906,000 at September 30, 1995) that consists of 80% of eligible accounts receivable. Substantially all the Company's receivables and general intangible assets are pledged to secure the credit line. As of September 30, 1995 the Company had no outstanding borrowings and had utilized $4,520,000 of the credit facility as the basis for a letter of credit. The interest rate on the line of credit is prime plus .75% (9.5% at September 30, 1995). The credit agreement obligates the Company to, among other things, maintain certain financial ratios and limits the payment of dividends. In December 1995, the Company has obtained a new letter of credit facility for $4,520,000. The letter of credit is collateralized by secured investments and will expire on December 12, 1996. On October 24, 1995 the Company consummated a Securities Purchase and Sale Agreement with Manor Healthcare Corp. under which the Company received net cash proceeds of approximately $18 million. These proceeds will be available to the Company for general corporate purposes. The Company anticipates that it will principally use the proceeds to invest in the expansion of Company operations into the eight geographic areas where Manor Healthcare is present and the Company is not, and to finance the Company's continued operations. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page(s) Consolidated Balance Sheets . . . . . . . . . . . . . . . 15-16 Consolidated Statements of Income . . . . . . . . . . . 17 Consolidated Statements of Shareholders' Equity . . . . . 18 Consolidated Statements of Cash Flows . . . . . . . . . .19 Notes to Consolidated Financial Statements . . . . . . . 20-29 Independent Auditors' Report . . . . . . . . . . . . . . 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1995 AND 1994 (DOLLARS AND SHARES IN THOUSANDS) ASSETS
1995 1994 --------- --------- Current Assets: Cash and cash equivalents $ 3,665 $ 911 Accounts receivable (net of allowances of $867 and $1,029 in 1995 and 1994, respectively) 14,130 20,318 Prepaid income tax - 459 Deferred income tax 2,129 800 Prepaid expenses and other current assets 1,470 1,438 --------- --------- Total current assets 21,394 23,926 --------- --------- Property: Furniture and equipment 9,997 9,007 Leasehold improvements 807 654 Computer equipment and software 7,480 7,057 --------- --------- Total 18,284 16,718 Accumulated depreciation (7,163) (4,993) --------- --------- Property - Net 11,121 11,725 --------- --------- Other Assets: Accounts receivable 17,592 13,830 Goodwill 5,748 5,906 Covenants not to compete - 128 Deposits 558 559 Other assets 1,146 652 --------- --------- Total other assets 25,044 21,075 --------- --------- Total Assets $ 57,559 $ 56,726 --------- --------- --------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 15 IN HOME HEALTH, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1995 AND 1994 (DOLLARS AND SHARES IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994 --------- --------- Current Liabilities: Current maturities of long-term debt $ 2,041 $ 2,286 Accounts payable 4,468 3,821 Accrued liabilities: Third party 4,480 7,666 Compensation 4,142 3,486 Insurance 5,127 2,960 Income tax 240 - Other 791 488 --------- --------- Total current liabilities 21,289 20,707 --------- --------- Long-Term Debt 2,443 3,304 Deferred Revenue 1,242 1,632 Deferred Rent Payable 351 516 Deferred Income Tax 1,725 2,085 Commitments and Contingencies - - Shareholders' Equity: Preferred stock - authorized 1,000 shares - - Common stock - $.01 par value: authorized - 40,000 shares; issued and outstanding -1995 - 16,277 shares 1994 - 15,944 shares 163 159 Additional paid-in capital 24,230 23,828 Retained earnings 6,116 4,495 --------- --------- Total shareholders' equity 30,509 28,482 --------- --------- Total Liabilities and Shareholders' Equity $ 57,559 $ 56,726 --------- --------- --------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 ----------- ----------- ----------- Revenue (net of Medicare reserves of $1,435, $3,861 and $1,100 in 1995, 1994 and 1993, respectively) $ 129,816 $ 120,485 $ 103,761 ----------- ----------- ----------- Operating Expenses: Direct costs of revenue (primarily payroll related costs) 74,082 69,411 57,059 General, administrative and selling expenses 51,960 49,721 44,270 ----------- ----------- ----------- Total operating expenses 126,042 119,132 101,329 ----------- ----------- ----------- Income from Operations 3,774 1,353 2,432 Interest: Interest expense 790 698 575 Interest income (23) (29) (95) ----------- ----------- ----------- Net interest expense 767 669 480 Income Before Income Taxes 3,007 684 1,952 Income Tax Expense 1,386 437 865 ----------- ----------- ----------- Income Before Cumulative Effect of Change in Accounting Principle 1,621 247 1,087 Cumulative Effect of Change in Accounting Principle - - 72 Net Income $ 1,621 $ 247 $ 1,015 ----------- ----------- ----------- ----------- ----------- ----------- Net Income per Common and Common Equivalent Share $ .10 $ .02 $ .06 ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Common and Common Equivalent Shares Outstanding 16,304 16,013 16,056 ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME PER SHARE IMPACT OF THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE IS LESS THAN $.01. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (DOLLARS AND SHARES IN THOUSANDS)
COMMON STOCK ADDITIONAL ------------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ----------- ----------- ------------- ----------- Balance - September 30, 1992 15,151 $ 151 $ 21,592 $ 3,233 Common stock issued for: Employee stock plans 194 2 521 - Acquisitions 173 2 943 - Net income - - - 1,015 ----------- ----- ------------- ----------- Balance - September 30, 1993 15,518 155 23,056 4,248 Common stock issued for: Employee stock plans 266 3 745 - Acquisitions 10 - 28 - Exchange for warrants 150 1 (1) - Net income - - - 247 ----------- ----- ------------- ----------- Balance - September 30, 1994 15,944 159 23,828 4,495 Common stock issued for: Employee stock plans 442 5 685 - Exchange for options (109) (1) (283) - Net income - - - 1,621 ----------- ----- ------------- ----------- Balance - September 30, 1995 16,277 $ 163 $ 24,230 $ 6,116 ----------- ----- ------------- ----------- ----------- ----- ------------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 IN HOME HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (DOLLARS IN THOUSANDS)
1995 1994 1993 --------- --------- ---------- Cash Flows From Operating Activities: Net income $ 1,621 $ 247 $ 1,015 Adjustments: Depreciation and amortization 3,226 3,233 2,146 Accounts receivable (760) (5,008) (11,062) Prepaid expenses and other assets (833) (210) (141) Accounts payable 647 (216) 545 Accrued liabilities 3,478 1,196 7,903 Deferred revenue (390) 1,632 - Deferred rent payable (165) (20) 139 Deferred income tax (1,689) 128 406 --------- --------- ---------- Net cash provided by operating activities 5,135 982 951 Cash Flows From Investing Activities: Acquisition of businesses - (389) (699) Acquisition of property (785) (995) (2,466) Advances to officers and employees 13 (135) 13 --------- --------- ---------- Net cash used by investing activities (772) (1,519) (3,152) Cash Flows From Financing Activities: Payment of long-term debt (2,015) (2,381) (2,741) Proceeds from issuance of common stock 406 748 523 --------- --------- ---------- Net cash used by financing activities (1,609) (1,633) (2,218) Cash and Cash Equivalents: Net increase (decrease) 2,754 (2,170) (4,419) Beginning of year 911 3,081 7,500 --------- --------- ---------- End of year $ 3,665 $ 911 $ 3,081 --------- --------- ---------- --------- --------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 IN HOME HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS - In Home Health specializes in high-quality health services to clients in their own homes, including infusion therapy, high-tech nursing, rehabilitation and personal care. BASIS OF CONSOLIDATION - The consolidated financial statements include the accounts of In Home Health, Inc. and its subsidiaries (the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS - Securities which are readily convertible into cash with original maturities of three months or less are considered cash equivalents. NOTES RECEIVABLES FROM OFFICER - Included in prepaid expenses and other current assets are advances to an officer of the Company in the amount of $150,000 as of September 30, 1995 and 1994. PROPERTY AND PROPERTY UNDER CAPITALIZED LEASES - Property and property under capitalized leases are stated at cost and depreciated or amortized over estimated useful lives (from three to twelve years) using the straight-line method. Property acquired by capital lease for the years ended September 30, 1995, 1994 and 1993 was $1,256,000, $753,000 and $3,713,000, respectively. GOODWILL - Costs in excess of net assets of acquired businesses have been capitalized and are being amortized over 40 years. Accumulated amortization was $578,000 and $420,000 at September 30, 1995 and 1994, respectively. DEFERRED REVENUE - Deferred revenue relates to the timing difference in recording certain software development costs for financial statement purposes and Medicare cost reporting purposes. Incremental costs relating to the development of software for certain major management information system projects undertaken during 1992 through 1994 have been capitalized and are included in computer equipment and software on the balance sheet. For Medicare cost reimbursement purposes, the Company has filed amended cost reports for prior years to include in reimbursable costs the amount of expenditures in the year they were incurred. 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 $1,799,000 and $2,368,000 as of September 30, 1995 and 1994, respectively. DEFERRED RENT PAYABLE - Deferred rent payable has been recorded for long- term office space operating leases which contain initial rent inducements. Rental expense is being amortized on a straight-line basis over the terms of the operating leases. INCOME TAXES - The Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes" in 1993. Under SFAS No. 109, the deferred tax provision is determined under the liability method. Under this method, deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. REVENUE RECOGNITION - Revenues are recognized at the time the service is provided to the client. The Company records revenue for services to Medicare beneficiaries at the time the services are rendered and based on the Medicare cost reimbursement principles. Under those principles, Medicare reimburses the Company for the reasonable costs (as defined) incurred in providing care to Medicare beneficiaries. The Company reports as reimbursable costs in the Medicare cost reports only those costs it believes to be reimbursable under the applicable Medicare cost reimbursement principles. In determining the amount of revenue to be recorded, those costs are reduced for costs that are in excess of reimbursable cost limits, and for costs for 20 which reimbursement may be questionable based on the Company's understanding of reimbursement principles in effect at that time. Accordingly, this process results in recording revenue only for the costs that the Company believes are reasonably assured of recovery. Refer to Note 5 for additional information. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - Net income per common and common equivalent share is computed by dividing net income by the weighted average number of common stock and dilutive common stock equivalents outstanding. Common stock equivalents result from dilutive stock options and warrants. Net earnings per share assuming full dilution would be substantially the same. 2. ACQUISITIONS The Company acquired all of the issued and outstanding capital stock of two and three home health care companies during the years ended September 30, 1994 and 1993, respectively. There were no acquisitions during the year ended September 30, 1995. The acquisitions accounted for as purchases for financial reporting purposes are summarized as follows (in thousands):
------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- CONSIDERATION: CASH ACQUISITION NOTES PAYABLE ISSUED TOTAL VALUE OF GOODWILL COMPANY NAME DATE COMMON STOCK CONSIDERATION RECORDED PAID ------------------------------------------------------------------------------------------------------------------------- CareServices of Raleigh Limited January, 1993 $ 210 $ 569 $ 548 Partnership, CareServices of - Raleigh, NC, Inc. and 58 shares CareServices of Greensboro, NC, Inc. ------------------------------------------------------------------------------------------------------------------------- Accent on Care Home Health January, 1993 $ 25 $ 100 $ 155 Services, Ltd. 25 8 shares ------------------------------------------------------------------------------------------------------------------------- Home Care Resources, Inc., HCR February, 1993 $ 205 $ 741 $ 852 Associates, Inc. and Physician - Home Health Care, Inc. 107 shares ------------------------------------------------------------------------------------------------------------------------- ENS, Inc. January, 1994 $ 41 $ 69 $ 232 - 10 shares ------------------------------------------------------------------------------------------------------------------------- RI Partners and RHC Partners May, 1994 $ 300 $ 300 $ 516 - - ------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------
The purchase price has been allocated to the net assets acquired, including intangible assets, based on their fair market values at the acquisition dates. The net assets acquired in these acquisitions consisted primarily of accounts receivable and current liabilities. The consolidated statements of operations include the results of operations of these companies since their respective acquisition dates. The fair market value of the common stock issued for the acquisitions in 1994 and 1993 was $28,000 and $945,000, respectively. Additional goodwill of $421,000 was recorded in 1993 related to 1992 acquisitions. Notes payable issued for the acquisitions in 1993 was $25,000. The Company incurred $95,000 and $264,000 of costs in 1994 and 1993, respectively, in connection with the acquisitions. 21 The following table summarizes the Company's unaudited pro forma operating results as if the 1994 acquisitions had occurred at the beginning of 1993 (in thousands, except per share amounts):
YEAR ENDED SEPTEMBER 30 1994 1993 ---- ---- Service revenue $121,277 $105,142 ------- ------- ------- ------- Net income $ 250 $ 996 ------- ------- ------- ------- Net income per common and common equivalent share $ .02 $ .06 ------- ------- ------- -------
The pro forma operating results do not purport to be indicative of the results that actually would have been obtained had the combined operations been conducted during the periods presented and are not intended to be a projection of future operating results. 3. NOTE PAYABLE - BANK The Company has an agreement with a bank which provides for a line of credit equal to the lesser of $7.5 million or a borrowing base (which was $5,906,000 at September 30, 1995) that consists of 80% of eligible accounts receivable. As of September 30, 1995 the Company had utilized $4,520,000 of the facility for an irrevocable standby letter of credit to secure workers' compensation commitments. The interest rate on the line of credit is prime plus .75% (9.5% at September 30, 1995). Borrowings are due at the expiration of the agreement and are collateralized by accounts receivable and intangibles. The Company had no bank borrowings at September 30, 1995 and 1994. The current line of credit expires on December 29, 1995. The Company has obtained a new letter of credit facility for $4,520,000. The letter of credit is collateralized by secured investments and will expire on December 12, 1996. 4. LONG-TERM DEBT Following is a summary of long-term debt at September 30 (in thousands):
1995 1994 ------- ------- Obligations under capitalized leases, up to 17.3% due through July 2000 $ 4,484 $ 5,220 Installment notes payable, secured by property - 370 ----- ----- Total 4,484 5,590 Less current maturities 2,041 2,286 ----- ----- Long-term debt $ 2,443 $ 3,304 ----- ----- ----- -----
22 Future minimum payments as of September 30, 1995 are as follows (in thousands):
YEAR ENDING CAPITALIZED SEPTEMBER 30 LEASES --------------------- ----------- 1996 $ 2,566 1997 1,574 1998 812 1999 214 2000 44 ----- Total minimum payments 5,210 Less amounts representing interest 726 ----- Present value of future minimum payments 4,484 Less current maturities 2,041 ----- Long-term debt $ 2,443 ----- -----
Assets recorded under capital leases are included in property at cost of $9,885,000 and $7,993,000, and accumulated depreciation of $3,719,000 and $1,854,000 at September 30, 1995 and 1994, respectively. Interest paid for the years ended September 30, 1995, 1994 and 1993 was $779,000, $687,000 and $546,000, respectively. 5. MEDICARE COST REIMBURSEMENT Approximately 76%, 74% and 73% of revenue for the years ended September 30, 1995, 1994 and 1993, respectively, was derived from services provided to Medicare beneficiaries. Payment for these services is made by the Medicare program based on reimbursable costs incurred in rendering the services. Payments are made via an interim payment rate as services are rendered. Cost reports are filed with Medicare on an annual basis, which are subject to audit and retroactive adjustment by Medicare. The Company reports revenue only for those costs that it believes are probable (as defined in Statement of Financial Accounting Standards No. 5) of recovery under the applicable Medicare statutes and regulations and reports its accounts receivable balances at net realizable value. The Company utilizes an extensive system of internal controls to ensure such proper reporting of revenues. The Company employs personnel with significant Medicare reimbursement experience to prepare its cost reports and to monitor its operations on an ongoing basis to identify and seek to minimize those costs which are not reimbursed. As a part of its system of internal controls, the Company uses a detailed analysis process in calculating its Medicare revenue at the time services are rendered. This process considers the nature and amounts of the disputed costs (as described in more detail below) along with several authoritative, legal and historical sources of information including: - Applicable statutes and regulations, such as those contained in the Title XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A) "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care", Health Care Financing Administration (HCFA) Publication 11 "Home Health Agency Manual", applicable sections of HCFA Publication 15-1 "Provider Reimbursement Manual" and intermediary letters and program memoranda issued by HCFA. - Administrative decisions and rulings on related issues by the Provider Reimbursement Review Board and Administrative Law Judges. - Judicial decisions from Federal District Courts on relevant cases. - Consultation with independent industry experts such as Medicare Cost Reimbursement Consultants. - Opinions of outside legal counsel who specialize in dealing with Medicare reimbursement issues. - Historical knowledge gained internally from past Medicare audits. - Meetings and other communication with Medicare Intermediaries, Blue Cross Association and HCFA. This detailed analysis process is updated on a quarterly basis, taking into account any new information (such as decisions relating to the Company's disputed costs, and administrative and judicial decisions relating to similar issues) that may affect the determination of the net realizable value of accounts receivable or of liabilities to repay amounts received for disputed costs. Results of this detailed analysis process are extrapolated to other unaudited cost reporting years for all of the Company's 23 operations, including operations that have not yet been audited by Medicare, to estimate the gross amount of reimbursement that would be affected. The Company, through this ongoing control and monitoring process, provides a reserve (by means of a revenue reduction) for any costs incurred which the Company believes are not probable of recovery. This reserve is reported as a reduction of accounts receivable for disputed costs for which the Company may not ultimately receive payment. The Company has also reported as a liability disputed costs for which it has received payment, which may have to be returned to Medicare. Accordingly, the Company believes that its accounts receivable are stated at net realizable value, and that it has recorded all probable liabilities for repayment of disputed costs. Over the years, Medicare auditors employed by the Medicare fiscal intermediaries have, in connection with their retrospective audit process, taken certain positions with respect to certain types of costs, claiming that they are not reimbursable and thus not recoverable by the Company from the Medicare program. These positions are based on interpretations promulgated after the period covered by the cost reports and applied retroactively, on interpretations of cost reimbursement principles that are contrary to the Company's interpretations, or on what the Company believes to be misapplications of specific reimbursement principles, that could not have been foreseen at the time services were rendered and revenue recorded. These positions taken by Medicare auditors are usually determined from Medicare's Notice of Program Reimbursement ("NPR") which typically are not received until two to three years after the services are rendered. In those situations where the Company decides to not challenge an NPR finding, any revenue relating to these costs, as well as the extrapolated impact, if any, on other open costs reporting years, if not written off or provided for earlier, is written off as a revenue reduction at that time. The results of all NPRs are included in the analysis process in calculating net Medicare revenue as described above. The Company has received NPRs challenging $12.1 million of costs as of September 30, 1995. There was an additional $15.1 million of costs at September 30, 1995 related to open cost reporting years that are similar to the costs that have been challenged on NPRs. Together these amounts ($27.2 million at September 30, 1995) comprise the total amount the Company considers to be disputed costs. The major cost category in dispute, accounting for approximately half of total disputed costs, is the treatment of certain personnel costs relating to the Company's community liaison positions, which Medicare auditors allege are unreimbursable sales costs; other costs in dispute relate to the cost of physical therapists employed by the Company, the method of allocation of administrative and general costs to branch operations, certain corporate expenses, and cost transfers within branch operations. These disputed costs (including the extrapolated impact) of $27.2 million at September 30, 1995 arose in the fiscal years ended September 30, 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million), 1992 ($4.4 million), and 1991 ($2.1 million). The amount of disputed costs has increased over the last several years as the Company's operations have grown, Medicare auditors have taken positions to disallow certain costs in certain cost reports as non-reimbursable, and the Company has extrapolated that amount of costs that may be challenged to other unaudited cost reporting years. The normal Medicare administrative appeal process may take several years to resolve these types of disputes. The Company disagrees with the positions taken by the Medicare fiscal intermediaries' auditors and the Health Care Financing Administration, and is vigorously pursuing these matters through administrative and legal channels. The disputed cost analysis process related to the community liaison and physical therapist positions (which comprise 60% of disputed costs) encompassed all of the authoritative, legal and historical sources discussed above. Based on this review the Company believes that the majority of the community liaison costs are probable of recovery, and that a relatively small portion of these costs are not probable of recovery. The Company has established, and is continuing to add to, a reserve for the portion of these costs not considered probable of recovery. Since the reserves have been established, the Company has continued to review whether the level is appropriate. Nothing has occurred in the legal or administrative process which the Company is pursuing concerning the disputes which has caused the Company to conclude that the reserve should be changed. Therefore, no change has been made in the rate of reserve used to record additional reserves on community liaison related costs incurred on an ongoing basis. On the physical therapist issue, the Company believes Medicare has no basis in the regulations for its disallowance of certain costs related to physical therapists employed by the Company, and therefore the Company has not established a reserve for these disputed costs. The Company has filed two suits against the U.S. Department of Health and Human Services ("HHS") and several members of the Blue Cross Association which act as fiscal intermediaries to administer the Medicare program. The two suits relate to the community liaison and physical therapist issues discussed above allege that the defendants have unjustly withheld payments that are owed to the Company for services it provided to Medicare beneficiaries from fiscal 1989 through fiscal 1994. Legal opinions have been received on both the community liaison and physical therapist issues from an attorney specializing in Medicare reimbursement issues indicating that it is probable that the Company will prevail in both issues. The Company, based on its analysis process, believes that recovery of $6,396,000 of total disputed costs (including the extrapolated impact) may not be probable and, accordingly, has established reserves which totaled that amount as of September 30, 1995. The net amount of disputed costs which the Company believes is probable of recovery has been included in revenues 24 in the respective years in which services were rendered and, to the extent not paid to the Company, is included in accounts receivable. Total accounts receivable (net of reserves) due from Medicare at September 30, 1995 were $26,034,000, including the receivables (net of reserves) for disputed costs of $20,771,000. As of September 30, 1995 the Company had received $4,480,000 in payments from Medicare for disputed costs. Medicare may seek repayment for such amounts and accordingly, the potential liability for repayments is recorded as Accrued Liabilities - Third Party. The Company believes it is probable that it has not incurred any other liability to repay disputed costs. In view of the expectation that resolution of the disputed costs will not likely be accomplished within the next twelve months, related net receivables of $17,592,000 as of September 30, 1995 have been classified as a non-current asset. The reserve balance of $6,396,000 at September 30, 1995 has been recorded during fiscal 1993 ($1,100,000), 1994 ($3,861,000), and 1995 ($1,435,000), based on the timing of information that was available to make an assessment of assurance of recovery of the disputed costs. In connection therewith, based on information that became available in the last fiscal quarter of 1994, adjustments to the Medicare reserves of $2,639,000 were recorded in that fiscal quarter. 6. COMMITMENTS AND CONTINGENCIES The Company is obligated under several noncancelable operating leases for office space and equipment. Total rental expense for all operating leases was $4,005,000, $3,666,000 and $2,763,000, for the years ended September 30, 1995, 1994 and 1993, respectively. Future minimum rental payments as of September 30, 1995 for operating leases with noncancelable terms in excess of one year are as follows (in thousands):
YEAR ENDING SEPTEMBER 30 ----------------------- 1996 $ 3,381 1997 2,567 1998 1,592 1999 1,110 2000 435 Thereafter 369 ----- Total minimum payments $ 9,454 ----- -----
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. 25 7. CAPITAL TRANSACTIONS STOCK OPTION PLAN The Company has adopted a stock option plan to provide for the granting of options to purchase up to a maximum of 3,150,000 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):
NUMBER OF SHARES ------------------------ AVAILABLE FOR GRANT OUTSTANDING EXERCISE PRICES --------- ----------- --------------- Balance - September 30, 1992 854 1,139 $ .53 to $5.38 Options granted (449) 449 $ 2.94 to $5.94 Options exercised - (76) $ .69 to $4.44 Options cancelled 109 (109) $ 1.03 to $5.50 ---- ----- Balance - September 30, 1993 514 1,403 $ .53 to $5.94 Options granted (360) 360 $ 1.88 to $4.06 Options exercised - (117) $ .54 to $2.69 Options cancelled 211 (211) $ 1.03 to $5.94 ---- ----- Balance - September 30, 1994 365 1,435 $ .53 to $5.63 Additional options authorized 650 - Options granted (637) 637 $ 1.75 to $3.06 Options exercised - (314) $ .53 to $2.50 Options cancelled 273 (273) $ 1.03 to $5.44 ---- ----- Balance - September 30, 1995 651 1,485 $ .53 to $5.63 ---- ----- ---- -----
At September 30, 1995, options for the purchase of 698,000 shares of common stock are currently exercisable at prices ranging from $.53 to $5.63 per share. In 1995, two officers of the Company surrendered 109,000 shares of common stock to the Company at fair market value in lieu of cash payment for the exercise of 194,000 options. WARRANTS As of September 30, 1995, private warrants issued in January 1993 totalling 96,000 and expiring January 1996, are exercisable at $6.00 per share. In April 1994, 150,000 shares of common stock were issued in exchange for 300,000 private warrants issued in January 1991 and expiring January 1996. STOCK PURCHASE PLAN The Company has a plan whereby eligible employees may purchase the Company's common stock at the lower of 85% of the market price at the time of grant or the time of purchase. There are 700,000 shares reserved for this plan of which 124,000 shares were issued on September 30, 1995 at $1.96 per share, 144,000 shares were issued on September 30, 1994 at $1.96 per share and 116,000 shares were issued on September 30, 1993 at $3.40 per share. 26 8. INCOME TAXES The income tax provision for the years ended September 30, 1995, 1994 and 1993 consisted of (in thousands):
1995 FEDERAL STATE TOTAL ------- ----- ----- Current $ 2,505 $ 593 $ 3,098 Deferred (1,380) (332) (1,712) ------ ---- ------ $ 1,125 $ 261 $ 1,386 ------ ---- ------ ------ ---- ------ 1994 FEDERAL STATE TOTAL ------- ----- ----- Current $ 483 $ 46 $ 529 Deferred (138) 46 (92) ------ ---- ------ $ 345 $ 92 $ 437 ------ ---- ------ ------ ---- ------ 1993 FEDERAL STATE TOTAL ------- ----- ----- Current $ 437 $ 94 $ 531 Deferred 291 43 334 ------ ---- ------ $ 728 $ 137 $ 865 ------ ---- ------ ------ ---- ------
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, 1995, 1994 and 1993 as follows (in thousands):
1995 1994 1993 ------ ------ ------ Tax at Federal statutory rate $ 1,022 $ 233 $ 664 State income taxes, net of Federal benefit 231 92 90 Officers life insurance 24 24 45 Goodwill amortization 33 44 44 Meals and entertainment 81 32 34 Other (5) 12 (12) ----- ---- ---- Income tax expense $ 1,386 $ 437 $ 865 ----- ---- ---- ----- ---- ----
The tax benefit related to the exercise of employee stock options is recorded as additional paid-in-capital. Income taxes paid during the years ended September 30, 1995, 1994 and 1993 were $2,376,000, $31,000 and $1,566,000, respectively. The Company adopted SFAS No. 109 as of the beginning of fiscal year 1993. The cumulative effect on prior years of this change in accounting principle reduced 1993 net income by $72,000, and is reported separately in the consolidated statement of income for the year ended September 30, 1993. The tax effect of the temporary differences giving rise to the Company's deferred tax assets and liabilities at September 30, 1995 and 1994 are as follows:
1995 1994 ------------------------ ------------------------ CURRENT LONG-TERM CURRENT LONG-TERM ASSET LIABILITY ASSET LIABILITY ------- --------- ------- --------- Bad debt allowance $ 335 $ - $ 397 $ - Depreciation and amortization - 2,031 - 2,047 Insurance accruals 1,397 - 225 - Capitalized items expensed for taxes - 372 - 516 Deferred revenue - (479) - - Vacation 318 - 240 - AMT credit carry forward - - - (321) Other 79 (199) (62) (157) ----- ----- --- ----- $ 2,129 $ 1,725 $ 800 $ 2,085 ----- ----- --- ----- ----- ----- --- -----
27 9. SUBSEQUENT EVENTS On October 24, 1995, the Company closed an agreement with Manor Healthcare Corp., a wholly owned subsidiary of Manor Care, Inc., a national health care and international lodging firm. Pursuant to this agreement, the Company conducted a cash self-tender offer and purchased 6,750,000 shares of its common stock (41% of outstanding) at $3.40 per share and Manor Healthcare purchased 6,750,000 shares from the Company at $3.40 per share. In addition, Manor Healthcare invested $20 million to purchase redeemable convertible preferred shares and a warrant to purchase 6,000,000 shares of common stock at an exercise price of $3.75 per share. These transactions have resulted in net cash proceeds to the Company of $18 million (after transaction costs of approximately $2 million). The redeemable preferred shares may be redeemed in cash at the option of the holder or the Company on and after the fifth anniversary of their issuance. The redeemable preferred shares have voting rights on an as-if converted basis, and are initially convertiable into 10 million common shares at an initial conversion price of $2 per share. The redeemable preferred shares bear dividends payable quarterly at 12% per annum. The Company's pro forma loss per share for 1995 would be $.07 assuming the transactions occurred on October 1, 1994, as a result of an assumed dividend on redeemable preferred shares of $2,400,000 and redeemable preferred share accretion of $291,000. The proforma effect on shareholders' equity of the Company at September 30, 1995, assuming the transactions occurred on such date, would be a reduction of $500,000 (comprised of the $2 million in transaction costs less the $1.5 million fair value of the warrant issued). Upon the close of the agreement, the Company granted options to purchase 650,000 shares of the Company's common stock to certain Company officers and employees with exercise prices equal to the fair value of the Company's common stock at the date of grant. 10. QUARTERLY FINANCIAL DATA (UNAUDITED) FISCAL 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Service revenue $32,334 $32,593 $32,239 $32,650 Income from operations 995 1,018 820 941 Net income 422 421 347 431 Net income per share .03 .03 .02 .02
FISCAL 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Service revenue $29,780 $30,167 $30,591 $29,947 Income (loss) from operations 1,375 979 597 (1,598) Net income (loss) 646 410 152 (961) Net income (loss) per share .04 .03 .01 (.06)
See Note 5 for a discussion of a fourth quarter adjustment recorded to the Company's Medicare reserve. 11. RECENTLY ISSUED ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," which will be effective in fiscal 1997. The Company has not determined the effect of the new standard on the financial statements. 28 INDEPENDENT AUDITORS' REPORT In Home Health, Inc.: We have audited the accompanying consolidated balance sheets of In Home Health, Inc. as of September 30, 1995 and 1994 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of In Home Health, Inc. as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 8 to the consolidated financial statements, effective October 1, 1992 the Company changed its method of accounting for income taxes. /s/ Deloitte & Touche LLP Minneapolis, Minnesota November 22, 1995, except for the second paragraph of Note 3, as to which the date is December 14, 1995. 29 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 1996 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 1996 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 1996 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 1996 Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS A PART OF THIS REPORT 1. FINANCIAL STATEMENTS The Consolidated Financial Statements filed with this Form 10-K are listed in Item 8 above. 2. FINANCIAL STATEMENT SCHEDULES The schedules required to be filed as part of this Annual Report on Form 10-K are listed below with their location in this report. PAGE ---- In Home Health, Inc.: Independent Auditors' Report . . . . . . . . . . . . . . . . . . 29 Schedules for the Years Ended September 30, 1995, 1994 and 1993: II - Valuation and Qualifying Accounts and Reserves . . . . . 34 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 1995. 30 (c) EXHIBITS:
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Restated Articles of Incorporation, as amended. 3.2 Restated Bylaws. 4.1 Form of specimen Common Stock certificate. (i) 4.2 Form of specimen certificate for Series A Preferred Stock. 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. 10.1 Revolving Credit Agreement dated September 24, 1992 as amended, with First Bank National Association. 10.2 Management Incentive Plan in place for fiscal 1995. 10.3 Lease agreement dated October 24, 1991 with Minnesota CC Properties, as amended. 10.4 The Company's 1987 Stock Option Plan, as amended. 10.5 The Company's 1995 Stock Option Plan, as amended. 10.6 Stock exchange agreement between In Home Health, Inc. and Robert L. Hancock dated January 11, 1993. (ii) 10.7 Asset purchase agreement between In Home Health, Inc., Robert L. Hancock and CareServices of Raleigh Limited Partnership dated January 11, 1993. (ii) 10.8 Asset purchase agreement between In Home Health, Inc., Carolyn Kelley and Accent On Care Home Health Services, Ltd. dated January 22, 1993. (iii) 10.9 Stock exchange agreement between In Home Health, Inc., John B. Syer, Scott L. Pachter, R. Evelyn Wool, Anita W. Fuering, Carol L. Michaelis, Cynthia A. Heide, Jane M. Hixon, Margaret D. Sullivan and Stephanie H. Shipman dated February 12, 1993. (iv) 10.10 Asset purchase agreement between In Home Health, Inc., Carol I. Peake and ENS, Inc. dated January 14, 1994. (vi) 10.11 Partnership purchase agreement between In Home Health, Inc. and Riata Health Care, Inc., Red Health Care, Inc., Crimson Health Care, Inc., William W. Sullivan, Jr., Warren Neely and Dennis Gutzman dated May 23, 1994. (vii) 10.12 Asset purchase agreement between In Home Health, Inc., RI Investments, Inc. Green Investments, Inc., Maroon Investments, Inc., William W. Sullivan, Jr., Warren Neely, Dennis Gutzman and RI Partners dated May 23, 1994. (vii) 10.13 Securities Purchase and Sale Agreement dated May 2, 1995, as amended between the Company and Manor Healthcare Corp. (viii) 10.14 Employment Agreement between the Company and Judy M. Figge dated May 2, 1995. (viii) 10.15 Employment Agreement between the Company and Kenneth J. Figge dated May 2, 1995. (viii) 10.16 Employment Agreement between the Company and James J. Lynn dated October 24, 1995. (viii) 10.17 Employment Agreement between the Company and Cathy R. Reeves dated October 24, 1995. (viii) 10.18 Employment Agreement between the Company and Margaret L. Maxon dated October 24, 1995. (viii) 10.19 Letter of Credit Agreement dated December 14, 1995 with Harris Trust and Savings Bank. 11 Computation of Per Share Earnings 24 Independent Auditors' Consent - --------------------- (i) Incorporated herein by reference to the Registrant's Registration Statement (Form S-18) No. 33-17228C. (ii) Incorporated herein by reference to the Registrant's current report on Form 8-K dated January 15, 1993. (iii) Incorporated herein by reference to the Registrant's current report on Form 8-K dated January 22, 1993. (iv) Incorporated herein by reference to the Registrant's current report on Form 8-K dated February 12, 1993. (v) Incorporated herein by reference to the Registrant's annual report on Form 10-K for the year ended September 30, 1991. (vi) Incorporated herein by reference to the Registrant's current report on Form 8-K dated January 17, 1994. (vii) Incorporated herein by reference to the Registrant's current report on Form 8-K dated May 26, 1994. (viii) Incorporated herein by reference to the Registrant's current report on Form 8-K dated May 2, 1995. (ix) Filed as Appendix II to the Company's definitive Proxy Statement for the Special Meeting of Shareholders held October 23, 1995.
31 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/ Mark L. Gildea ---------------------------------------- Mark L. Gildea, Chief Executive Officer Date: December 29, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date set forth above.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Mark L. Gildea Chief Executive Officer December 29, 1995 - ------------------------- and Director Mark L. Gildea (principal executive officer) /s/ Judy M. Figge President and Director December 29, 1995 - ------------------------- Judy M. Figge /s/ Kenneth J. Figge Executive Vice President, December 29, 1995 - ------------------------- Chief Financial Officer, Kenneth J. Figge Secretary, and Director (principal financial officer) /s/ James J. Lynn Director December 29, 1995 - ------------------------- James J. Lynn /s/ Joseph Buckley Director December 29, 1995 - ------------------------- Joseph Buckley /s/ Donald C. Tomasso Director December 29, 1995 - ------------------------- Donald C. Tomasso /s/ James H. Rempe Director December 29, 1995 - ------------------------- James H. Rempe
32 IN HOME HEALTH, INC. SCHEDULE AND EXHIBIT INDEX SCHEDULE PAGE - -------- -------- II Valuation and Qualifying Accounts and Reserves 34 EXHIBIT - ------- 3.1 Restated Articles of Incorporation, as amended 35 3.2 Restated Bylaws 38 4.2 Form of specimen certificate of Series A Preferred Stock 63 10.1 Amendments No. 4 and 5 to Second Amended and Restated Credit Agreement 65 10.2 Management Incentive Plan in place for fiscal 1995 78 10.3 Amendment to Lease Agreement with Minnesota CC Properties 82 10.4 1987 Stock Option Plan, as amended 86 10.5 1995 Stock Option Plan, as amended 98 10.19 Letter of Credit Agreement dated December 14, 1995 with Harris Trust and Savings Bank 110 11 Computation of Earnings per Share 114 24 Independent Auditors' Consent 115 27 Financial Data Schedule 116 33 SCHEDULE II IN HOME HEALTH, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993 (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------------------------------------------------------------------------------------------- ADDITIONS ---------- (2) (1) CHARGED BALANCE BALANCE AT CHARGED TO TO OTHER AT BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS END OF CLASSIFICATION OF PERIOD EXPENSES DESCRIBE -DESCRIBE PERIOD (B) (A) - ---------------------------------------------------------------------------------------------------------------------------------- 1995 - ---- Allowance for Doubtful Accounts - Current $ 1,029 $ 856 $ - $ 1,018 $ 867 Medicare Reserve 4,961 - 1,435 - 6,396 1994 - ---- Allowance for Doubtful Accounts - Current $ 859 $ 914 $ - $ 744 $ 1,029 Medicare Reserve 1,100 - 3,861 - 4,961 1993 - ---- Allowance for Doubtful Accounts - Current $ 576 $ 427 $ - $ 144 $ 859 Medicare Reserve - - 1,100 - 1,100 (A) Write-off of Bad Debts, Net of Recoveries and acquisition balances. (B) Adjustment to Medicare reserve.
34 EX-3.1 2 EX-3.1 EXHIBIT 3.1 SECOND RESTATEMENT OF ARTICLES OF INCORPORATION OF IN HOME HEALTH, INC. I, Kenneth J. Figge, as Secretary of In Home Health, Inc., a Minnesota corporation, do hereby certify that this Second Restatement correctly sets forth without change the existing provisions of the articles of incorporation of In Home Health, Inc. as previously amended to date, and that this Second Restatement was duly approved by the Board of Directors of In Home Health, Inc. on October 24, 1995, to wit: ARTICLE I The name of this corporation shall be In Home Health, Inc. ARTICLE II The location and address of this corporation's registered office in this state is: In Home Health, Inc. Carlson Center, Suite 500 601 Lakeshore Parkway Minnetonka, MN 55305-5214 ARTICLE III The authorized capital stock of this corporation shall consist of Forty Million (40,000,000) shares of Common Stock, par value $.01 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 35 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. ARTICLE IV Shareholders shall have no rights of cumulative voting. ARTICLE V Shareholders shall have no rights, preemptive or otherwise, to acquire any part of any unissued shares or other securities of this corporation or of any rights to purchase shares or other securities of this corporation before the corporation may offer them to other persons. ARTICLE VI The Board of Directors of this corporation shall consist of three directors or such other number of directors as shall be fixed in the manner provided in the By-laws or this corporation. ARTICLE VII Any action required or permitted to be taken at a meeting of the Board of Directors may be taken by written action signed by all of the directors then in office, unless the action is one which need not be approved by the shareholders, in which case such action shall be effective if signed by the number of directors that would be required to take the same action at a meeting at which all directors were present. ARTICLE VIII No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty by such director as a director; provided, however, that his Article VIII shall not eliminate or limit the liability of a director to the extent provided by applicable law (I) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes, (iv) for any transaction from which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the date when this Article VIII become effective. If the Minnesota Business Corporation Act is amended after approval by the shareholders of this Article to authorize corporate action further eliminating or 36 limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as so amended. No amendment to or repeal of this Article VIII shall apply to, or have any effect on, the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. IN WITNESS WHEREOF, I have hereunto subscribed my name pursuant to and authorized by the foregoing resolution this 24th day of October, 1995. /s/ Kenneth J. Figge ------------------------------------ Kenneth J. Figge, Secretary of In Home Health, Inc. STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 24th day of October, 1995, by Kenneth J. Figge, the Secretary of In Home Health, Inc., a Minnesota corporation, on behalf of the corporation. /s/ Myrna J. Florentine ------------------------------------ Notary Public My Commission Expires: Jan 31, 2000 ---------- MYRNA J. FLORENTINE [NOTARY PUBLIC SEAL] NOTARY PUBLIC MINNESOTA MY COMMISSION EXPIRES JANUARY 31, 2000 37 EX-3.2 3 EX-3.2 EXHIBIT 3.2 As amended through May 2, 1995, effective October 24, 1995 RESTATED BY-LAWS OF IN HOME HEALTH, INC. ARTICLE I Offices SECTION 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the corporation shall be such as is designated by the Board of Directors from time to time. SECTION 2. REGISTERED OFFICE. The location and address of the registered office of the corporation shall be such as is designated by the Board of Directors or the President from time to time and certified to the Secretary of State. The registered office need not be identical with the principal executive office of the corporation and may be changed from time to time by the Board of Directors. SECTION 3. OTHER OFFICES. The corporation may have other offices at such places within and without the State of Minnesota as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETING. All meetings of the shareholders of this corporation shall be held at its principal executive office unless some other place for any such meeting within or without the State of Minnesota be designated by the 38 Board of Directors in the notice of meeting. Any regular or special meeting of the shareholders of the corporation called by or held pursuant to a written demand of shareholders shall be held in the county where the principal executive office is located. SECTION 2. REGULAR MEETINGS. (a) Regular meetings of the shareholders of this corporation may be held at the discretion of the Board of Directors on an annual or less frequent periodic basis on such date and at such time and place as may be designated by the Board of Directors in the notice of meeting. At regular meetings the shareholder shall elect a Board of Directors and transact such other business as may be appropriate for action by shareholders. If a regular meeting of shareholders has not been held for a period of fifteen (15) months, one or more shareholders holding not less than three percent (3%) of the voting power of all shares of the corporation entitled to vote may call a regular meeting of shareholders by delivering to the President or Treasurer a written demand for a regular meeting. Within thirty (30) days after the receipt of such written demand by the President or Treasurer, the Board of Directors shall cause a regular meeting of shareholders to be called and held on notice no later than ninety (90) days after the receipt of written demand, all at the expense of the corporation. (b) At a regular meeting, the shareholders shall elect directors of the corporation and shall transact such other business s as may properly come before them. To be properly brought before the meeting, business must be of a nature that is 39 appropriate for consideration at a regular meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before a regular meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation, and received not later than the close of business on the 10th day following the day on which such notice of the date of the regular meeting was mailed or public disclosure of the meeting was made, whichever first occurs. Each such notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the regular meeting (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the regular meeting, (2) the name and address of record of the shareholder proposing such business, (3) the class or series (if any) and number of shares of the corporation which are owned by the shareholder, and (4) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the regular meeting except in 40 accordance with the procedures set forth in this Article; PROVIDED, HOWEVER, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the regular meeting in accordance with these Bylaws. SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes appropriate for action by shareholders, may be called by the President, by the Vice President in the absence of the President, by the Treasurer, or by the Board of Directors or any two or more members thereof. Such meeting shall be held on such date and at such time and place as shall be fixed by the person or persons calling the meeting and designated in the notice of meeting. Special meetings may also be called by one or more shareholders holding not less than ten percent (10%) of the voting power of all shares of the corporation entitled to vote by delivering to the President or Treasurer a written demand for a special meeting, which demand shall contain the purposes of the meeting; PROVIDED, HOWEVER, that a special meeting for the purpose of considering any action to directly or indirectly facilitate a business combination (as defined in the Minnesota Business Corporation Act), including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by twenty-five percent (25%) or more of the voting power of all shares entitled to vote. Within thirty (30) days after the receipt of a written demand for a special meeting of 41 shareholders by the President or Treasurer, the Board of Directors shall cause a special meeting of shareholders to be called and held on notice no later than ninety (90) days after the receipt of such written demand, all at the expense of the corporation. Business transacted at any special meeting of shareholders shall be limited to the purpose or purposes stated in the notice of meeting. Any business transacted at any special meeting of shareholders that is not included among the stated purposes of such meeting shall be voidable by or on behalf of the corporation unless all of the shareholders have waived notice of the meeting. SECTION 4. NOTICE OF MEETINGS. Except where a meeting of shareholders is an adjourned meeting and the date, time, and place of such meeting were announced at the time of adjournment, notice of all meetings of shareholders stating the date, time, and place thereof, and any other information required by law or desired by the Board of Directors or by such other person or persons calling the meeting, and in the case of special meetings, the purpose thereof, shall be given to each shareholder of record entitled to vote at such meeting not less than three (3) nor more than sixty (60) days prior to the date of such meeting. In the event that a plan of merger or the sale or other disposition of all or substantially all of the assets of the corporation is to be considered at a meeting of shareholders, notice of such meeting shall be given to every shareholder, whether or not 42 entitled to vote, not less than fourteen (14) days prior to the date of such meeting. Notices of meeting shall be given to each shareholder entitled thereto by oral communication, by mailing a copy thereof to such shareholder at an address he has designated or to the last known address of such shareholder, by handing a copy thereof to such shareholder, or by any other delivery that conforms to law. Notice by mail shall be deemed given when deposited in the United States mail with sufficient postage affixed. Any shareholder may waive notice of any meeting of shareholders. Waiver of notice shall be effective whether given before, at, or after the meeting and whether given orally, in writing, or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of that item at the meeting. SECTION 5. RECORD DATE. For the purpose of determining shareholders entitled to notice of and to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may, but need not, fix a 43 date as the record date for any such determination of shareholders, which record date, however, shall in no event be more than sixty (60) days prior to any such intended action or meeting. SECTION 6. QUORUM. The holders of a majority of the voting power of all shares of the corporation entitled to vote at a meeting shall constitute a quorum at a meeting of shareholders for the purpose of taking any action other than adjourning such meeting. If the holders of a majority of the voting power of all shares are not represented at a meeting, the shareholders present in person or by proxy shall constitute a quorum for the sole purpose of adjourning such meeting, and the holders of a majority of the shares so represented may adjourn the meeting to such date, time, and place as they shall announce at the time of adjournment. Any business may be transacted at the meeting held pursuant to such an adjournment and at which a quorum shall be represented, which might have been transacted at the adjourned meeting. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of shareholders originally represented leaves less than the number otherwise required for a quorum. A meeting of the shareholders at which there is a quorum may be adjourned as to all or part of the matters to be considered at the meeting upon motion by the person presiding at such meeting and by a majority vote of shares represented in person or by 44 proxy at such meeting. Such adjournment shall be until a specific time and place, and the time and place for the reconvened meeting shall be announced at the meeting and reflected in the minutes thereof. SECTION 7. VOTING AND PROXIES. At each meeting of the shareholders every holder of the Common Stock shall be entitled to one vote in person or by proxy for each share of Common Stock held by such shareholder and each holder of Preferred Stock having the power to vote with the Common Stock shall be entitled to such number of votes in person or by proxy as is specified pursuant to the terms of such Preferred Stock for each share of such Preferred Stock held by such shareholder, but no appointment of a proxy shall be valid for any purpose more than eleven (11) months after the date of its execution, unless a longer period is expressly provided in the appointment. Every appointment of a proxy shall be in writing (which shall include telegraphing, cabling, or telephotographic transmission), and shall be filed with the Secretary of the corporation before or at the meeting at which the appointment is to be effective. An appointment of a proxy for shares held jointly by two or more shareholders shall be valid if signed by any one of them, unless the Secretary of the corporation receives from any one of such shareholders written notice either denying the authority of that person to appoint a proxy or appointing a different proxy. All questions regarding the qualification of voters, the validity of appointments of proxies, and the acceptance or rejection of votes 45 shall be decided by the presiding officer of the meeting. The shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of the shares present, in person or represented by proxy, and entitled to vote, except where a different vote is required by law, the Articles of Incorporation, or these By-Laws. (First sentence amended May 2, 1995, effective October 24, 1995, to include references to voting rights of preferred shares.) SECTION 8. ACTION WITHOUT MEETING BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting by written action signed by all of the shareholders entitled to vote on such action. Such written action shall be effective when signed by all of the shareholders entitled to vote thereon or at such different effective time as is provided in the written action. ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors. The directors may exercise all such powers and do all such things as may be exercised or done by the corporation, subject to the provisions of applicable law, the Articles of Incorporation, and these By-Laws. SECTION 2. NUMBER, TENURE, AND QUALIFICATION. The number of directors which shall constitute the whole Board of Directors shall be fixed from time to time by resolution of the shareholders, subject to increase by resolution of the Board of 46 Directors. In the event that the shareholders fail to fix the number of directors, the number of directors shall be the number provided for in the Articles of Incorporation, subject to increase by resolution of the Board of Directors. No decrease in the number of directors pursuant to this section shall effect the removal of any director then in office except upon compliance with the provisions of Section 7 of this Article. Each director shall be elected at a regular meeting of shareholders, except as provided in Sections 6 and 7 of this Article, and shall hold office until the next regular meeting of shareholders and thereafter until his successor is duly elected and qualified, unless a prior vacancy shall occur by reason of his death, resignation, or removal from office. Directors shall be natural persons but need not be shareholders. SECTION 3. MEETINGS. Meetings of the Board of Directors may be held at such times and places as shall from time to time be determined by the Board of Directors. Meetings of the Board of Directors also may be called by the President, by the Vice President in the absence of the President, or by any director, in which case the person or persons calling such meeting may fix the date, time, and place thereof, either within or without the State of Minnesota, and shall cause notice of meeting to be given. The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors when present. (Last sentence added by amendment adopted May 2, 1995, effective October 24, 1995.) 47 SECTION 4. NOTICE OF MEETINGS. If the date, time, and place of a meeting of the Board of Directors has been announced at a previous meeting, no notice is required. In all other cases three (3) days' notice of meetings of the Board of Directors, stating the date and time thereof and any other information required by law or desired by the person or persons calling such meeting, shall be given to each director. If notice of meeting is required, and such notice does not state the place of the meeting, such meeting shall be held at the principal executive office of the corporation. Notice of meetings of the Board of Directors shall be given to directors in the manner provided in these By-Laws for giving notice to shareholders of meetings of shareholders. Any director may waive notice of any meeting. A waiver of notice by a director is effective whether given before, at, or after the meeting, and whether given orally, in writing, or by attendance. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, unless such director objects at the beginning of the meeting to the transaction of business on grounds that the meeting is not lawfully called or convened and does not participate thereafter in the meeting. SECTION 5. QUORUM AND VOTING. A majority of the directors currently holding office shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. In the absence of a quorum, a majority of the directors present 48 may adjourn the meeting from time to time until a quorum is present. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of directors originally present leaves less than the number otherwise required for a quorum. The Board of Directors shall take action by the affirmative vote of a majority of the directors present at any duly held meeting, except as to any question upon which any different vote is required by law, the Articles of Incorporation, or these By-Laws. A director may give advance written consent or objection to a proposal to be acted upon at a meeting of the Board of Directors. If the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected, such consent or objection shall be counted as a vote for or against the proposal and shall be recorded in the minutes of the meeting. Such consent or objection shall not be considered, in determining the existence of a quorum. SECTION 6. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the directors remaining in office, even though said remaining directors be less than a quorum. Any newly created directorship resulting from an increase in the authorized number of directors by action of the Board of Directors may be filled by a majority vote of the 49 directors serving at the time of such increase. Any vacancy or newly created directorship may be filled by resolution of the shareholders. Unless a prior vacancy occurs by reason, of his death, resignation, or removal from office, any director so elected shall hold office until the next regular meeting of shareholders and until his successor is duly elected and qualified. SECTION 7. REMOVAL OF DIRECTORS. The entire Board of Directors or any director or directors may be removed from office, with or without cause, at any special meeting of the shareholders, duly called for that purpose as provided in these By-Laws, by a vote of the shareholders holding a majority of the shares entitled to vote at an election of directors. At such meeting, without further notice, the shareholders may fill any vacancy or vacancies created by such removal as provided in Section 6 of this Article. Any such vacancy not so filled may be filled by the directors as provided in Section 6 of this Article. Any director named by the Board of Directors to fill a vacancy may be removed at any time, with or without cause, by an affirmative vote of a majority of the remaining directors, even though said remaining directors be less than a quorum, if the shareholders have not elected directors in the interval between the appointment to fill the vacancy and the time of removal. SECTION 8. COMMITTEES. The Board of Directors, by a resolution approved by the affirmative vote of a majority of the directors then holding office, may establish one or more commit- 50 tees of one or more persons having the authority of the Board of Directors in the management of the business of the corporation to the extent provided in such resolution. Such committees, however, shall at all times be subject to the direction and control of the Board of Directors. Committee members need not be directors and shall be appointed by the affirmative vote of a majority of the directors present. A majority of the members of any committee shall constitute a quorum for the transaction of business at a meeting of any such committee. In other matters of procedure the provisions of these By-Laws shall apply to committees and the members thereof to the same extent they apply to the Board of Directors and directors, including, without limitation, the provisions with respect to meetings and notice thereof, absent members, written actions, and valid acts. Each committee shall keep regular minutes of its proceedings and report the same to the Board of Directors. SECTION 9. ACTION IN WRITING. Any action required or permitted to be taken at a meeting of the Board of Directors or of a lawfully constituted committee thereof may be taken by written action signed by all of the directors then in office or by all of the members of such committee, as the case may be. If the action does not require shareholder approval, such action shall be effective if signed by the number of directors or members of such committee that would be required to take the same action at a meeting at which all directors or committee members were present. If any written action is taken by less than all 51 directors, all directors shall be notified immediately of its text and effective date. The failure to provide such notice, however, shall not invalidate such written action. SECTION 10. MEETING BY MEANS OF ELECTRONIC COMMUNICATION. Members of the Board of Directors of the corporation, or any committee designated by such Board, may participate in a meeting of such Board or committee by means of conference telephone or similar means of communication by which all persons participating in the meeting can simultaneously hear each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting. SECTION 11. NOMINATIONS TO THE BOARD OF DIRECTORS. Subject to the rights, if any, of holders of any preferred stock, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote generally in the election of directors. However, any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors at a regular or special meeting of shareholders only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation and received not later than the close of business on the 10th day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever 52 first occurs. Each such notice to the Secretary shall set forth: (i) the name and address of record of the shareholder who intends to make the nomination; (ii) a representation that the shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a director of the corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The presiding officers of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 53 ARTICLE IV OFFICERS SECTION 1. NUMBER AND QUALIFICATION. The officers of the corporation shall be elected by the Board of Directors and shall include a Chief Executive Officer, a President, a Secretary, and a Treasurer. The Board of Directors may also appoint one or more Vice Presidents or such other officers and assistant officers as it may deem necessary. Except as provided in these By-Laws, the Board of Directors shall fix the powers, duties, and compensation of all officers. officers may, but need not, be directors of the corporation. Any number of offices may be held by the same person. (First sentence amended May 2, 1995, effective October 24, 1995, to include reference to Chief Executive officer.) SECTION 2. TERM OF OFFICE. An officer shall hold office until his successor shall have been duly elected, unless prior thereto he shall have resigned or been removed from office as hereinafter provided. SECTION 3. REMOVAL AND VACANCIES. Any officer or agent elected or appointed by the Board of Directors shall hold office at the pleasure of the Board of Directors and may be removed, with or without cause, at any time by the vote of a majority of the Board of Directors. Any vacancy in an office of the corpo- ration shall be filled by the Board of Directors. SECTION 4. PRESIDENT. The President shall have such powers and perform such duties as the Board of Directors may from time 54 to time prescribe. The President shall report to the Chief Executive Officer of the corporation. (Amended in its entirety by amendment adopted May 2, 1995, effective October 24, 1995.) SECTION 5. VICE PRESIDENTS. The Vice President, if any, or vice Presidents in case there be more than one, shall have such powers and perform such duties as the Board of Directors may from time to time prescribe. In the absence of the President or in the event of his death, inability, or refusal to act, the Vice President, or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or, in the absence of any designation, in the order of their election, shall perform the duties of the President, and, when so acting, shall have all the powers of and be subject to all of the restrictions upon the President. (First sentence amended May 2, 1995, effective October 24, 1995, to delete the President's authority to determine the duties of the Vice-Presidents.) SECTION 6. SECRETARY. The Secretary shall attend all meetings of the Board of Directors and of the shareholders and shall maintain records of, and whenever necessary, certify all proceedings of the Board of Directors and of the shareholders. He shall keep the stock books of the corporation, and, when so directed by the Board of Directors or other person or persons authorized to call such meetings, shall give or cause to be given notice of meetings of the shareholders and of meetings of the Board of Directors. He shall also perform such other duties and 55 have such other powers as the Board of Directors may from time to time prescribe. (Last sentence amended May 2, 1995, effective October 24, 1995, to delete President's authority to prescribe secretary's duties.) SECTION 7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be the chief financial officer of the corporation. He shall have the care and custody of the corporate funds and securities of the corporation and shall disburse the funds of the corporation as may be ordered from time to time by the Board of Directors. He shall keep full and accurate financial records for the corporation and shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. (Amended May 2, 1995, effective October 24, 1995, to change title from Treasurer to CFO and delete President's authority to prescribe CFO's powers.) SECTION 8. OTHER OFFICERS. The Assistant Secretaries and Assistant Treasurers in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the Secretary or Treasurer, perform the duties and exercise the powers of the Secretary and Treasurer respectively. Such Assistant Secretaries and Assistant Treasurers shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. Any other officers appointed by the Board of Directors shall hold office at the pleasure of the Board of Directors and shall have such powers, perform such duties, and be responsible to such 56 other officers as the Board of Directors may from time to time prescribe. (Second sentence amended May 2, 1995, effective October 24, 1995, to delete President's power to prescribe duties of officers.) SECTION 9. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall preside at all meetings of the shareholders and shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall have such powers and perform such duties as the Board of Directors may from time to time prescribe. SECTION 10. TREASURER. The Treasurer shall have such powers and perform such duties as the Board of Directors may from time to time prescribe. (Sections 9 and 10 added by amendment adopted May 2, 1995, effective October 24, 1995.) ARTICLE V CERTIFICATES AND OWNERSHIP OF SHARES SECTION 1. CERTIFICATES. All shares of the corporation shall be represented by certificates. Each certificate shall contain on its face (a) the name of the corporation, (b) a statement that the corporation is incorporated under the laws of the State of Minnesota, (c) the name of the person to whom it is issued, and (d) the number and class of shares, and the designation of the series, if any, that the certificate represents. Certificates shall also contain any other information required by law or desired by the Board of Directors, and shall be in such 57 form as shall be determined by the Board of Directors. Such certificates shall be signed by either the President, a Vice President, the Secretary, or an Assistant Secretary. If a certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the corporation and a registrar, the signature of any such President, Vice President, Secretary, or Assistant Secretary may be a facsimile. If a person signs or has a facsimile signature placed upon a certificate while an officer, transfer agent, or registrar of a corporation, the certificate may be issued by the corporation, even if the person has ceased to have that capacity before the certificate is issued, with the same effect as if the person had that capacity at the date of its issue. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued with the number of shares and date of issue shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation or the transfer agent for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate, a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. 58 SECTION 2. TRANSFER OF SHARES. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, and on surrender of such shares to the corporation or the transfer agent of the corporation. SECTION 3. OWNERSHIP. Except as otherwise provided in this Section, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. The Board of Directors, however, by a resolution approved by the affirmative vote of a majority of directors then in office, may establish a procedure whereby a shareholder may certify in writing to the corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of one or more beneficial owners. Upon receipt by the corporation of the writing, the persons specified as beneficial owners, rather than the actual shareholder, shall be deemed the shareholders for such purposes as are permitted by the resolution of the Board of Directors and are specified in the writing. ARTICLE VI CONTRACTS, LOANS, CHECKS, AND DEPOSITS SECTION 1. CONTRACTS. The Board of Directors may authorize such officers or agents as they shall designate to enter into 59 contracts or execute and deliver instruments in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. SECTION 2. LOANS. The corporation shall not lend money to, guarantee the obligation of, become a surety for, or otherwise financially assist any person unless the transaction, or class of transactions to which the transaction belongs, has been approved by the affirmative vote of a majority of directors present, and (a) is in the usual and regular course of business of the corporation, (b) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship, or an organization to which the corporation has the power to make donations, (c) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board of Directors, to benefit the corporation, or (d) has been approved by the affirmative vote of the holders of two-thirds of the outstanding shares, including both voting and nonvoting shares. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation shall be signed by such officers or agents of the corporation as shall be 60 designated and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks or other financial institutions as the Board of Directors may select. ARTICLE VII MISCELLANEOUS SECTION 1. DIVIDENDS. The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law. SECTION 2. RESERVES. There may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, deem proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for the purchase of additional property, or for such other purpose as the directors shall deem to be consistent with the interests of the corporation, and the directors may modify or abolish any such reserve. SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be such twelve-month period as may be set by a resolution of the Board of Directors, provided, however, that the first fiscal year of the corporation may be a shorter period if 61 permitted by law and set by a resolution of the Board of Directors. SECTION 4. AMENDMENTS. Except as limited by the Articles of Incorporation, these By-Laws may be altered or amended by the Board of Directors at any meeting of directors to the full extent permitted by law, subject, however, to the power of the shareholders of this corporation to alter or repeal such By-Laws. * * * * * The undersigned, Secretary of In Home Health, Inc., a Minnesota corporation does hereby certify that the foregoing are the Restated By-Laws of the corporation incorporating all amendments to date. Dated: October 24, 1995 /s/ KENNETH J. FIGGE ---------------------------------------- Kenneth J. Figge, Secretary 62 EX-4.2 4 EX-4.2 EXHIBIT 4.2 SEE REVERSE SIDE FOR IMPORTANT NOTICES INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA NUMBER SHARES IN HOME HEALTH, INC. SERIES A PREFERRED STOCK PAR VALUE $1.00 PER SHARE THIS CERTIFIES THAT __________________________________________ IS THE OWNER AND REGISTERED HOLDER OF ________________________________________________ SHARES OF Series A Preferred Stock, par value $1.00 per share 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 DULY AUTHORIZED OFFICERS AND TO BE SEALED WITH THE SEAL OF THE CORPORATION THIS _______________ DAY OF _____________, 19____________, /s/ Kenneth J. Figge /s/ Judy M. Figge ____________________________ _____________________________ SECRETARY PRESIDENT 63 THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER RELEVANT STATE SECURITIES LAWS. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EXEMPTION THEREFROM. THE COMPANY RESERVES THE RIGHT TO REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO IT BEFORE EFFECTING ANY TRANSFER OF THE SHARES. A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND A STATEMENT OF THE AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES, ARE ON FILE WITH THE CORPORATION AND WILL BE FURNISHED TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE. FOR VALUE RECEIVED ________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO _____________________________________________________________________________ _______________________________________________________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT _____________________________________________________________________ ATTORNEY TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED __________________________, 19 _____ ________________________________ IN PRESENCE OF ______________________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGE- MENT OR ANY CHANGE WHATEVER. 64 EX-10.1 5 EX-10.1 EXHIBIT 10.1 AMENDMENT NO. 4 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDMENT NO. 4 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT ("Amendment No. 4") is entered into as of the 30th day of September, 1995, by and between IN HOME HEALTH, INC., a Minnesota corporation (the "Borrower") and FIRST BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"). RECITALS FIRST: Borrower is indebted to the Bank pursuant to the terms of a Second Amended and Restated Credit Agreement dated March 31, 1994, as amended (the "Credit Agreement"), as evidenced by a Substitute Revolving Credit Note dated June 30, 1994, in the original principal amount of $15,000,000 (the "Revolving Note"). SECOND: All indebtedness of the Borrower to the Bank is secured by a Security Agreement dated September 24, 1992, executed by the Borrower in favor of the Bank, as successor by merger to Marquette Bank Minneapolis, National Association. THIRD: The Borrower and the Bank have agreed to amend certain terms and provisions of the Credit Agreement and address certain existing Events of Default, all as more particularly set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as follows: 1. DEFINED TERMS. All capitalized terms used in this Amendment No. 3 which are not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. 2. WAIVER. Borrower acknowledges that an Event of Default exists under the Credit Agreement due to the breach of Section 6.6 of the Credit Agreement as a result of making a loan to a director and officer of the Borrower. Subject to the conditions to the effectiveness of this Amendment No. 4 as set forth in paragraph 6 below, the Bank hereby waives the above-described Event of Default through and including October 31, 1995; PROVIDED, HOWEVER, that the waiver granted herein is limited to the specific Event of Default described in this paragraph and is not intended, and shall not be construed, to be a general waiver of any term or provision of the Credit Agreement or any other existing or future Default or Event of Default. September 20, 1995 65 3. CONSTRUCTION. All references in the Credit Agreement to "this Credit Agreement", "herein" and similar references shall be deemed to refer to the Credit Agreement as amended by this Amendment No. 4. 4. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this Amendment No. 4 and to grant the waiver hereunder, the Borrower hereby warrants and represents to the Bank that it is duly authorized to execute and deliver this Amendment No. 4 and to perform its obligations under the Credit Agreement as amended hereby and that this Amendment No. 4 and all other documents executed by the Borrower in connection herewith constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms. The Credit Agreement, as amended hereby, and the Revolving Note, shall continue to be secured by the Security Agreement, without loss of lien or priority. The Borrower further represents and warrants that it has been advised by the Bank that the Bank does not intend to renew the Revolving Credit Commitment after December 31, 1995, that the Bank intends to terminate the Revolving Credit Commitment on December 31, 1995 (unless earlier terminated in accordance with the terms of the Credit Agreement) and that the Bank will notify the beneficiaries of any letters of credit on or before December 1, 1995, that any letters of credit will not be renewed on their expiry date. 5. EFFECTIVE DATE. This Amendment No. 4 shall become effective on the date first set forth above upon the satisfaction of each of the following conditions precedent: (a) WARRANTIES. Before and after giving effect to this Amendment No. 4, the representations and warranties in Section 4 of the Credit Agreement shall be true and correct as though made on the date hereof, except for changes that are permitted by the terms of the Credit Agreement. The execution by the Borrower of this Amendment No. 4 shall be deemed a representation that the Borrower has complied with the foregoing condition. (b) DEFAULTS. After giving effect to this Amendment No. 4, no Default or Event of Default shall have occurred and be continuing under the Credit Agreement. The execution by the Borrower of this Amendment No. 4 shall be deemed a representation that the Borrower has complied with the foregoing condition. (c) DOCUMENTS. The following shall have been delivered to the Bank, each in form and substance satisfactory to the Bank: September 20, 1995 66 (i) AMENDMENT NO. 4. This Amendment No. 4 appropriately completed and duly executed by the Borrower. (ii) SECRETARY'S CERTIFICATE. A Secretary's Certificate signed by the Borrower's corporate secretary certifying that copies of the Articles of Incorporation and the Bylaws of the Borrower attached thereto are in full force and effect. (iii) LEGAL FEES AND EXPENSES. Payment of the legal fees and expenses of counsel for the Bank incurred in connection with the preparation, negotiation and execution of this Amendment No. 4. 6. EXPENSES. The Borrower agrees to reimburse the Bank upon demand for all reasonable expenses (including attorneys' fees and legal expenses) incurred by the Bank in the preparation, negotiation and execution of this Amendment No. 4, and any other document required to be furnished herewith, and in enforcing the obligations of the Borrower under the Credit Agreement as amended hereby, which obligations of the Borrower shall survive any termination of the Credit Agreement. 7. COUNTERPARTS. This Amendment No. 4 may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same instrument. 8. SEVERABILITY. Any provision of this Amendment No. 4 which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 9. SUCCESSORS ENFORCEABILITY. This Amendment No. 4 shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and the successors and assigns of the Bank. Except as hereby amended, the terms and provisions of the Credit Agreement shall remain in full force and effect and the Credit Agreement is hereby ratified and confirmed in all respects. 10. ENTIRE AGREEMENT. The Credit Agreement, as amended hereby, together with the other Loan Documents constitute the entire agreement of the parties and all other agreements, whether oral or in writing, are merged into the Credit Agreement, as amended hereby, and are superseded hereby. September 20, 1995 67 11. GOVERNING LAW. THIS AMENDMENT NO. 4 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE LAW OF CONFLICTS) OF THE STATE OF MINNESOTA, GIVING EFFECT TO LAWS APPLICABLE TO NATIONAL BANKS. IN WITNESS WHEREOF, the Borrower and the Bank have caused this Amendment No. 4 to be executed by their duly authorized officers as of the date and year first above written. IN HOME HEALTH, INC., a Minnesota corporation By /s/ MICHAEL J. KENNEDY -------------------------------- Its VICE-PRESIDENT-TREASURER ---------------------------- FIRST BANK NATIONAL ASSOCIATION, a national banking association By /s/ CONRAD A. KEECH -------------------------------- Its VICE PRESIDENT ---------------------------- September 20, 1995 68 SECRETARY'S CERTIFICATE I, Kenneth J. Figge, do hereby certify that I am the duly elected and acting secretary of In Home Health, Inc. a corporation (the "Corporation") duly organized and existing under the laws of the state of Minnesota, and am keeper of the records of the Corporation. I further certify that the Articles of Incorporation nor the Bylaws of the Corporation have been altered, amended, modified or repealed since May 2, 1995 and the same remain in full force and effect as in existence on said date. WITNESS my hand as of the 22 day of September, 1995. /s/ Kenneth J. Figge ----------------------------------- Secretary of said corporation 69 EXHIBIT 10.1 AMENDMENT NO. 5 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDMENT NO. 5 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT ("Amendment No. 5") is entered into as of the 30 day of November, 1995, by and between IN HOME HEALTH, INC., a Minnesota corporation (the "Borrower") and FIRST BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"). RECITALS FIRST: Borrower is indebted to the Bank pursuant to the terms of a Second Amended and Restated Credit Agreement dated March 31, 1994, as amended (the "Credit Agreement"), as evidenced by a Substitute Revolving Credit Note dated June 30, 1994, in the original principal amount of $15,000,000 (the "Revolving Note"). SECOND: All indebtedness of the Borrower to the Bank is secured by a Security Agreement dated September 24, 1992, executed by the Borrower in favor of the Bank, as successor by merger to Marquette Bank Minneapolis, National Association. THIRD: The Borrower and the Bank have agreed to amend certain terms and provisions of the Credit Agreement and address certain existing Events of Default, all as more particularly set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as follows: 1. DEFINED TERMS. All capitalized terms used in this Amendment No. 5 which are not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. 2. WAIVER. Borrower acknowledges that as of the date hereof, an Event of Default exists under the Credit Agreement due to the breach of Section 6.6 of the Credit Agreement as a result of making a loan to a director and officer of the Borrower. Subject to the conditions to the effectiveness of this Amendment No. 5 as set forth in paragraph 6 below, the Bank hereby waives the above- described Event of Default through and including December 29, 1995; PROVIDED, HOWEVER, that the waiver granted herein is limited to the specific Event of Default described in this paragraph and is not intended, and shall not be construed, to be a general waiver of any term or provision of the Credit Agreement or any other existing or future Default or Event of Default. November 1, 1995 70 3. CONSTRUCTION. All references in the Credit Agreement to "this Credit Agreement", "herein" and similar references shall be deemed to refer to the Credit Agreement as amended by this Amendment No. 5. 4. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this Amendment No. 5 and to grant the waiver hereunder, the Borrower hereby warrants and represents to the Bank that it is duly authorized to execute and deliver this Amendment No. 5 and to perform its obligations under the Credit Agreement as amended hereby and that this Amendment No. 5 and all other documents executed by the Borrower in connection herewith constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms. The Credit Agreement, as amended hereby, and the Revolving Note, shall continue to be secured by the Security Agreement, without loss of lien or priority. 5. EFFECTIVE DATE. This Amendment No. 5 shall become effective on the date first set forth above upon the satisfaction of each of the following conditions precedent: (a) WARRANTIES. Before and after giving effect to this Amendment No. 5, the representations and warranties in Section 4 of the Credit Agreement shall be true and correct as though made on the date hereof, except for changes that are permitted by the terms of the Credit Agreement. The execution by the Borrower of this Amendment No. 5 shall be deemed a representation that the Borrower has complied with the foregoing condition. (b) DEFAULTS. After giving effect to this Amendment No. 5, no Default or Event of Default shall have occurred and be continuing under the Credit Agreement. The execution by the Borrower of this Amendment No. 5 shall be deemed a representation that the Borrower has complied with the foregoing condition. (c) DOCUMENTS . The following shall have been delivered to the Bank, each in form and substance satisfactory to the Bank: (i) AMENDMENT NO. 5. This Amendment No. 5 appropriately completed and duly executed by the Borrower. (ii) SECRETARY'S CERTIFICATE. A Secretary's Certificate signed by the Borrower's corporate secretary certifying that copies of the Articles of Incorporation and the Bylaws of the Borrower attached thereto are in full force and effect and that the Board of November 1, 1995 71 Directors has authorized the Borrower to enter into this Amendment No. 5 by all necessary corporate action. (iii) LEGAL FEES AND EXPENSES. Payment of the legal fees and expenses of counsel for the Bank incurred in connection with the preparation, negotiation and execution of this Amendment No. 5. 6. EXPENSES. The Borrower agrees to reimburse the Bank upon demand for all reasonable expenses (including attorneys' fees and legal expenses) incurred by the Bank in the preparation, negotiation and execution of this Amendment No. 5, and any other document required to be furnished herewith, and in enforcing the obligations of the Borrower under the Credit Agreement as amended hereby, which obligations of the Borrower shall survive any termination of the Credit Agreement. 7. COUNTERPARTS. This Amendment No. 5 may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same instrument. 8. SEVERABILITY. Any provision of this Amendment No. 5 which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 9. SUCCESSORS: ENFORCEABILITY. This Amendment No. 5 shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and the successors and assigns of the Bank. Except as hereby amended, the terms and provisions of the Credit Agreement shall remain in full force and effect and the Credit Agreement is hereby ratified and confirmed in all respects. 10. ENTIRE AGREEMENT. The Credit Agreement, as amended hereby, together with the other Loan Documents constitute the entire agreement of the parties and all other agreements, whether oral or in writing, are merged into the Credit Agreement, as amended hereby, and are superseded hereby. 11. GOVERNING LAW. THIS AMENDMENT NO. 5 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE LAW OF CONFLICTS) OF THE STATE OF MINNESOTA, GIVING EFFECT TO LAWS APPLICABLE TO NATIONAL BANKS. November 1, 1995 72 IN WITNESS WHEREOF, the Borrower and the Bank have caused this Amendment No. 5 to be executed by their duty authorized officers as of the date and year first above written. IN HOME HEALTH, INC., a Minnesota corporation By /s/ MICHAEL J. KENNEDY -------------------------------- Its VICE PRESIDENT-TREASURER ---------------------------- FIRST BANK NATIONAL ASSOCIATION, a national banking association By /s/ CONRAD A. KEECH -------------------------------- Its VICE PRESIDENT ---------------------------- November 1, 1995 73 SECRETARY'S CERTIFICATE I, Kenneth J. Figge, do hereby certify that I am the duly elected and acting secretary of In Home Health, Inc. a corporation (the "Corporation") duly organized and existing under the laws of the state of Minnesota, and am keeper of the records of the Corporation. I further certify that, except for the amendments to the Corporation's Articles of Incorporation that are stated on the attached Exhibits A and B, the Articles of Incorporation and the Bylaws of the Corporation have not been altered, amended, modified or repealed since May 2, 1995 and the same remain in full force and effect as in existence on said date. I further certify that the resolutions previously adopted by the Corporation's Board of Directors with respect to the Corporation's agreements with First Bank National Association have not been amended or revoked and remain in full force and effect as of the date hereof, and that under such resolutions the undersigned as Chief Financial Officer and the Vice President - Treasurer of the Corporation are authorized to execute on behalf of the Corporation, and deliver to First Bank National Association, Amendment No. 5 to Second Amended and Restated Credit Agreement. WITNESS my hand as of the 30th day of November, 1995. /s/ Kenneth J. Figge ----------------------------------- Secretary of said corporation 74 SECOND RESTATEMENT OF ARTICLES OF INCORPORATION OF IN HOME HEALTH. INC. I, Kenneth J. Figge, as Secretary of In Home Health, Inc., a Minnesota corporation, do hereby certify that this Second Restatement correctly sets forth without change the existing provisions of the articles of incorporation of In Home Health, Inc. as previously amended to date, and that this Second Restatement was duly approved by the Board of Directors of In Home Health, Inc. on October 24, 1995, to wit: ARTICLE I The name of this corporation shall be In Home Health, Inc. ARTICLE II The location and address of this corporation's registered office in this state is: In Home Health, Inc. Carlson Center, Suite 500 601 Lakeshore Parkway Minnetonka, MN 55305-5214 ARTICLE III The authorized capital stock of this corporation shall consist of Forty Million (40,000,000) shares of Common Stock, par value $.01 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 75 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. ARTICLE IV Shareholders shall have no rights of cumulative voting. ARTICLE V Shareholders shall have no rights, preemptive or otherwise, to acquire any part of any unissued shares or other securities of this corporation or of any rights to purchase shares or other securities of this corporation before the corporation may offer them to other persons. ARTICLE VI The Board of Directors of this corporation shall consist of three directors or such other number of directors as shall be fixed in the manner provided in the By-laws or this corporation. ARTICLE VII Any action required or permitted to be taken at a meeting of the Board of Directors may be taken by written action signed by all of the directors then in office, unless the action is one which need not be approved by the shareholders, in which case such action shall be effective if signed by the number of directors that would be required to take the same action at a meeting at which all directors were present. ARTICLE VIII No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty by such director as a director; provided, however, that this Article VIII shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes, (iv) for any transaction from which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the date when this Article VII become effective. If the Minnesota Business Corporation Act is amended after approval by the shareholders of this Article to authorize corporate action further eliminating or 76 limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as so amended. No amendment to or repeal of this Article VIII shall apply to, or have any effect on, the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. IN WITNESS WHEREOF, I have hereunto subscribed my name pursuant to and authorized by the foregoing resolution this 24th day of October, 1995. /s/ Kenneth J. Figge ----------------------------------- Kenneth J. Figge, Secretary of In Home Health, Inc. STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 24th day of October, 1995, by Kenneth J. Figge, the Secretary of In Home Health, Inc., a Minnesota corporation, on behalf of the corporation. /s/ Myrna J. Florentine ------------------------------------ Notary Public My Commission expires: Jan. 31, 2000 ------------- [SEAL (Notary Public)] 77 EX-10.2 6 EX-10.2 EXHIBIT 10.2 IN HOME HEALTH, INC. MANAGEMENT INCENTIVE PLANS FISCAL YEAR 1995 In Home Health has annual incentive plans for key positions. The purpose of these plans is: * To ensure a competitive total compensation package for key management and support positions. * To attract, retain and motivate qualified employees in key management and support positions. * To stimulate higher performance levels by clarifying and strengthening the links between an individual's contributions and their compensation. * To assure that corporate goals and objectives are an integral part of every employee's performance. ELIGIBILITY The plans are intended to include those management and support personnel who have measurable effects on financial results. Positions will be identified by the Executive Management Team and the Compensation Committee of the Board of Directors. TOTAL COMPENSATION OPPORTUNITY The total compensation package, composed of base salary and benefits, plus the management incentive plan, is designed to provide participants with an opportunity to earn above average compensation for meeting and exceeding the plan objectives. 78 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. INCENTIVE ELEMENTS For fiscal year 1995, the emphasis will be placed on operating profit/net income and/or asset management. An individual incentive worksheet has been developed for each eligible position and provided to each participant. Corporate profit is defined as consolidated net income. Area, branch and infusion profit is defined as operating profit before the adjustment for aged accounts receivable over 120 days. No bonus will be paid to any manager where a loss occurs in their area of responsibility, even if the loss was planned or if the Company incurs a loss for the year. GENERATION OF INCENTIVE POOL Each year, incentive dollars will be integrated into the operating budget based on performance projections for individuals and the corporation. INCENTIVE PAYMENTS Incentive payments will be paid annually. Payments will be made when the audited results of the preceding fiscal year are available and the individual incentive amount has been approved by the appropriate department head and at 79 least one executive officer. The incentive amount is a percentage of base salary in effect on the last day of the fiscal year. NEW HIRES Participants hired during the year must be employed for at least 6 of the 12 months of the fiscal year in order to be eligible for the incentive. A prorated payment may be made based on the number of full months (6 to 11 months) worked during the fiscal year. Exceptions to this policy must receive the prior written approval of the President/Chief Executive Officer. TRANSFERS, PROMOTIONS AND LEAVES If an employee is transferred or promoted into an incentive eligible position during the fiscal year, he/she will be eligible for incentive when they complete at least six (6) months of employment in the position. A prorated payment may be made based on the number of full months (six to eleven) worked in the eligible position. If the employee is promoted from one eligible position to another eligible position and is in the higher position at least six months, the amount paid may be prorated according to the number of months worked in each position. If the employee is in the new position for less than six months, the incentive will not be prorated but will be based on the lower position's incentive rate. An employee transferring into a lower incentive from a higher incentive position will receive the lower incentive rate for the entire year. An employee who transfers out of an eligible incentive position any time during the year is ineligible for any incentive relating to that year. An employee on an unpaid leave of absence will not be paid incentive for the months or portions of months absent. The amount will be prorated for the full months worked in an eligible position. 80 TERMINATION In the event a participant is terminated for cause, no incentive will be paid. When a participant voluntarily terminates their position before the incentive award is due to be paid, payment of the incentive will not be made. Exceptions to this policy may be made at the discretion of the President/Chief Executive Officer and must be in writing. Payments to former employee will be made on the normal schedule. REGIONAL OR AREA POSITIONS All Corporate, area or regional positions will participate in the Company's Annual Incentive Plan utilizing the Company's consolidated results to determine their Management Incentive compensation for the year. Branch and Pharmacy General Managers will participate in the General Managers Incentive Plan. Details of the pertinent plan will be distributed to the participants. DURATION OF PLAN The company may change, modify, or amend this plan at any time. This plan is for fiscal year 1995 only and no plan for fiscal year 1996 or any other fiscal year is implied. 81 EX-10.3 7 EX-10.3 EXHIBIT 10.3 AMENDMENT NO. 4 TO LEASE AGREEMENT AGREEMENT, made as of November 10, 1994, between MINNESOTA CC PROPERTIES, INC. ("Landlord") and IN HOME HEALTH, INC. ("Tenant"). A. Landlord and Tenant entered into a written lease dated October 24, 1991 (the "Lease"), relating to the premises currently consisting of approximately 20,867 rentable square feet ("Current Premises") on the fifth floor of the building commonly known as 601 Lakeshore Parkway, Minnetonka, Minnesota (the "Project") and approximately 5,333 rentable square feet ("Temporary Space") on the third floor of the Project. B. The Lease has not been amended or modified except by Amendment No. 1 to Lease Agreement dated January 4, 1993 ("Amendment No. 1"), Amendment No. 2 to Lease Agreement dated March 11, 1993 ("Amendment No. 2"), and Amendment No. 3 to Lease Agreement dated February 22, 1994 ("Amendment No. 3"), which Amendments shall be deemed included in the term "Lease". C. Landlord and Tenant desire to expand the Premises to include additional space and to amend the Lease as provided in this Amendment. FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are expressly acknowledged, Landlord and Tenant agree as follows: 1. EFFECT. The Lease is hereby amended to the extent necessary to give effect to this Amendment, and the terms of this Amendment shall supersede any contrary terms in the Lease. All references in the Lease to "this Lease" shall be deemed to refer to the Lease as amended by this Amendment. In all other respects, the terms and conditions of the Lease shall remain unmodified and in effect. 2. SPACE C. A. As of the Space C Delivery Date (as defined below), the Premises shall be amended and expanded by adding to the Current Premises approximately 6,992 rentable square feet ("Space C") on the second floor of the Project as shown on the attached Exhibit 1, so that the Premises shall thereafter consist of approximately 27,859 rentable square feet on the second and fifth floors of the Project. Except as expressly provided otherwise in this Amendment or in the Lease, Space C shall be added to and become part of the Premises on all of the terms and conditions of the Lease, and any reference in the Lease to the Premises shall thereafter be deemed to refer to and include Space C. B. Space C shall be added to the Premises effective on the earlier of (the "Space C Delivery Date"): (1) January 1, 1995, or (2) the date Tenant occupies Space C; provided, that if Landlord has not substantially completed Landlord's Work in Space C pursuant to Section 2E of this Amendment by January 1, 1995, other than for delays caused by Tenant Delay (as defined in Exhibit C-1 to the Lease), the Space C Delivery Date for purposes of this Amendment shall be postponed until substantial completion of Landlord's Work in Space C; Landlord shall not be liable for any delay and the Lease shall not be impaired; and the Space C Term shall automatically be extended to include the same number of months set forth in Section 2C of this Amendment, plus, if the Space C Delivery 82 Date is not the first day of a calendar month, the partial month in which the Space C Delivery Date occurs. C. Space C shall be added to the Premises for a limited term ("Space C Term") of thirty-six (36) months beginning on the Space C Delivery Date and ending on December 31, 1997, unless sooner terminated as provided in the Lease. Upon the expiration or termination of the Space C Term, Tenant shall completely vacate and surrender possession of Space C to Landlord in as good condition as when Tenant took possession, ordinary wear and tear excepted. The expiration or termination of the Space C Term shall not terminate or modify the Term of the Lease with respect to the remaining Premises. D. In addition to the Rent payable for the Current Premises as provided in the Lease, Tenant shall pay Rent for Space C during the Space C Term as follows: (1) Base Rent for Space C shall be determined at an annual rate per rentable square foot in Space C and payable in monthly installments as follows: Period of Annual Rate Monthly Space C Term Per Square Foot Installment - ------------ --------------- ----------- Months 1-12 $10.00 $5,826.67 Months 13-24 $11.00 $6,409.33 Months 25-36 $12.00 $6,992.00 If the Space C Term is extended as provided in Section 2B of this Amendment and the Space C Delivery Date is not the first day of a calendar month, Month 1 in the above schedule shall be the first full calendar month beginning after the Space C Delivery Date, and the Base Rent for the initial partial month shall be prorated daily and paid at the rate provided for Month 1 in the above Schedule. (2) Tenant's Proportionate Share of Operating Costs shall be 9.56%, and Operating Cost Rent shall be payable for Space C at the same rate per rentable square foot as payable for the Current Premises and subject to the same adjustments as provided in the Lease. (3) If the Space C Term begins or ends other than on the first day and last day of a calendar month, the Base Rent and Operating Cost Rent for Space C for any such partial month shall be prorated daily and paid in advance. Rent for Space C shall be payable at the same time and in the same manner as provided for payment of Rent with respect to the Current Premises. E. Landlord shall provide an allowance ("Tenant Finish Allowance") not to exceed $9.60 per rentable square foot in Space C (total $67,123.20) or the total cost of such improvements, whichever is less, to be applied to Tenant Finish Costs (as defined in Exhibit C to the Lease) relating to Space C. Any Tenant Finish Costs in excess of such Tenant Finish Allowance shall be payable by Tenant to Landlord as Additional Rent within thirty (30) days of Landlord's invoice for such costs. As Landlord's Work, Landlord shall construct leasehold improvements in Space C, substantially in accordance with plans and specifications approved by Tenant and Landlord, in a total 83 amount not to exceed the Tenant Finish Allowance. Landlord's Work shall be performed in compliance with the terms and conditions of Exhibit C-1 to the Lease. In all other respects, Tenant agrees to accept Space C in its present condition, "as is," with no obligation for Landlord to do or pay for any improvements or plans. F. During the Space C Term, the term "Premises" shall be deemed to refer to and include Space C, except as expressly provided otherwise in the Lease or this Amendment. Upon the expiration or termination of the Space C Term, Space C shall be deleted from the Premises, and the Lease shall continue in effect as to the remaining Premises. G. Within ten (10) days after written request by Landlord from time to time, Tenant shall execute a written confirmation concerning the Space C Delivery Date, the Space C Term, and any other matter reasonably relating to Space C. 4. TEMPORARY SPACE. Effective on the Space C Delivery Date, the Temporary Space Term (as defined in Amendment No. 3) shall terminate; the Temporary Space shall be deleted from the Lease; and Tenant shall completely vacate and surrender possession of the Temporary Space to Landlord in as good condition as when Tenant took possession, ordinary wear and tear excepted. 5. TENANT REPRESENTATIONS. Tenant hereby represents to Landlord that there has been no assignment of the Lease and no sublease of all or any portion of the Premises, there are no existing defenses or offsets which Tenant has against enforcement of the Lease, and Landlord and Tenant are not currently in default under the Lease. 6. ENTIRE AGREEMENT. The Lease, including, without limitation, this Amendment and all exhibits which are attached hereto and hereby incorporated by reference, constitutes the entire agreement between Landlord and Tenant with respect to the subject matter hereof. Tenant acknowledges that it has not been induced to enter into this Amendment by any agreements or representations which are not set forth in this Amendment. This Amendment shall not be effective until execution and delivery by both Landlord and Tenant. By signing this Amendment, the parties agree to the above terms. LANDLORD: TENANT: MINNESOTA CC PROPERTIES, INC. IN HOME HEALTH, INC. By /s/ Mark J. Wood By /s/ MJ Kennedy -------------------------- ---------------------------- Printed Name: MARK J. WOOD Printed Name: MJ KENNEDY -------------- ---------------- Its: ASST. SECRETARY Its: VP-TREASURER ----------------------- ------------------------- 84 EXHIBIT 1 [CARLSON CENTER - 601 TOWER FLOOR PLAN] 85 EX-10.4 8 EX-10.4 IN HOME HEALTH, INC. STOCK OPTION PLAN OF 1987 Effective April 15, 1987 as amended through October 24, 1995 86 IN HOME HEALTH, INC. STOCK OPTION PLAN ARTICLE I. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT. In Home Health, Inc., a Minnesota corporation ("Company"), hereby establishes a stock option plan for key employees selected for participation in the Plan which shall be known as the "STOCK OPTION PLAN OF 1987" (the "Plan"). It is intended that certain of the options issued pursuant to the Plan to employees of the Company may constitute incentive stock options within the meaning of section 422A of the Internal Revenue Code, and that other options, if any, issued pursuant to the Plan shall constitute nonstatutory options. The Board shall determine which options are to be incentive stock options and which are to be nonstatutory options and shall enter into option agreements with recipients accordingly. 1.2 PURPOSE. The purpose of this Plan is to enhance stockholder investment by attracting, retaining and motivating key employees of the Company, and to encourage stock ownership by such employees by providing them with a means to acquire a proprietary interest in the Company's success. ARTICLE II. DEFINITIONS 2.1 DEFINITIONS. Whenever used herein, the following terms shall have the respective meanings set forth below, unless the context clearly requires otherwise, and when said meaning is intended, the term shall be capitalized. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" shall mean the Committee provided for by Article IV hereof, which may be created at the discretion of the Board. (d) "COMPANY" means In Home Health, Inc., a Minnesota corporation. (e) "DATE OF EXERCISE" means the date the Company receives notice, by an Optionee, if the exercise of an Option pursuant to section 8.1 of this Plan. Such notice shall indicate the number of shares of Stock the Optionee intends to exercise. (f) "EMPLOYEE" means any person, including an officer or director of the Company, who is employed by the Company. 87 (g) "FAIR MARKET VALUE" means the fair market value of Stock upon which an option is granted under this Plan. (h) "INCENTIVE STOCK OPTION" means an Option granted under this Plan which is intended to qualify as an "incentive stock option" within the meaning of Section 422A of the Code. (i) "NONSTATUTORY OPTION" means an Option granted under this Plan which is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Code. Nonstatutory Options may be granted at such times and subject to such restrictions as the Board shall determine without conforming to the statutory rules of Section 422A of the Code applicable to incentive stock options. (j) "OPTION" means the right, granted under this Plan, to purchase Stock of the Company at the option price for a specified period of time. For purposes of this Plan, an Option may be either an Incentive Stock Option or a Nonstatutory Option. (k) "OPTIONEE" means an Employee designated by the Board to participate in the Plan. (l) "PARENT CORPORATION" shall have the meaning set forth in Section 425(e) of the Code with the Company being treated as the employer corporation for purposes of this definition. (m) "SUBSIDIARY CORPORATION" shall have the meaning set forth in Section 425(f) of the Code with the Company being treated as the employer corporation for purposes of this definition. (n) "SIGNIFICANT SHAREHOLDER" means an individual who, within the meaning of Section 422A(b)(6) of the Code, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation of the Company. In determining whether an individual is a Significant Shareholder, an individual shall be treated as owning stock owned by certain relatives of the individual and certain stock owned by corporations in which the individual is a shareholder, partnerships in which the individual is a partner, and estates or trusts of which the individual is a beneficiary, all as provided in Section 425(d) of the Code. (o) "STOCK" means the Common Stock of the Company. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, any masculine terminology when used in this Plan also shall include the feminine gender, and the definition of any term herein in the singular also shall include the plural. 88 ARTICLE III. ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY AND PARTICIPATION. All Employees are eligible to participate in this Plan and receive Incentive Stock Options and/or Nonstatutory Options hereunder. Optionees in the Plan shall be selected by the Board from among those Employees who, in the opinion of the Board, are in a position to contribute materially to the Company's and its Subsidiary Corporations' continued growth and development and to its long-term financial success. ARTICLE IV. ADMINISTRATION 4.1 ADMINISTRATION. The Plan shall be administered by the Board of Directors or by a Committee of two or more persons who are disinterested persons within the meaning of SEC Regulation 16b-3. The Committee shall be appointed by the Board and shall serve at the pleasure of the Board. Where a Committee has been created by the Board, references in the Plan to actions to be taken by the Board shall be deemed to refer to the Committee, except where limited by the Plan or by the Board. The Committee shall have the power and authority: (i) to select the officers and other key employees of the Company and its Subsidiaries to whom Options may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Nonstatutory Options, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such Option granted hereunder; and (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of Options granted hereunder. The Committee shall also have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Option issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Optionees. 89 ARTICLE V. STOCK SUBJECT TO THE PLAN 5.1 NUMBER. The total number of shares of Stock hereby made available and reserved for issuance under the Plan shall be 2,500,000. The aggregate number of shares of Stock available under this Plan shall be subject to adjustment as provided in section 5.3. The total number of shares of Stock may be authorized but unissued shares of Stock, or shares acquired by purchase as directed by the Board from time to time in its discretion, to be used for issuance upon exercise of Options granted hereunder. 5.2 UNUSED STOCK. If an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares of Stock subject thereto shall (unless the Plan shall have terminated) become available for other Options under the Plan. 5.3 ADJUSTMENT IN CAPITALIZATION. In the event of any change in the outstanding shares of Stock by reason of a stock dividend or split, recapitalization, reclassification, or other similar corporate change, the aggregate number of shares of Stock set forth in Section 5.1 shall be appropriately adjusted by the Board, whose determination shall be conclusive; provided however, that fractional shares shall be rounded to the nearest whole share. In any such case, the number and kind of shares that are subject to any Option (including any Option outstanding after termination of employment) and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon exercise of the Option. ARTICLE VI. DURATION OF THE PLAN 6.1 DURATION OF THE PLAN. Subject to the stockholder approval, the Plan shall be in effect for ten years from the date of its adoption by the Board. Any Options outstanding at the end of said period shall remain in effect in accordance with their terms. The Plan shall terminate before the end of said period, if all Stock subject to it has been purchased pursuant to the exercise of Options granted under the Plan. ARTICLE VII. TERMS OF STOCK OPTIONS. 7.1 GRANT OF OPTIONS. Subject to section 5.1, Options may be granted to Employees at any time and from time to time as determined by the Board. The Board shall have complete discretion in determining the number of Options granted to each Optionee. In making such determinations, the Board may take into account the nature of services rendered by such Employees, their present and potential contributions to the Company, and such other factors as the Board in its discretion shall deem relevant. The Board also shall determine whether an Option is to be an Incentive Stock Option or a Nonstatutory Option. 90 The total Fair Market Value (determined at the date of grant) of shares of Stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year under all plans of the Company under which Incentive Stock Options may be granted (and all such plans of any Parent Corporations and any Subsidiary Corporations of the Company) shall not exceed $100,000. (Hereinafter, this limitation is sometimes referred to as the "$100,000 Limitation.") The written Option agreements with the Optionees shall contain such provisions as may be necessary to implement the $100,000 Limitation, taking into account the restrictions on exercise which already exist upon the Option or Options held by the Optionee which are subject to the $100,000 Limitation. Where an Option holder already holds Options subject to the $100,000 Limitation, and the Optionee is granted a new Incentive Stock Option under this plan, the Board or Committee may, if permitted by the Code and the regulations and interpretations thereunder, impose the restrictions upon exercisability which are necessary to implement the $100,000 Limitation in whole or in part upon the previously issued Option or Options to accelerate the exercisability of the newly granted Incentive Stock Option. Nothing in this Article VII of the Plan shall be deemed to prevent the grant of Options in excess of the $100,000 Limitation where such excess amount is treated as a Nonstatutory Option. The Board is expressly given the authority to issue amended Options with respect to shares of Stock subject to an Option previously granted hereunder. An amended Option amends the terms of an Option previously granted and thereby supersedes the previous Option. 7.2 NO TANDEM OPTIONS. Where an Option granted under this Plan is intended to be an Incentive Stock Option, the Option shall not contain terms pursuant to which the exercise of the Option would affect the Optionee's right to exercise another Option, or vice versa, such that the Option intended to be an Incentive Stock Option would be deemed a tandem stock option within the meaning of the regulations under Section 422A of the Code. 7.3 OPTION AGREEMENT. As determined by the Board on the date of grant, each Option shall be evidenced by an Option Agreement (the "Option Agreement") that includes the nontransferability provisions of Section 10.2 hereof and specifies: whether the Option is an Incentive Stock Option or a Nonstatutory Option; the Option price; the duration of the Option; the number of shares of Stock to which the Option applies; any vesting or serial exercise restrictions which the Board may impose; and any other terms or conditions which the Board may impose. All Option Agreements shall incorporate the provisions of this Plan by reference, with certain provisions to apply depending upon whether the Option Agreement applies to an Incentive Stock Option or to a Nonstatutory Option. 7.2 OPTION PRICE. No Incentive Stock Option granted pursuant to this Plan shall have an Option price that is less than the Fair Market Value of Stock on the date the Option is granted. 91 Incentive Stock Options granted to Significant Shareholders shall have an Option price of not less than 110 percent of the Fair Market Value of Stock on the date of grant. The Option price for Nonstatutory Options shall be established by the Board and shall not be subject to the restrictions applicable to Incentive Stock Options. 7.5 TERM OF OPTIONS. Each Option shall expire at such time as the Board shall determine when it is granted, provided however that no Option shall be exercisable later than the tenth anniversary date of its grant. By its terms, an Incentive Stock Option granted to a Significant Shareholder shall not be exercisable after five years from the date of grant. 7.6 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such time and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for all Optionees. 7.7 PAYMENT. Payment for all shares of Stock shall be made at the time that an Option, or any part thereof, is exercised, and no shares shall be issued until full payment therefore has been made. Payment shall be made (i) in cash, or (ii) if acceptable to the Board, in stock or in some other form; provided, however, in the case of an Incentive Stock Option, that said other form of payment does not prevent the Option from qualifying for treatment as an "incentive stock option" within the meaning of the Code. 7.8 ANNUAL LIMIT ON ALL STOCK OPTIONS. No eligible person shall be granted any stock options for more than 300,000 shares of stock in the aggregate during any fiscal year period, subject to adjustments pursuant to Section 5.3. For this purpose, each fiscal year period shall begin each October 1 and shall end on the following September 30. ARTICLE VIII. WRITTEN NOTICE, ISSUANCE OF STOCK CERTIFICATES, STOCKHOLDER PRIVILEGES 8.1 WRITTEN NOTICE. An Optionee wishing to exercise an Option shall give written notice to the Company, in the form and manner prescribed by the Board. Full payment for the shares exercised pursuant to the Option must accompany the written notice. 8.2 ISSUANCE OF STOCK CERTIFICATES. As soon as practicable after the receipt of written notice and payment, the Company shall deliver to the Optionee or to a nominee of the Optionee a certificate or certificates for the requisite number of shares of Stock. 8.3 PRIVILEGES OF A STOCKHOLDER. An Optionee or any other person entitled to exercise an Option under this Plan shall not have stockholder privileges with respect to any Stock covered by the Option until the date of issuance of a stock certificate for such stock. 92 ARTICLE IX. TERMINATION OF EMPLOYMENT 9.1 DEATH. If an Optionee's employment terminates by reason of death, the Option may thereafter be exercised at any time prior to the expiration date of the Option or within 12 months after the date of such death, whichever period is the shorter, by the person or persons entitled to do so under the Optionee's will or, if the Optionee shall fail to make a testamentary disposition of an Option or shall die intestate, the Optionee's legal representative or representatives. The Option shall be exercisable only to the extent that such Option was exercisable as of the date of death. 9.2 TERMINATION OTHER THAN FOR CAUSE OR DUE TO DEATH. In the event of an Optionee's termination of employment, other than by reason of death, the Optionee may exercise such portion of his Option as was exercisable by him at the date of such termination (the "Termination Date") at any time within three (3) months of the Termination Date; provided, however, that where the Optionee is terminated due to disability within the meaning of Code Section 422A(c)(7), he may exercise such portion of his Option as was exercisable by him on his Termination Date within One year of his Termination Date. In any event, the Option cannot be exercised after the expiration of the term of the Option. Options not exercised within the applicable period specified above shall terminate. In the case of an Employee, a change of duties or position within the Company or an assignment of employment in a Subsidiary Corporation or Parent Corporation of the Company, if any, or from such a Corporation to the Company, shall not be considered a termination of employment for purposes of this Plan. The Option Agreements may contain such provisions as the Board shall approve with reference to the effect of approved leaves of absence upon termination of employment. 9.3 TERMINATION FOR CAUSE. In the event of an Optionee's termination of employment by the Company for cause, any Option or Options held by him under the Plan, to the extent not exercised before such termination, shall forthwith terminate. ARTICLE X. RIGHTS OF OPTIONEES 10.1 SERVICE. Nothing in this Plan shall interfere with or limit in any way the right of the Company to terminate any Employee's employment at any time, nor confer upon any Employee any right to continue in the employ of the Company. 10.2 NONTRANSFERABILITY. All Options granted under this Plan shall be nontransferable by the Optionee, other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee. 93 ARTICLE XI. OPTIONEE'S TRANSFER OR LEAVE OF ABSENCE 11.1 OPTIONEE'S TRANSFER OR LEAVE OF ABSENCE. For Plan purposes-- (a) a transfer of an Optionee from the Company to a Subsidiary Corporation or Parent Corporation, or from one such Corporation to another, or (b) a leave of absence for an Optionee (i) which is duly authorized in writing by the Company, and (ii) if the Optionee holds an Incentive Stock Option, which qualifies under the applicable regulations under the Code which apply in the case of incentive stock options, shall not be deemed a termination of employment. However, under no circumstances may an Optionee exercise an Option during any leave of absence, unless authorized by the Board. ARTICLE XII. AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN 12.1 AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN. The Board may at any time terminate, and from time to time any may amend or modify the Plan, provided, however, that no such action of the Board, without approval of the stockholders, may-- (a) increase the total amount of Stock which may be purchased through Options granted under the Plan, except as provided in section 5.1; (b) change the class of Employees eligible to receive Options; No amendment, modification, or termination of the Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent of the Optionee holding the Option. ARTICLE XIII. MERGER OR CONSOLIDATION 13.1 MERGER OR CONSOLIDATION. (a) Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation, any Option granted hereunder shall pertain to and apply to the Securities to which a holder of the number of shares of Stock subject to the Option would have been entitled in such merger or consolidation. (b) A dissolution or a liquidation of the Company or a merger and consolidation in which the Company is not the surviving corporation shall cause every Option outstanding hereunder to terminate as of the effective date of such dissolution, liquidation, merger or consolidation. 94 However, the Optionee either (i) shall be offered a firm commitment whereby the resulting or surviving corporation in a merger or consolidation will tender to the Optionee an option (the "Substitute Option") to purchase its shares on terms and conditions both as to number of shares and otherwise, which will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder granted by the Company, or (ii) shall have the right immediately prior to such dissolution, liquidation, merger, or consolidation to exercise any unexercised Options whether or not then exercisable, subject to the provisions of this Plan. The Board shall have absolute and uncontrolled discretion to determine whether the Optionee has been offered a firm commitment and whether the tendered Substitute Option will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder. In any event, any Substitute Option for an Incentive Stock Option shall comply with the requirements of Code Section 425(a). Notwithstanding the foregoing provisions providing that Options shall or may become immediately exercisable in full upon the dissolution or liquidation of the Company, or in certain mergers or consolidations, Incentive Stock Options shall become immediately exercisable in full only to the extent that this is permitted under the $100,000 Limitation as this Limitation is interpreted by the Code and the regulations and decisions thereunder. To the extent an Incentive Stock Option is not exercisable due to this Limitation, the unexercised portion of the Option shall terminate. However, in the case of a merger, consolidation, or other form of reorganization, the surviving corporation or its parent corporation shall have the right, but not the obligation, to issue Substitute Options for the portion not exercisable, as provided above. 13.2 CHANGE IN CONTROL. In the event that the Company closes and consummates any transaction which has been approved by the Company's stockholders which, while not a merger or consolidation, involves a change in control of the Company, then, notwithstanding any other provision of the Plan, (i) the Board or the Committee may grant as a part of such transaction Options which are not subject to the termination provisions of Article IX and having such other terms and provisions as the Board or the Committee deems appropriate, and (ii) any outstanding Option held by non-employee members of the Board of Directors shall be immediately vested in full. ARTICLE XIV. SECURITIES REGISTRATION 14.1 SECURITIES REGISTRATION. In the event that the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any Stock with respect to which an Option may be or shall have been granted or exercised, or to qualify any such Options or Stock under the Securities Act of 1933, as amended, or any other statute, then the Optionee shall cooperate with the Company and take such action as is necessary to permit registration or qualified of such Options or Stock. Unless the Company has determined that the following representation is unnecessary, each person exercising an Optionee under the Plan may be required by the Company, as a condition to 95 the issuance of the shares pursuant to exercise of the Option, to make a representation in writing (a) that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof, and (b) that before any transfer in connection with the resale of such shares, he will obtain the written opinion of counsel for the Company, or other counsel acceptable to the Company, that such shares may be transferred. The Company may also require that the certificates representing such shares contain legends reflecting the foregoing. ARTICLE XV. TAX WITHHOLDING 15.1 TAX WITHHOLDING. Whenever shares of Stock are to be issued in satisfaction of Options exercised under this Plan, the Company shall have the power to require the recipient of the Stock to remit to the Company in amount sufficient to satisfy federal, state, and local withholding tax requirements. ARTICLE XVI. INDEMNIFICATION 16.1 INDEMNIFICATION. To the extent permitted by law, each person who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's articles of incorporation or bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them to hold them harmless. ARTICLE XVII. REQUIREMENTS OF LAW 17.1 REQUIREMENTS OF LAW. The granting of Options and the issuance of shares of Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchange as may be required. 17.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Minnesota. 96 ARTICLE XVIII. EFFECTIVE DATE OF PLAN 18.1 EFFECTIVE DATE. The Plan shall be effective on April 15, 1987, the date of its adoption by the Board. ARTICLE XIX. COMPLIANCE WITH CODE. 19.1 COMPLIANCE WITH CODE. Incentive Stock Options granted hereunder are intended to qualify as "incentive stock options" under Code Section 422A. If any provision of this Plan is susceptible to more than one interpretation, such interpretation shall be given thereto as is consistent with Incentive Stock Options granted under this Plan being treated as incentive stock options under the Code. ARTICLE XX. NO OBLIGATION TO EXERCISE OPTION. 20.1 NO OBLIGATION TO EXERCISE. The granting of an Option shall impose no obligation upon the holder thereof to exercise such Option. 97 EX-10.5 9 EX-10.5 IN HOME HEALTH, INC. 1995 STOCK OPTION PLAN Effective November 8, 1994 as amended through October 24, 1995 98 IN HOME HEALTH, INC. STOCK OPTION PLAN ARTICLE I. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT. In Home Health, Inc., a Minnesota corporation ("Company"), hereby establishes a stock option plan for key employees selected for participation in the Plan which shall be known as the "1995 STOCK OPTION PLAN" (the "Plan"). It is intended that certain of the options issued pursuant to the Plan to employees of the Company may constitute incentive stock options within the meaning of section 422A of the Internal Revenue Code, and that other options, if any, issued pursuant to the Plan shall constitute nonstatutory options. The Board shall determine which options are to be incentive stock options and which are to be nonstatutory options and shall enter into option agreements with recipients accordingly. 1.2 PURPOSE. The purpose of this Plan is to enhance stockholder investment by attracting, retaining and motivating key employees of the Company, and to encourage stock ownership by such employees by providing them with a means to acquire a proprietary interest in the Company's success. ARTICLE II. DEFINITIONS 2.1 DEFINITIONS. Whenever used herein, the following terms shall have the respective meanings set forth below, unless the context clearly requires otherwise, and when said meaning is intended, the term shall be capitalized. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" shall mean the Committee provided for by Article IV hereof, which may be created at the discretion of the Board. (d) "COMPANY" means In Home Health, Inc., a Minnesota corporation. (e) "DATE OF EXERCISE" means the date the Company receives notice, by an Optionee, if the exercise of an Option pursuant to section 8.1 of this Plan. Such notice shall indicate the number of shares of Stock the Optionee intends to exercise. (f) "EMPLOYEE" means any person, including an officer or director of the Company, who is employed by the Company. 99 (g) "FAIR MARKET VALUE" means the fair market value of Stock upon which an option is granted under this Plan. (h) "INCENTIVE STOCK OPTION" means an Option granted under this Plan which is intended to qualify as an "incentive stock option" within the meaning of Section 422A of the Code. (i) "NONSTATUTORY OPTION" means an Option granted under this Plan which is not intended to qualify as an incentive stock option within the meaning of Section 422A of the Code. Nonstatutory Options may be granted at such times and subject to such restrictions as the Board shall determine without conforming to the statutory rules of Section 422A of the Code applicable to incentive stock options. (j) "OPTION" means the right, granted under this Plan, to purchase Stock of the Company at the option price for a specified period of time. For purposes of this Plan, an Option may be either an Incentive Stock Option or a Nonstatutory Option. (k) "OPTIONEE" means an Employee designated by the Board to participate in the Plan. (l) "PARENT CORPORATION" shall have the meaning set forth in Section 425(e) of the Code with the Company being treated as the employer corporation for purposes of this definition. (m) "SUBSIDIARY CORPORATION" shall have the meaning set forth in Section 425(f) of the Code with the Company being treated as the employer corporation for purposes of this definition. (n) "SIGNIFICANT SHAREHOLDER" means an individual who, within the meaning of Section 422A(b)(6) of the Code, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation of the Company. In determining whether an individual is a Significant Shareholder, an individual shall be treated as owning stock owned by certain relatives of the individual and certain stock owned by corporations in which the individual is a shareholder, partnerships in which the individual is a partner, and estates or trusts of which the individual is a beneficiary, all as provided in Section 425(d) of the Code. (o) "STOCK" means the Common Stock of the Company. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, any masculine terminology when used in this Plan also shall include the feminine gender, and the definition of any term herein in the singular also shall include the plural. 100 ARTICLE III. ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY AND PARTICIPATION. All Employees are eligible to participate in this Plan and receive Incentive Stock Options and/or Nonstatutory Options hereunder. Optionees in the Plan shall be selected by the Board from among those Employees who, in the opinion of the Board, are in a position to contribute materially to the Company's and its Subsidiary Corporations' continued growth and development and to its long-term financial success. ARTICLE IV. ADMINISTRATION 4.1 ADMINISTRATION. The Plan shall be administered by the Board of Directors or by a Committee of two or more persons who are disinterested persons within the meaning of SEC Regulation 16b-3. The Committee shall be appointed by the Board and shall serve at the pleasure of the Board. Where a Committee has been created by the Board, references in the Plan to actions to be taken by the Board shall be deemed to refer to the Committee, except where limited by the Plan or by the Board. The Committee shall have the power and authority: (i) to select the officers and other key employees of the Company and its Subsidiaries to whom Options may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Nonstatutory Options, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such Option granted hereunder; and (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of Options granted hereunder. The Committee shall also have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Option issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Optionees. 101 ARTICLE V. STOCK SUBJECT TO THE PLAN 5.1 NUMBER. The total number of shares of Stock hereby made available and reserved for issuance under the Plan shall be 1,300,000. The aggregate number of shares of Stock available under this Plan shall be subject to adjustment as provided in section 5.3. The total number of shares of Stock may be authorized but unissued shares of Stock, or shares acquired by purchase as directed by the Board from time to time in its discretion, to be used for issuance upon exercise of Options granted hereunder. 5.2 UNUSED STOCK. If an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares of Stock subject thereto shall (unless the Plan shall have terminated) become available for other Options under the Plan. 5.3 ADJUSTMENT IN CAPITALIZATION. In the event of any change in the outstanding shares of Stock by reason of a stock dividend or split, recapitalization, reclassification, or other similar corporate change, the aggregate number of shares of Stock set forth in Section 5.1 shall be appropriately adjusted by the Board, whose determination shall be conclusive; provided however, that fractional shares shall be rounded to the nearest whole share. In any such case, the number and kind of shares that are subject to any Option (including any Option outstanding after termination of employment) and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon exercise of the Option. ARTICLE VI. DURATION OF THE PLAN 6.1 DURATION OF THE PLAN. Subject to the stockholder approval, the Plan shall be in effect for ten years from the date of its adoption by the Board. Any Options outstanding at the end of said period shall remain in effect in accordance with their terms. The Plan shall terminate before the end of said period, if all Stock subject to it has been purchased pursuant to the exercise of Options granted under the Plan. ARTICLE VII. TERMS OF STOCK OPTIONS. 7.1 GRANT OF OPTIONS. Subject to section 5.1, Options may be granted to Employees at any time and from time to time as determined by the Board. The Board shall have complete discretion in determining the number of Options granted to each Optionee. In making such determinations, the Board may take into account the nature of services rendered by such Employees, their present and potential contributions to the Company, and such other factors as the Board in its discretion shall deem relevant. The Board also shall determine whether an Option is to be an Incentive Stock Option or a Nonstatutory Option. 102 The total Fair Market Value (determined at the date of grant) of shares of Stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year under all plans of the Company under which Incentive Stock Options may be granted (and all such plans of any Parent Corporations and any Subsidiary Corporations of the Company) shall not exceed $100,000. (Hereinafter, this limitation is sometimes referred to as the "$100,000 Limitation.") The written Option agreements with the Optionees shall contain such provisions as may be necessary to implement the $100,000 Limitation, taking into account the restrictions on exercise which already exist upon the Option or Options held by the Optionee which are subject to the $100,000 Limitation. Where an Option holder already holds Options subject to the $100,000 Limitation, and the Optionee is granted a new Incentive Stock Option under this plan, the Board or Committee may, if permitted by the Code and the regulations and interpretations thereunder, impose the restrictions upon exercisability which are necessary to implement the $100,000 Limitation in whole or in part upon the previously issued Option or Options to accelerate the exercisability of the newly granted Incentive Stock Option. Nothing in this Article VII of the Plan shall be deemed to prevent the grant of Options in excess of the $100,000 Limitation where such excess amount is treated as a Nonstatutory Option. The Board is expressly given the authority to issue amended Options with respect to shares of Stock subject to an Option previously granted hereunder. An amended Option amends the terms of an Option previously granted and thereby supersedes the previous Option. 7.2 NO TANDEM OPTIONS. Where an Option granted under this Plan is intended to be an Incentive Stock Option, the Option shall not contain terms pursuant to which the exercise of the Option would affect the Optionee's right to exercise another Option, or vice versa, such that the Option intended to be an Incentive Stock Option would be deemed a tandem stock option within the meaning of the regulations under Section 422A of the Code. 7.3 OPTION AGREEMENT. As determined by the Board on the date of grant, each Option shall be evidenced by an Option Agreement (the "Option Agreement") that includes the nontransferability provisions of Section 10.2 hereof and specifies: whether the Option is an Incentive Stock Option or a Nonstatutory Option; the Option price; the duration of the Option; the number of shares of Stock to which the Option applies; any vesting or serial exercise restrictions which the Board may impose; and any other terms or conditions which the Board may impose. All Option Agreements shall incorporate the provisions of this Plan by reference, with certain provisions to apply depending upon whether the Option Agreement applies to an Incentive Stock Option or to a Nonstatutory Option. 7.2 OPTION PRICE. No Incentive Stock Option granted pursuant to this Plan shall have an Option price that is less than the Fair Market Value of Stock on the date the Option is granted. 103 Incentive Stock Options granted to Significant Shareholders shall have an Option price of not less than 110 percent of the Fair Market Value of Stock on the date of grant. The Option price for Nonstatutory Options shall be established by the Board and shall not be subject to the restrictions applicable to Incentive Stock Options. 7.5 TERM OF OPTIONS. Each Option shall expire at such time as the Board shall determine when it is granted, provided however that no Option shall be exercisable later than the tenth anniversary date of its grant. By its terms, an Incentive Stock Option granted to a Significant Shareholder shall not be exercisable after five years from the date of grant. 7.6 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such time and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for all Optionees. 7.7 PAYMENT. Payment for all shares of Stock shall be made at the time that an Option, or any part thereof, is exercised, and no shares shall be issued until full payment therefore has been made. Payment shall be made (i) in cash, or (ii) if acceptable to the Board, in stock or in some other form; provided, however, in the case of an Incentive Stock Option, that said other form of payment does not prevent the Option from qualifying for treatment as an "incentive stock option" within the meaning of the Code. 7.8 ANNUAL LIMIT ON ALL STOCK OPTIONS. No eligible person shall be granted any stock options for more than 300,000 shares of stock in the aggregate during any fiscal year period, subject to adjustments pursuant to Section 5.3. For this purpose, each fiscal year period shall begin each October 1 and shall end on the following September 30. ARTICLE VIII. WRITTEN NOTICE, ISSUANCE OF STOCK CERTIFICATES, STOCKHOLDER PRIVILEGES 8.1 WRITTEN NOTICE. An Optionee wishing to exercise an Option shall give written notice to the Company, in the form and manner prescribed by the Board. Full payment for the shares exercised pursuant to the Option must accompany the written notice. 8.2 ISSUANCE OF STOCK CERTIFICATES. As soon as practicable after the receipt of written notice and payment, the Company shall deliver to the Optionee or to a nominee of the Optionee a certificate or certificates for the requisite number of shares of Stock. 8.3 PRIVILEGES OF A STOCKHOLDER. An Optionee or any other person entitled to exercise an Option under this Plan shall not have stockholder privileges with respect to any Stock covered by the Option until the date of issuance of a stock certificate for such stock. 104 ARTICLE IX. TERMINATION OF EMPLOYMENT 9.1 DEATH. If an Optionee's employment terminates by reason of death, the Option may thereafter be exercised at any time prior to the expiration date of the Option or within 12 months after the date of such death, whichever period is the shorter, by the person or persons entitled to do so under the Optionee's will or, if the Optionee shall fail to make a testamentary disposition of an Option or shall die intestate, the Optionee's legal representative or representatives. The Option shall be exercisable only to the extent that such Option was exercisable as of the date of death. 9.2 TERMINATION OTHER THAN FOR CAUSE OR DUE TO DEATH. In the event of an Optionee's termination of employment, other than by reason of death, the Optionee may exercise such portion of his Option as was exercisable by him at the date of such termination (the "Termination Date") at any time within three (3) months of the Termination Date; provided, however, that where the Optionee is terminated due to disability within the meaning of Code Section 422A(c)(7), he may exercise such portion of his Option as was exercisable by him on his Termination Date within One year of his Termination Date. In any event, the Option cannot be exercised after the expiration of the term of the Option. Options not exercised within the applicable period specified above shall terminate. In the case of an Employee, a change of duties or position within the Company or an assignment of employment in a Subsidiary Corporation or Parent Corporation of the Company, if any, or from such a Corporation to the Company, shall not be considered a termination of employment for purposes of this Plan. The Option Agreements may contain such provisions as the Board shall approve with reference to the effect of approved leaves of absence upon termination of employment. 9.3 TERMINATION FOR CAUSE. In the event of an Optionee's termination of employment by the Company for cause, any Option or Options held by him under the Plan, to the extent not exercised before such termination, shall forthwith terminate. ARTICLE X. RIGHTS OF OPTIONEES 10.1 SERVICE. Nothing in this Plan shall interfere with or limit in any way the right of the Company to terminate any Employee's employment at any time, nor confer upon any Employee any right to continue in the employ of the Company. 10.2 NONTRANSFERABILITY. All Options granted under this Plan shall be nontransferable by the Optionee, other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee. 105 ARTICLE XI. OPTIONEE'S TRANSFER OR LEAVE OF ABSENCE 11.1 OPTIONEE'S TRANSFER OR LEAVE OF ABSENCE. For Plan purposes-- (a) a transfer of an Optionee from the Company to a Subsidiary Corporation or Parent Corporation, or from one such Corporation to another, or (b) a leave of absence for an Optionee (i) which is duly authorized in writing by the Company, and (ii) if the Optionee holds an Incentive Stock Option, which qualifies under the applicable regulations under the Code which apply in the case of incentive stock options, shall not be deemed a termination of employment. However, under no circumstances may an Optionee exercise an Option during any leave of absence, unless authorized by the Board. ARTICLE XII. AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN 12.1 AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN. The Board may at any time terminate, and from time to time any may amend or modify the Plan, provided, however, that no such action of the Board, without approval of the stockholders, may-- (a) increase the total amount of Stock which may be purchased through Options granted under the Plan, except as provided in section 5.1; (b) change the class of Employees eligible to receive Options; No amendment, modification, or termination of the Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent of the Optionee holding the Option. ARTICLE XIII. MERGER OR CONSOLIDATION 13.1 MERGER OR CONSOLIDATION. (a) Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation, any Option granted hereunder shall pertain to and apply to the Securities to which a holder of the number of shares of Stock subject to the Option would have been entitled in such merger or consolidation. (b) A dissolution or a liquidation of the Company or a merger and consolidation in which the Company is not the surviving corporation shall cause every Option outstanding hereunder to terminate as of the effective date of such dissolution, liquidation, merger or consolidation. 106 However, the Optionee either (i) shall be offered a firm commitment whereby the resulting or surviving corporation in a merger or consolidation will tender to the Optionee an option (the "Substitute Option") to purchase its shares on terms and conditions both as to number of shares and otherwise, which will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder granted by the Company, or (ii) shall have the right immediately prior to such dissolution, liquidation, merger, or consolidation to exercise any unexercised Options whether or not then exercisable, subject to the provisions of this Plan. The Board shall have absolute and uncontrolled discretion to determine whether the Optionee has been offered a firm commitment and whether the tendered Substitute Option will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder. In any event, any Substitute Option for an Incentive Stock Option shall comply with the requirements of Code Section 425(a). Notwithstanding the foregoing provisions providing that Options shall or may become immediately exercisable in full upon the dissolution or liquidation of the Company, or in certain mergers or consolidations, Incentive Stock Options shall become immediately exercisable in full only to the extent that this is permitted under the $100,000 Limitation as this Limitation is interpreted by the Code and the regulations and decisions thereunder. To the extent an Incentive Stock Option is not exercisable due to this Limitation, the unexercised portion of the Option shall terminate. However, in the case of a merger, consolidation, or other form of reorganization, the surviving corporation or its parent corporation shall have the right, but not the obligation, to issue Substitute Options for the portion not exercisable, as provided above. 13.2 CHANGE IN CONTROL. In the event that the Company closes and consummates any transaction which has been approved by the Company's stockholders which, while not a merger or consolidation, involves a change in control of the Company, then, notwithstanding any other provision of the Plan, (i) the Board or the Committee may grant as a part of such transaction Options which are not subject to the termination provisions of Article IX and having such other terms and provisions as the Board or the Committee deems appropriate, and (ii) any outstanding Option held by non-employee members of the Board of Directors shall be immediately vested in full. ARTICLE XIV. SECURITIES REGISTRATION 14.1 SECURITIES REGISTRATION. In the event that the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any Stock with respect to which an Option may be or shall have been granted or exercised, or to qualify any such Options or Stock under the Securities Act of 1933, as amended, or any other statute, then the Optionee shall cooperate with the Company and take such action as is necessary to permit registration or qualified of such Options or Stock. Unless the Company has determined that the following representation is unnecessary, each person exercising an Optionee under the Plan may be required by the Company, as a condition to 107 the issuance of the shares pursuant to exercise of the Option, to make a representation in writing (a) that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof, and (b) that before any transfer in connection with the resale of such shares, he will obtain the written opinion of counsel for the Company, or other counsel acceptable to the Company, that such shares may be transferred. The Company may also require that the certificates representing such shares contain legends reflecting the foregoing. ARTICLE XV. TAX WITHHOLDING 15.1 TAX WITHHOLDING. Whenever shares of Stock are to be issued in satisfaction of Options exercised under this Plan, the Company shall have the power to require the recipient of the Stock to remit to the Company in amount sufficient to satisfy federal, state, and local withholding tax requirements. ARTICLE XVI. INDEMNIFICATION 16.1 INDEMNIFICATION. To the extent permitted by law, each person who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's articles of incorporation or bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them to hold them harmless. ARTICLE XVII. REQUIREMENTS OF LAW 17.1 REQUIREMENTS OF LAW. The granting of Options and the issuance of shares of Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchange as may be required. 17.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Minnesota. 108 ARTICLE XVIII. EFFECTIVE DATE OF PLAN 18.1 EFFECTIVE DATE. The Plan shall be effective on November 8, 1994, the date of its adoption by the Board. ARTICLE XIX. COMPLIANCE WITH CODE. 19.1 COMPLIANCE WITH CODE. Incentive Stock Options granted hereunder are intended to qualify as "incentive stock options" under Code Section 422A. If any provision of this Plan is susceptible to more than one interpretation, such interpretation shall be given thereto as is consistent with Incentive Stock Options granted under this Plan being treated as incentive stock options under the Code. ARTICLE XX. NO OBLIGATION TO EXERCISE OPTION. 20.1 NO OBLIGATION TO EXERCISE. The granting of an Option shall impose no obligation upon the holder thereof to exercise such Option. 109 EX-10.19 10 EX-10.19 [HARRIS BANK LOGO] Harris Trust and Savings Bank Attn: Letter of Credit Section P.O. Box 755 311 W. Monroe St., 13th Floor Chicago, IL 60690-0755 Chicago, Illinois 60606 EXHIBIT 10.19 OUR IRREVOCABLE STANDBY LETTER OF DATE OF ISSUE: DECEMBER 21, 1995 CREDIT NUMBER SPL 35003 APPLICANT: BENEFICIARY: IN HOME HEALTH, INC. THE TRAVELERS INDEMNITY CO. 601 LAKESHORE PARKWAY NATIONAL ACCTS COLLATERAL MINNETONKA, MN 55305 ONE TOWER SQUARE HARTFORD, CT. 06183 AVAILABLE AMOUNT: MAXIMUM USD 4,520,000.00 EXPIRY DATE : DECEMBER 12, 1996 THIS IS A NON-PRINT LETTER OF CREDIT TO BE USED FOR FILE PURPOSES ONLY. THE ORIGINAL DOCUMENT WAS CREATED TODAY OUTSIDE OF THE LETTER OF CREDIT SYSTEM, A COPY OF WHICH IS ATTACHED. PREPARED BY: RFN 110 [HARRIS BANK LOGO] Harris Trust and Savings Bank Attn: Letter of Credit Section P.O. Box 755 311 W. Monroe St., 13th Floor Chicago, IL 60690-0755 Chicago, Illinois 60606 MAIL TO: DECEMBER 21, 1995 IN HOME HEALTH, INC. OUR STANDBY LETTER OF CREDIT 601 LAKESHORE PARKWAY NUMBER: SPL35003 MINNETONKA, MN 55305 YOUR CUSTOMER: THE TRAVELERS INDEMNITY CO. WE HEREWITH INVOICE YOU AS FOLLOWS: CHARGE TYPE CHARGE AMOUNT ------------------------ ---------------- STANDBY L/C COMMISSION USD 11,425.56 ________________ TOTAL DUE: USD 11,425.56 AMOUNT CALCULATED: $4,520,000.00 X 1/4% X 364/360 (12/15/95-12/12/96 PLEASE REMIT YOUR CHECK, ALONG WITH A COPY OF THIS INVOICE, TO THE ATTENTION OF THE STANDBY LETTER OF CREDIT UNIT, 311 WEST MONROE STREET, 13TH FLOOR, CHICAGO, ILLINOIS 60606 QUOTING OUR REFERENCE NUMBER SPL35003. IF YOU HAVE ANY QUESTIONS REGARDING THIS INVOICE, PLEASE CALL THE STANDBY LETTER OF CREDIT PROCESSING UNIT AT (312) 461-6460 OR (312) 461-6463. HARRIS TRUST AND SAVINGS BANK PREPARED BY: RFN 111 Harris Trust and 111 West Monroe Street Telephone (312) 461-2121 Savings Bank P.O. Box 755 Chicago, Illinois 60690-0755 - -------------------------------------------------------------------------------- [HARRIS BANK - LOGO] IRREVOCABLE LETTER OF CREDIT NO. SPL35003 TO: The Travelers Indemnity Company (Beneficiary) December 15, 1995 National Accounts Collateral Unit Attn: Indra Gajraj - 9GS One Tower Square Hartford, Connecticut 06183 We hereby establish this clean irrevocable Letter of Credit in favor of the aforesaid addressee ("BENEFICIARY") for drawings up to United States $4,520,000 effective immediately. This Letter of Credit is issued, presentable and payable at our office at 311 West Monroe Street, Chicago, Illinois 60606 and expires with our close of business on December 12, 1996. Shawmut Bank Connecticut, N.A., Boston, Massachusetts is hereby authorized to negotiate documents under this credit. After the Letter of Credit has been issued, it cannot be revoked or reduced without the consent of the Beneficiary. The term "BENEFICIARY" includes any successor by operation of law of the named Beneficiary including, without limitation, any liquidator, rehabilitator, receiver or conservator. We hereby undertake to promptly honor your sight draft(s) drawn on us, indicating our Credit No. SPL35003, for all or any part of this Credit if presented at our office, or the office of the negotiating bank, specified in paragraph one on or before the expiry date or any automatically extended expiry date. If you so choose, you will be able to draw on this Letter of Credit more than once, so long as the sum of the amounts which you draw does not exceed the full amount of the Letter of Credit. This Letter of Credit sets forth in full the terms of our undertaking, and such undertaking shall not in any way be modified, amended or amplified by reference to any note, document, instrument or agreement referred to herein or in which this Letter of Credit relates and any such reference shall not be deemed to be incorporated herein by reference to any note, document or agreement. The obligation of Harris Trust and Savings Bank under this Letter of Credit is the individual obligation of Harris Trust and Savings Bank, and is in no way contingent upon reimbursement with respect thereto. It is a condition of this Letter of Credit that it is deemed to be automatically extended without amendment for one year from the expiry date hereof, or any future expiration date, unless 90 days prior to any expiration date we notify you by registered mail that we elect not to consider this Letter of Credit renewed for any such additional period. In that event, you may draw hereunder on or prior to the then relevant expiration date, up to the full amount then available hereunder, against your sight draft(s) on us, bearing the number of this Letter of Credit. 112 Harris Trust and Savings Bank This Letter of Credit is subject to and governed by the Laws of the State of Connecticut and the 1993 Revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication No. 500) and, in the event of any conflict, the Laws of the State of Connecticut will control. If this Credit expires during an interruption of business as described in Article 17 of said Publication 500, the bank hereby specifically agrees to effect payment if this Credit is drawn against within 30 days after the resumption of business. Very truly yours, HARRIS TRUST AND SAVINGS BANK By /s/ (illegible) -------------------------------- Its Sr Vice President 113 EX-11 11 EX-11 EXHIBIT 11 IN HOME HEALTH, INC. COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 ------ ------ ------ PRIMARY: Net income $ 1,621 $ 247 $ 1,015 ------ ------ ------ ------ ------ ------ Shares: Weighted average number of shares outstanding during the period 16,062 15,656 15,302 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 242 357 754 ------ ------ ------ Total shares 16,304 16,013 16,056 ------ ------ ------ ------ ------ ------ Net income per share $ .10 $ .02 $ .06 ------ ------ ------ ------ ------ ------ ASSUMING FULL DILUTION: Net income $ 1,621 $ 247 $ 1,015 ------ ------ ------ ------ ------ ------ Shares: Weighted average number of shares outstanding during the period 16,062 15,656 15,302 Shares issuable in connection with stock options and warrants less shares purchasable from proceeds 352 357 754 ------ ------ ------ Total shares 16,414 16,013 16,056 ------ ------ ------ ------ ------ ------ Net income per share $ .10 $ .02 $ .06 ------ ------ ------ ------ ------ ------
NOTE 1. Net income per share impact of the cumulative effect of the change in accounting principle is less than $.01. 114 EX-24 12 EX-24 EXHIBIT 24 INDEPENDENT AUDITORS' CONSENT In Home Health, Inc. We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-38504, 33-75876 and 33-75830) and to the Registration Statements on Form S-3 (No. 33-77174) of our report dated November 22, 1995, except for the second paragraph of Note 3, as to which the date is December 14, 1995, appearing in this Annual Report on Form 10-K of In Home Health, Inc. for the year ended September 30, 1995. /s/ Deloitte & Touche LLP Minneapolis, Minnesota December 27, 1995 115 EX-27 13 EX-27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS, THE STATEMENTS OF INCOME AND THE STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1995 OCT-01-1994 SEP-30-1995 3,665 0 32,589 867 0 21,394 18,284 7,163 57,559 21,289 0 163 0 0 30,346 57,559 0 129,816 0 74,082 51,960 0 767 3,007 1,386 1,621 0 0 0 1,621 .10 0
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